But they may be struggling in vain.

Since 1945, the party that has controlled the White House has lost an average of 16 House seats in the president’s first midterm election, according to the Cook Political Report, a nonpartisan publication in Washington. However, losses for the Democrats could be far steeper next year if they fail to put unemployed Americans back to work.

Then-U.S. President Bill Clinton and the Democrats lost 52 House seats in 1994.

“Unemployment is the leading economic indicator when it comes to politics,” Democratic pollster Peter Hart told The Wall Street Journal. “Anytime unemployment hits double digits, it’s hard to see the party in control having a good election year.”

Right now, polls are showing that the majority of Americans list jobs as their top concern. And rightfully so.

The economy unexpectedly shed 263,000 jobs last month as the jobless rate soared to a 26-year high of 9.8%.  And many economists expect the unemployment rate will reach 10% by the end of the year and peak at about 10.5% next summer.

Lawmakers are scrambling to staunch the bleeding, but that process has been made difficult by an escalating budget deficit.

The government ended its 2009 fiscal year in September with a total deficit of $1.4 trillion, the Congressional Budget Office (CBO) said. That equates to 9.9% of gross domestic product and is the largest deficit since 1945.

Government spending rose by 18% in the year, with the bailout of the financial industry, which alone required $245 billion. The spending increases and tax cuts included in the economic stimulus package approved in February added almost $200 billion to the 2009 deficit, the CBO said.

The Obama administration’s $787 billion stimulus plan, which was touted as a catalyst for job creation, has been criticized for its slow progress and ineffectiveness.

Only about a quarter of Obama’s stimulus, or $164 billion, has been paid out. About half, nearly $400 billion, will be paid out over the next 12 months in the build-up to mid-term elections, and the remainder will be disbursed in 2011.

In January, the administration claimed the stimulus package would keep unemployment below 8% and push it below 7% by the end of 2010 – a fact that has already been seized on by Republican opposition.

“We’ll continue to remind Democrats of their failed promises that led to what is now, at best, a jobless recovery,” said National Republican Congressional Committee (NRCC) spokesman Paul Lindsay told The Journal.

President Obama said in his Saturday radio address that he would “explore additional options to promote job creation.”

But with a growing perception that the stimulus has failed and a deepening concern about the nation’s snowballing deficit, the White House has bristled at talk of a second stimulus package.

“This is not a discussion of second fiscal stimulus,” Jen Psaki, the senior White House economic spokeswoman told the Financial Times. “The president and his economic team have continued to look at a wide number of policy options to create new jobs and ease the burden of those who cannot find employment but any notion that we are any farther along than preliminary discussions about new proposals is wildly inaccurate.”

In particular, the administration is hoping to extend such stimulus measures as the $8,000 tax credit for first-time homebuyers.

When it expires on Dec. 1, the homebuyers credit will be responsible for nearly 400,000 sales of new and existing homes, out of total sales of 1.4 million, Mark Zandi, chief economist at Moody’s Economy.com, told The New York Times. That’s roughly in line with estimates from the National Association of Realtors (NAR).

Zandi, who formerly advised Senator John McCain, recommends extending the credit through August 2010. Legislators are also considering extending the credit to current homeowners.

The administration may also consider expanding the federal transportation funding program, which comes up for renewal every six years. That 2003 program expired on Sept. 30 and is currently operating under a 30-day extension period.

Obama is also expected to push for an extension of the “Making Work Pay” middle class tax cut that accounted for about a third of the February stimulus.

Extending these programs could cost the government tens of billions of dollars in tax revenue.

For example, congressional analysts estimate the cost of the current homebuyer credit at about $1 billion a month. Expanding the credit through next August could cost as much as $30 billion, according to Moody’s Zandi.

That, in turn, could lead to another large run-up in the budget deficit, which in the last year was exacerbated by dwindling tax revenue. Individual income taxes, the biggest source of tax receipts, fell by 20%, and corporate income taxes dropped by 54%, the CBO said.

“There may not be anything we can do,” a Democratic Congressional leadership aide conceded to The Times. “Under any circumstances, it’s going to take a while for jobs to recover.”

Source: Can Democrats Anchor Unemployment Without Doing More Damage to the Deficit?

