Starting in July the U.S. Bureau of Economic Analysis will recalculate U.S. Economic GDP data to include film royalties and spending on research and development. These changes are coming at a convenient time as the U.S. bubble economy is showing signs of once again having reached a point of no further growth, despite all the artificial stimuli through government incentives, massive monetary debasing with trillions of newly created dollars injected into the markets, deficit spending, and artificially low interest rates.
We’re capitalizing research and development and also this category referred to as entertainment, literary and artistic originals, which would be things like motion picture originals, long-lasting television programs, books and sound recordings….We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history. – Brent Moulton of Bureau of Economic Analysis, CNBC
There is a big misconception in the United States and around the world that the Economy of the United States is free market capitalist. To believe that the United States has a free market economy is utterly naive and ignorant of economic facts. The interest rates are not a result of demand, supply, and risk but are artificial due to market interference by both the Federal Reserve and the US Government. Major companies are not successful due to their intelligent business practices but because of government contracts they receive, regulation they lobby for, government subsidies they receive, and bailouts that eliminate their risk while compensating for their losses. All these anti-free market variables are not new but have dictated American business for over a century.
The anti-free market economy is not the result of one party as both Republicans and Democrats have supported and continue to support legislation that attacks free market principles. Through big government incentives, regulations, subsidies, and bailouts, both parties have destroyed the free market and created an economic mess that rewards financial irresponsibility, creating an environment in which it is difficult for the responsible to compete.
Even the universally idolized conservative and pro-free market President Ronald Reagan implemented significant anti-free market policies. With his Executive Order 12631 President Reagan ensured that the US does not have a market system based on supply and demand but one that is heavily influenced by Government and the hidden agendae of those who are represented by the President’s Working Group on Financial Markets.
It is beyond obvious that the United States does not have a free market and that its economy is not capitalist. Whether “China Does Capitalism Better than America” was debated by Ian Bremmer, Minxin Pei, Orville Schell,a and Peter Schiff in New York during an Intelligent Squared debate hosted by Robert Rosenkranz and moderated by John Donvan.
California was at the epitome of the Real Estate bubble, with an artificial economy booming during the years of appreciating home values fueled by the artificial low interest rates policy of the Federal Reserve and the Government loan guarantees that consistently were raised with the anti-free market support of both Democrats and Republicans.
When the bubble to the artificial economy bursts the economy is exposed for what it truly is. Therefore it should come as no surprise that the unemployment rate in California is greater than that of many other States. The Sacramento Bee recently published an animated map of California Counties illustrating the change in unemployment rate from January 2008 to July 2011. Make sure to click the red “Play” button.
In order to reduce the unemployment rate in California lawmakers should understand that it is crucial to provide a business friendly environment. California has all but a business friendly environment as businesses are overtaxed and over regulated. The only way California will be able to prevent losing additional businesses and the jobs that go along with them from leaving the State is by changing the business climate. It is crucial for California to understand that it cannot afford to fight unemployment with growth in Government. The private sector must create those necessary jobs and it is therefore necessary for California to create a business friendly environment by attracting businesses with lower tax rates and less regulation.
The investment ratings business is like any other. You please your customer and treat them like a king or else you’ll lose them to your competition. Why would it be any different for a rating agency? It isn’t, which answers the question as to why S&P, Moody’s, Fitch, and other analysts missed the top of the Real Estate Bubble. It didn’t make business sense for them. Simple as that. A rating agency isn’t there for the benefit of those that do not provide them with a revenue stream, just like a Real Estate Agent isn’t there for your benefit but for the commission. There’s no difference between a used Car Salesman, a stock broker or a rating agency. They are all there to sell you something while making a profit in the process. It’s naive and financially ignorant to think that any professional investment advice you receive is there for your benefit, especially when you don’t pay for it. And don’t be fooled thinking that as a small client you receive valuable advice for your money from a stock broker.
An upgrade for a stock often results in increased demand for that security and provides the big player with an excellent exit strategy. When a company or city pays an investment rating agency to review its debt product the buyer of the rating expects a good review in return. The paid for review is a business cost which allows the city to sell more debt and at a better annual return. If the rating agency fails to put a positive spin on the review the buyer of the review will seek out a competitor that gets the job done. WTF Finance already illustrated the ratings politics between Warren Buffett’s Bershire Hathaway and Moody’s.
Today’s article in the LA Times highlights the game of rating politics:
“After its downgrade of U.S. debt last week, S&P cut its rating of L.A.’s general investment pool to AA from AAA. It also downgraded dozens of other municipalities with large investments in U.S. Treasury notes.”
Los Angeles stops using S&P
In response to the downgrade, which according to WTF Finance is still too optimistic, Intermim Los Angeles Treasurer Steve Ongele who was just appointed by Mayor Villaraigosa states that “We have really lost faith in S&P’s judgment”. San Mateo County of California and Florida’s Manatee County both opted to no longer renew their investment rating review contracts with S&P. Steve Ongele was also quoted stating that
“The market crash that came with the real estate debacle, it happened because folks like S&P rated AAA corporations that were not worth much of anything, corporations that are no longer there today…The fact that we have the courage to do this, the fact that we are the first city, I think that’s a big bragging right.”
This perfectly illustrates that companies and governments buy their reviews only from those ratings agencies who give favorable ratings. Overrating Real Estate companies was a problem but when your city is downgraded you opt to no longer renew the rating review contracts. How convenient and hypocritical of Los Angeles. The ratings process is a business after all and pleasing your customer is as important and essential for the bottom line as in any other sector.
With the markets in a steep downturn since the US credit downgrade announcement by S&P, many traders and investors carefully listened to the FOMC meeting in anticipation of an announcement that the Federal Reserve would interfere in the markets through credit injection. Bernanke didn’t confirm the much anticipated next round of Quantitative Easing. Instead the Fed chairman released a statement in which he admits that the economic recovery is not as strong as previously anticipated:
“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”
With the FOMC meeting at 2:15pm the markets sold off rather rapidly as no announcement was made about QE3. Failing to confirm a capital injection in combination with the negative economic growth outlook resulted in new session lows for stocks. It wasn’t until the DJIA reached a session and week low of 10603 around 2:45pm that money flooded to the markets. Within the last 75min of market activity the DJIA gained 639 pts to close at a day high of 11,242. That begs the question, where did that injection of capital come from? The President’s Working Group on Financial Markets? Or did the “policy tools” to promote price stability by any chance include the next round of Quantitative Easing unannounced?
“Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.
Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.”
WTF Finance would once again like to point out that the “economic recovery” was only made possible with the trillions of dollars that the Federal Reserve and Federal Government have infused into the markets to distort demand and supply variables. WTF Finance agrees with Madeline Schnapp, director of Macroeconomic Research at TrimTabs who stated that
“the U.S. economy has become alarmingly dependent on government stimulus”.
Not only does over one third of the US population depend directly on Government handouts, the remaining portion of the US Economy heavily relies on credit and Government deficit spending in order to appear viable.
Without the stimulus, banks would not have the luxury of keeping non-performing assets on their balance sheets allowing a large percentage of people living mortgage-free for years which allows them to spend the money they save elsewhere. The result is that spending has returned to 2006 levels, confidence is up, earnings are breaking records, and the Government can claim that the stimulus has worked as the economy has recovered. Nothing has fundamentally changed as WTF Finance mentioned in its article “Why Investing In US Stocks Or Treasuries Is A Bad Idea”. This spending is unsustainable and the increased dependence on Government spending to prop up the economy will only accelerate the eventual shift away from the USD as the World Reserve Currency.
Many Economists use GDP and Debt to GDP to evaluate the health of the US Economy, its ability to handle the increasing debt load, and to predict the future economic environment. GDP stands for Gross Domestic Product and can wrongfully mislead people into believing that this statistic reflects the productivity of the Nation.
How is GDP calculated? Let’s take a look at the formula that is being used to come up with that number. This is the “Expenditure Method” of calculating GDP:
GDP = private consumption + gross investment + government spending + (exports – imports)
It is very important to note that GDP includes private consumption and government spending. It is certainly no surprise that much of American consumption is made possible with credit spending and it is also widely known that Government spending greatly exceeds revenue. In essence there are two components of the GDP that are debt variables: debt spending by the individual and debt spending by the Government.
When the Bureau of Economic Analysis (BEA) releases GDP numbers the public is conditioned to believe that a greater GDP reflects a growing economy and that this growth reflects economic health. WTF Finance disagrees that a growing GDP reflects economic health when a majority of that economic growth comes from the debt spending of individuals and increased deficits by the Government.
The reasoning that a growing GDP reflects a growing and healthy economy is about as erroneous as the belief that Americans could handle their increased debt during the housing bubble when it was more than obvious that the real estate appreciation and not individual productivity kept them in good credit standing.
WTF Finance reports how markets are moved by the announcement of GDP figures. A better than expected GDP often provides investors with confidence that leads to a rally in the stock market as such an increase in GDP is associated with an improving economy. Given that it is official policy to have a President’s Working Group on Financial Markets (the Plunge Protection Team) interfere with the markets it is no stretch to state that the Government might announce over-inflated numbers in order to boost the stock market. WTF Finance reported how the GDP numbers are often revised down in the weeks after advances in the stock market were made possible by positive GDP announcements that turn out to be overstated.