Could be. We’re not betting one way or the other. But we’re pretty sure this rally is going to end… and end badly… sooner or later. So far, the rally surpassed the rally in ’29 by a few weeks… but has not quite reached its magnitude. It will need another few hundred points to reach the ’30 level.

But when the rally is over… then what?

Despite the fact that a majority (!) of economists polled by the Wall Street Journal say the recession is already over, there is no durable recovery.

Nouriel Roubini explains why:

“Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

“Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

“The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.

“Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

“Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.

“Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.”

Roubini thinks the US will climb out of recession towards the end of the year… but then, it could fall back into a ‘double-dip’ recession. Maybe he will be right. Maybe this downturn will resemble Japan’s multiple recessions over the last two decades. Or maybe it will be a single, deeper and longer lasting slump – like the one in the early ‘30s. We don’t know. Either way, it should be thought of as a depression, not a recession. Because it is fundamentally different. And the difference is:

Recovery is impossible.

If the markets were to recover, it means they need to go back to the way they were. That, dear reader, ain’t gonna happen. Because it can’t happen. The economy can’t go back to what it was. In the 2005-2006 period, it was in the throes of a credit cycle blowout… where it took more than $5 of new credit to produce one stinkin’ extra dollar of output.

Consumers had to borrow $100, in other words, in order for the GDP to go up $20. It was a period of madness that couldn’t possibly be sustained… and now, can’t possibly be revived. Who’s going to invest in another condo development in Florida now? Who’s going to buy derivative debt at 2006 prices? Who’s going to build another factory in China to produce more things for American consumers who can’t pay for them?

Well, ha ha… that’s the funny thing; the Chinese ARE building more factories.

But we’ll get back to that later.

Comes word this morning that Florida has lost population, for the first time since 1946! People are leaving the sunshine state because the big boom in suburban sand is over. A large part of the Florida economy was based on building houses for people coming down from the north. Now those people are going home and trying to pay off their debt. The point is, after a bubble… like after adultery… things never go back to where they were before. You can pretend that they are the same. You can act like they are the same. You can try to make them the same. But they never are.

A recession is merely a sprained ankle or a head cold. You can recover. But a depression is fatal. There is no going back. There is no recovery.

Trying to ‘recover’ from a depression is a futile fight with the future. Governments try to restore the old economy – as it was. They prop up the old industries. They bail out the failed executives and speculators. They pass out money to people, encouraging them to make more of the same mistakes that got them into trouble in the first place.

But there is no going back. It’s a depression. The model has to change. The future… whatever it is… has to express itself.

The US budget deficit hit a record $180 billion last month. July’s deficit was nearly $30 billion more than total tax receipts for the month. In July, the feds only took in $151 billion in taxes…giving it the worst margin in history. For every dollar of revenue, the federal government spent $2.15.

Not a very good business model. But the feds seem determined to stick with it – they’re going to make it up on volume. Deficits are expected to exceed $1 trillion every year for the next 8 years. And that assumes the economy ‘recovers.’ If it doesn’t recover, the deficits will be much worse… with falling tax revenues and the need for even more stimulus.

The feds are running into the brick wall of the future. They’ve made promises – mainly to older voters – that now have to be fulfilled. And the number of older voters is increasing… as the Baby Boomer generation enters its retirement years. Social Security and health care promises alone will add trillions to federal deficits. By one estimate, US debt could rise to 300% of GDP by the middle of the century.

Of course, this poses a bit of a problem. US GDP is about $14 trillion. Three times that amount would be $42 trillion. Who’s got that kind of money to lend to the US government? No one. First, because the world doesn’t have that much in savings.

Second, because even if they did, they are unlikely to want to lend it to such a huge debtor. Of course, we’re always surprised by what people are willing to do with their money – and anything is possible.

But more than likely the US will be forced to trim its promises… or inflate them away.

*** As dear readers know, we have become suspicious of inflation. Not that we don’t expect it; in fact, we think we’ll see it in its souped-up hyper version sometime in our lives. What we’re suspicious of is the easy assumption that the feds can create inflation at will… and control it. They can’t. They aren’t that good. Even at inflation they are hapless and incompetent. And their hands aren’t completely free.

First, they have to answer to the Chinese bond vigilantes. The Chinese are watching. If it looks like the feds are increasing the inflation rate – thereby reducing the value of Chinese savings – they could send the US government and the US economy into chaos simply by selling their stash of Treasury bonds.

Of course, the Chinese don’t want to do that – because it would mean hundreds of billions in losses. But push them far enough… make them afraid enough… or cause them to get mad enough… and they could strap on their shootin’ irons.

Second, there are also the ineluctable results of a major credit contraction… and a gross oversupply of capacity. Both are pushing down prices and could do so for many, many years. They can be overcome by aggressive use of the printing press. Argentina and Zimbabwe proved that. But neither Argentina nor Zimbabwe depended on credit from the Chinese. Inflation may be a monetary phenomenon, but hyper inflation is a political phenomenon… the feds only resort to it when they have no choice. We’ll get to that point; but right now, it is still far away.

*** Shutters should be added to our list of the world’s greatest inventions. What’s on our list? Crispy duck. Berets. The semi-colon. And now shutters.

It has been hot here in France. The sun beats down; the temperature has risen to the high ‘80s. We have no air conditioning. But we have shutters. We close the shutters, partially, in the morning to block out the sun. Then, in the evening, when it cools off, we open them up and enjoy the cool air. In the winter, you close shutters at night to conserve heat. In the summer, you use them to regulate heat and light. And always, they protect windows, curtains and fabrics.

We still remember the louvred shutters on our grandparents’ house in Maryland. With the shutters closed, rooms were mysteriously dark… even in the middle of the day. When they were opened, it was like the opening of the cathedral doors on Easter Sunday… the light came in and the room was transformed. And in the summer, when it rained, we left the shutters closed and the windows opened. The fresh, moist air was a delight.

And now, with the coming of the credit contraction, real shutters are ready for a comeback.

Source: Recovery is Impossible

Sounds like our Treasury Secretary is finally putting his foot down, insisting that Congress pull back its lavish spending programs and start addressing our incredible $11.6 trillion national debt.

Wait… what’s that? Oh, Geithner’s actually asking for Congress to raise the debt ceiling. If Congress authorizes our government to dig deeper than $12.1 trillion in debt (our current glass ceiling) our partners here and abroad will somehow “remain confident.” How perverse is that?

The U.S. budget deficit rose $181 billion in July, to a record $1.3 trillion, the Congressional Budget Office reported over the weekend. You know the drill by now… tax receipts are plunging while bailout spending is soaring. In budget parlance, revenues in this fiscal year are down 17% while outlays are up 21%.

That’s a $530 billion increase in spending from fiscal 2008.

The CBO still projects the government budget deficit to exceed $1.8 trillion, about four times 2008’s record $455 deficit. More to come tomorrow, when the Treasury unveils official budget numbers.

Sounds like a great time for the government to buy a bunch of fancy jets! Congress recently earmarked $550 million in a defense funding bill to buy themselves eight private passenger jets. That would be the same Congress that went out of their way to publicly embarrass Big Three execs for jet setting from Detroit to D.C.

Prepared for a public backlash, Congress has several lame talking points at the ready… that the current fleet of private jets is outdated… that having new high-tech planes will be better for the environment and ultimately lower cost… and that these planes will be used mostly by the Pentagon and only about 15% of the time for lawmakers.

But here’s our favorite: Legislators are eager to complete the transaction so that they can have a new fleet in time for the busiest congressional travel period of the year… August, when they are all on holiday!

Source: The Debt Ceiling Riseth

Long-time readers know I never shy away from this topic.

In fact, last year, when everyone else believed the world’s reserve currency was about to be usurped by the euro, I predicted it would rally and we would see the end of the weak dollar. And rally it did. After the impressive move, of course, I changed my stance on the falling dollar.

And since that time I’ve only become more convinced the U.S. dollar is doomed to lose value over the long term. Here’s why we need a weak dollar…

Why We Need A Weak Dollar: A Dramatic Shift in Power

One of the first reasons why we need a weak dollar is that we are witnessing a dramatic shift in the balance of power. For decades, the U.S. dollar garnered strength from our big spending ways. After all, we were the world’s largest economy and the buyers of last resort. But now we’re getting serious competition from emerging economies.