Many Economists and Government officials reason that the US Debt is at a manageable level. They do so by using the ratio of Debt to GDP and comparing this figure with the Debt to GDP ratio of other Nations. This could be a viable comparison if each Nation had a GDP figure comprised of similar economic variables. However, that is not the case as Americans and the US exceed other Nations in debt spending. WTF Finance reported how this stock market rally since March 2009 can be attributed to an increase in debt spending, a continuation of non-sense lending environment, as well as accounting changes. Fundamentally the US Economy did not improve. It is through the debt spending that GDP numbers have made a comeback and investors now wrongfully believe that the recession is an event of the past.
WTF Finance does not disagree that the US currently has a relative low debt to GDP level when compared to that ratio of other Nations. However, other Nation’s GDP is not skewed to be comprised of the collective debt of both Government and its citizens. If every other Nation had the ability to increase its debt spending it also could reduce the relative ratio of debt to GDP. An individual is in no better financial standing if he continues to credit spend and grow his debt balance, so why should it be any different for the Government?
WTF Finance believes that the United States is in a massive GDP Bubble as the current GDP does not reflect a productive Nation with a balanced economy but a consumer Nation overextending itself on credit. The instant the United States will no longer have the means to deficit spend and American consumers are forced to live within their means is the instant the US GDP will experience a massive contraction. It is only then that the ratio of Debt to GDP would be exposed as overleveraged, unsustainable and it would then become obvious that the US does not have the means to maintain its debt. The notion that the debt level of the US is appropriate given the Debt to GDP ratio is ludicrous as such ratio can only be low as long as the US and the American consumer have the ability to overextend themselves
Former Federal Chairman Alan Greenspan was hosted on CNBC answering questions about monetary policy and his views on the current state of the U.S Economy. WTF Finance is a harsh critique of Alan Greenspan as the policies of the Federal Reserve were interfering with the natural demand and supply variables of the markets. Greenspan “solved” economic recessions by infusing trillions of newly created liquidity into the markets while keeping interest rates at artificial lows, fueling the speculation in the stock and real estate markets.
“The Fed does do look at future inflation…. It can look at future inflation just as well as he can, not any better, not any worse”
Greenspan acknowledged the budget problems and rightfully questioned equity prices while also voicing concern about the deficit spending and the loose monetary policy. Interesting given that this is descriptive of the policies of the Federal Reserve while Greenspan himself was head of the quasi-private Federal Reserve Bank.
The U.S. Treasury Department released updated data of foreign Treasury holders. According to The Wall Street Journal the data is more accurate than the previously released numbers:
“Treasury’s preliminary report of foreign holdings of securities is based on better data than its first estimate posted last year, helping to paint a more accurate picture of foreign purchases or sales of U.S. assets. The data are likely to prove fodder for many analysts who have suspected that China has been routing a significant portion of its purchases of U.S. Treasury securities through other major financial centers such as London to play down its debt profile in the U.S., a politically sensitive subject in Washington.”
According to the official U.S. Treasury website, the major foreign holders of treasury securities for December 2010 are:
China $1,160.1 Billions
Japan $ 882.3 Billions
United Kingdom $272.1 Billion
Oil Exporters $211.9 Billion
Brazil $186.1 Billion
Caribbean Banking Centers $168.6 Billion
Taiwan $155.1 Billion
Russia $151.0 Billion
Hong Kong $134.2 Billion
Switzerland $107.0 Billion
On January 28, 2011, the U.S. Commerce Department’s Bureau of Economic Analysis released the advance estimate of the gross domestic product (GDP) for the fourth quarter of 2010. In response to the reported 3.2% annual growth rate the markets initiated a rally but later sold off due to the Egypt crisis. The following Monday the markets continued the rally and many economists mentioned the GDP to conclude that the US Economy has recovered.
Here’s part of the press release from the Commerce Department where U.S. Commerce Secretary Gary Locke said:
“With more than a million jobs created by the private sector over the last year, there is no doubt that America’s economy is stronger today than it was two years ago when President Obama took office; today’s GDP number is yet another strong indication of that. Growth in consumer spending and exports during the fourth quarter has led to increasing optimism about our economy. As the President emphasized in his State of the Union address, winning the future depends on our ability to out-innovate, out-educate, and out-build our global competition and restructure our economic foundation so that it is competitive, growing, and working for all Americans.”
Today the previously reported GDP estimate for the fourth quarter of 2010 was adjusted downward. Economists expected GDP to be revised upward from the previous annualized rate of 3.2% to 3.3% but the growth domestic product was revised to 2.8% for that period. Despite the negative revision the markets closed positive reversing the downtrend of the week. This once again illustrates that news only matters when the financial powers that be want them to.