“The emerging world is not just a source of supply [anymore] but also a source of demand,” says Robert Sinche, head of strategy for currencies, global rates and commodities for Bank of America (NYSE:BAC).

For instance, Brazil, Russia, India and China alone now account for 15% of global GDP, up from 8.7% in 2004.

As time elapses, the relative size of the U.S. economy will only continue shrinking, bringing its significance and, ultimately, the value of the U.S. dollar down with it.

Second, U.S. policymakers want and actually NEED a weak dollar. It’s the only way to make our goods cheaper to foreign buyers and in turn, start shrinking our massive, and record, current account deficit.

As it stands now, the U.S. budget deficit to GDP ratio rests at 13.1% – one of the highest among G-10 nations and up from 3.2% in 2008. In 2010, it will stay in double-digit territory, around 10% – this all but ensures we’ll keep issuing new Treasury securities, which every investor knows weakens a currency.

The last reason the dollar will falter is because we don’t have any control over it. Our fate lies in foreigner’s hands. With countries like China and Russia particularly, buying so much U.S. debt they can easily influence the value of the dollar.

And it won’t take drastic measures like selling their current holdings or refusing to buy any more Treasuries. All they have to do is stop buying so much of our debt, which recent statements from foreign governments suggests is becoming a strong possibility.

Three Ways to Insulate Your Portfolio From a Dollar Decline

If a long-term dollar decline is imminent, how do we protect our portfolios? One obvious way is to buy an ETF that gives us short exposure. However, I don’t think that’s adequate. We need a more comprehensive approach. I would recommend tactically adjusting your asset allocation to make sure it includes the following:

• Commodities. Real assets will appreciate in value as the dollar weakens. Look no further than the recent rise in oil for proof.

• International companies doing a majority of business outside the United States. Such companies provide a hedge against a weakening dollar, as well as a way to capitalize on the growing significance of international consumers. In other words, they offer us two ways to profit.

• U.S. companies doing significant amounts of business overseas. By focusing on U.S. companies with at least 25% of business overseas, we can diminish the impact of a weak dollar. As the U.S. dollar falls in value these foreign profits will become more valuable.

In the end, I’m not about to join the camp of pundits proclaiming the U.S. dollar will lose its status as the world’s reserve currency. That’s not going to happen, just like a prisoner with a life sentence is never going to get out of jail. There are just no alternatives.

That being said, I am convinced the dollar will struggle mightily in the years ahead while we try to rid ourselves of a crushing deficit and emerging economies become even bigger consumers. So make sure you invest accordingly.

Good investing,

Louis Basenese

Source: Why We Need a Weak Dollar

Good day… And a Marvelous Monday to you! You know the Jobs Jamboree data that printed on Friday, and created some HUGE euphoria among the media types that love to just “read the news” and not actually do the research to report it? Yes… It was a very good number, on the outside… Not that losing 345,000 jobs in a month is a good thing, but it is far better than the near 700,000 jobs lost a couple of months ago.

So… I’ve got that to talk about today… And the rebound by the dollar that has taken the euro to the 1.38 handle and looking as if it is going to go lower… And, then finally, I have to get on my soapbox again, because I don’t think I want my President calling me names! So, all that and more as we begin this 2nd week of June…

OK… Well… Did you get all caught up in the euphoria of the Jobs Jamboree on Friday? I know the 2 different cable news stations we have on here in the office, sure took the number, hook, line and sinker. The markets all reacted violently to the number too… At first… You see, when the number was reported, which was -345,000 for May, the euro took off, and the dollar selling was incredible, but the flurry only lasted about 1/2 hour, then someone with an ounce of gray matter, looked closer at the number. It was like a game of Who’s foolin’ Who?

So… Here’s the skinny… If the jobs losses were really just -345,000 in May it would have signaled a bottoming of the job losses, and a bottoming of the recession / depression, which would feed right into the inflation story, albeit a lot sooner than anyone would have expected… And with that thought, the dollar got sold. But… A funny thing happened on the way to the forum, and the currencies were soon to reverse their recent trend, and it all came back to the Jobs Jamboree…

First of all… The Bureau of Lying Statistics, I mean Labor Statistics, reported on their website that 220,000 jobs were created in May through the Birth / Death Model… And 43,000 of the 220,000 “ghost jobs” were Construction jobs… Really? You’ve got to be kidding me! But if you think that’s all… That’s just the tip of the labor iceberg… The number of unemployed persons actually increased by 787,000 in May! The number of long-term unemployed (those jobless for 27 weeks or more increased by 268,000 over the month to 3.9 million and has tripled since the start of the recession.

Not that I’m trying bum you out on a Monday morning, I just think you “should know” the score… The total number of unemployed persons is 14.5 Million… In January of this year 5 months ago it was 11.6 million… And… Oh, by the way… The 9.4% Unemployment Rate? It’s probably nearing 20% in “real terms”…

The thing that gets me is that people, investors, traders, hedge funds, etc. all react to data and make investment decisions based on the data when it prints… I guess this will teach them to wait until all the dust settles and the numbers have had a chance to be exposed to the daylight! I just think it’s a shame that we have to deal with these liars, and cheats, just to make us all “feel good”…

So… Eventually the truth comes to the top, because the truth… Is out there! So… Why is this bad for the currencies? Well… In normal times this news would be manna from heaven for the currencies… But these aren’t normal times, as the President, U.S. Treasury Sec. and Fed Chairman all remind us at least once a week… And the trading pattern for this type of bad news, is that the inflation picture everyone was thinking of last week and the week before, just isn’t going to come that fast… So… The currencies gave back gains that they had made in the last two weeks…

Whew! I typed all that “non-stop” and have to give my fat fingers a chance to rest here for a minute!

The euro also has had to deal with the Irelands rating was lowered by S&P to AA… But, I do have to say that since I’ve come in this morning, the bias has been to sell dollars, and buy euros… But, the move has been very small…

There’s not much in the data cupboard this week, until Thursday when the May Retail Sales report prints… The Butler Household Index (BHI) tells me to expect stronger Retail Sales in May. Wednesday we’ll get the May Budget Statement, which will be around a deficit of -181 Billion… Did you all get that notes I wrote last week about the month of April and the Budget Deficit… Did it hit home with you? Maybe I should repeat it just for GP…

Here’s what I said on Thursday… The Budget Deficit this April was $20.9 Billion, the first deficit in this “tax-paying” month in 26 years! Can you imagine that? In April when taxes are paid, we recorded a deficit? That’s pretty amazing folks… April 2009 tax receipts dropped 44% compared with those in April 2008.

And Here’s what I said on Friday… And I also believe that we will return to the underlying Weak Dollar Trend for good in the 2nd half of this year… Because… By then… the U.S. Budget Deficit, which has already breached 5% of GDP (late last year), will be heading beyond 10% of GDP this year. So… Do you want to own a truck load of dollars when the markets are staring at a Budget Deficit of greater than 10% of GDP? I don’t think so!

And… Then this week we get the actual data to tie it all together in a nice bow!

I just saw a news story flash across the screen quoting the President… Hmmm, seems President Obama believes that his “stimulus package” will create 600,000 jobs… Well, that should be in the bag, right? I mean if it’s not people being hired to take the census, then the BLS will just create them out of thin air, and the President will be able to say… “See! I told you I would create 600,000 jobs!”

I shake my head in disgust… I really do folks… And speaking of the President… I don’t know about you… But I’m tired of him apologizing to other countries… And I really don’t like him calling me names… OH! He’s calling you names too!

OK, back to regular stuff… The Reserve Bank of New Zealand will meet this week, and I’m on the fence regarding what they will do… I’m leaning toward leaving rates unchanged, but jawboning for further rate cuts… Which is about the same as actually cutting them! So… Just cut the darn things! Quit beating around the bush!

And… U.S. Treasury yields continue to climb higher, and that means further losses to holders… The 10-year U.S. Treasury yield hit a seven-month high this morning… Treasuries have to deal with more supply this week. Hmmm… I have to blow my own horn here and tell you that I told you a couple of months ago that this would happen… That the deficit spending would create a monster, and that monster would be the need to issue more Treasuries than ever before, and the more you issue, the less the value of those outstanding become… So, to sell them, you have to allow the markets to let the yields rise to attract investment, and… As the yields rise, those previous issues lose value, in the secondary markets… Sure, if you hold them to maturity, there’s no principal loss… But how many of those Treasuries were bought last year in the flight to safety, to hold until maturity? I don’t have an answer, but my guess is… Not many!

See? Deficits Do Matter! And these days it’s the Budget Deficit that’s taking the hits… The Trade Deficit, which used to be the Big Kahuna, is no longer adding $700 Million to the Current Account each year. In fact, the Trade Deficit will print this week for April, and is expected to remain below $30 million… Not a Surplus, but still, much better than the $65 million figures we used to see every month! As I’ve explained before though this is simply, not the preferred way to reduce one’s Trade Deficit… To have a recession! No, it would have been far better to have our exports be competitive…

And in the “here we go again” category… Saudi Arabia, Bahrain, Kuwait and Qatar signed an agreement to create a Persian Gulf monetary union, committing themselves to working toward a common currency despite the withdrawal of the United Arab Emirates and Oman.

These “oil states” threaten to do this about once a year… Kuwait finally go tired of waiting and dropped their peg to the dollar over a year ago! But, an oil monetary unit? Now that would really put a dent in the dollar’s armor, eh? Just don’t go hanging your hat on that happening any time soon!

I think that we’ve seen some real profit taking in the past few days… A reversal of the risk taking that was going on… And… The feeling that we went too far too fast… This move back in the euro and other currencies does give all those that were sitting on the sidelines and just couldn’t pull the trigger on the rally that began in March, an opportunity to get in at cheaper levels than the past two weeks…

And with that… I’ll head to the Big Finish!

Currencies today 6/8/09: A$ .7870, kiwi .62, C$ .89, euro 1.3850, sterling 1.59, Swiss .9130, rand 8.1850, krone 6.4470, SEK 7.8645, forint 207.35, zloty 3.2810, koruna 19.50, yen 98.55, sing 1.4585, HKD 7.7520, INR 47.57, China 6.8372, pesos 13.40, BRL 1.9615, dollar index 81.30, Oil $67.45, Silver $14.96, and Gold… $951.02

Chuck Butler

Source: Who’s Foolin’ Who?

Governments like to ‘stimulate’ the economy; it makes them feel like they’re doing something. They also, quite rightly, believe it will help them win elections. What they don’t like to think about is the long-term consequences of their actions.

Stimulating the economy is relatively easy. The Treasury borrows money and sets up a $700 billion slush fund for “too big to fail” corporations. It calls it the TARP and does what it likes with the money with little or no oversight. The Treasury then borrows more money and sets up a separate $787 billion slush fund – this time for Democratic Party pet projects. This gets spun as an “economic recovery package.” And the government does what it likes with the money.

When all this borrowing starts to cause trouble in the Treasury markets, the Fed steps in and starts to print money to buy surplus government bonds. It calls it “quantitative easing” or “credit easing.” But it’s really just plain old dollar printing. The Fed also buys junk securities from banks in return for more funny money.

The problem is all this stimulation sets the economy up for inflation. The government is happy because all the money it’s borrowed out of an empty pocket can be paid back on the cheap. Banks and borrowers are happy too: inflation makes it easier for debtors to pay back their loans.

Inflation is only a problem if you have dollar savings and investments in dollar-denominated assets. It makes every dollar you hold worth less. A lot of readers have been writing to us asking for practical advice on how to deal with inflation. That’s why in today’s Notes, we want to discuss four ways you can protect your savings from this menace.

The buck fell to its lowest level vs. the euro since December, as the flight to the greenback continues to wane.

“We’ve turned to a more dollar-bearish environment,” said Nic Pifer, of RiverSource Investments. “As markets start to loosen up again and risk appetite comes back into vogue — in high-yield debt, emerging markets and equities — that safe-haven demand for the dollar has dissipated.”

The dollar may be stuck between a rock and a hard place. “In the near term, the stars are aligned against the U.S. dollar,” wrote foreign exchange strategists at Brown Brothers Harriman.

“If the news stream is good,” they wrote, “we are told investors are less risk averse and do not need the dollar’s security. If the news stream is poor, we are told the U.S. is in horrific shape and the budget deficit and Fed’s balance sheet will swell even more … It is difficult to see what will break this psychology in the coming weeks.”

Some analysts have expressed concern that the U.S. might not maintain its AAA credit rating, after the U.K.’s top-tier rating was given a negative outlook by Standard & Poor’s on Thursday.

However, “I don’t think institutional investors are all that concerned over what S&P may do in the future,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union.

“We would have to see a continuing onslaught of real deterioration in the U.S. financial situation for its rating to come under threat,” Sullivan added. “The dollar’s issues are mostly related to quantitative easing and how inflationary that might be. Also, risk aversion has lessened considerably” recently.

Source: Dollar in Freefall Against Euro

Not that we know. But they asked us anyway.

We report to you today from the banks of the Potomac. Our old friend, Congressman Ron Paul, organized an off-the-record discussion with several other members of Congress. The subject was the financial meltdown…and the bailout. We were there to talk, of course, but we were more interested in listening.

“You don’t understand,” said a Senate functionary we met later, “these people live in Bubble World. They’re protected from the real world by their staffs and by the system itself. You imagine that they would know what is going on. But they don’t. They know less than we do. And they’ll be the last to find out. They are so busy meeting constituents…dealing with donors…working out deals with their political parties and supporters…and feeling like big shots…they don’t really have any time to study the issues. So they count on staff and party committees to tell them what to say, how to vote…and what to think.”

Waiting in the corridor of the Cannon building, two men in grey suits walked by…we overheard this conversation:

“Did you vote ‘no’ on that last resolution? You we’re supposed to vote ‘yes.’”

“I thought I was supposed to vote ‘yes’ to cutting off the argument… as far as I’m concerned we’ve heard enough about Nancy’s problem with the CIA…”

“But that wasn’t about cutting off the debate, that was just technical…about allowing them to modify the previous vote…”

“What are you talking about…”

“I don’t know…I didn’t think it had anything to do with stopping all this gabbing about Nancy and the CIA…”

We take it for granted that Members of Congress often don’t know what they are talking about. But it is shocking to realize that they often don’t know what they are voting on either. And neither do the voters.

The Economist reports, for example, that the measures put before California voters in a recent plebiscite were challenged…not by the courts, but by a grammarian. She claimed they were worded in such a way that it was impossible for a reasonably intelligent person to understand what they were supposed to mean.

More on our visit to Capitol Hill:

*** Since the meeting was “off-the-record,” we can’t tell you who was there or what they said. We can only report what we had to say.

“Look…economies…and empires…go in cycles,” we began. We thought we ought to start with the basics, since we didn’t know what they thought.

“Growth…maturity…then, decline. That’s just the way it is. So in order to get an idea of what lies ahead you have to figure out where you are in the cycle.

“You never know for sure, but there are tell-tale signs. The credit cycle, for example, has been on an upswing in the US since the Great Depression. First, there was in-store consumer credit as early as the ‘20s. There was some mortgage credit…and some margin credit for investors too. But during the ’30s, the financial strain was so great that most people regretted their debt and paid it down. Or they defaulted.

“You could get a mortgage back then if you put 50% down…and paid it off in full in 3 to 5 years. And then Franklin Roosevelt set up the FHA…along with Fannie Mae. And pretty soon, you could borrow 80% of the house price and pay it off over 15 years.

“Major credit cards – Mastercard (NYSE:MA) and Visa (NYSE:V) – didn’t become widely used until the ‘60s. And then, credit began to rise more steeply. Total debt had been about 150% of GDP in the ‘50s and ‘60s…but it rose quickly after the ‘80s. By the 2000s, you could get a mortgage for 110% of your house price – an inflated price at that. And you could take 30 years to pay it off.

“As for credit cards, hardly a day passed when you didn’t get a new one in the mail….usually with a higher debt limit. Debt rose…and rose…and rose…up to 350% of GDP. And finally, the whole debt bubble blew up.

“You have to remember that the US economy – in fact, much of the whole world economy – came to rely on more and more debt as a way to expand. At first, a fellow could borrow $1.50…he’d spend it and invest it…and it would lead to an increase in GDP of $1. But, as time when by it took more and more debt to produce more GDP. The fellow would borrow a $1.50…but then, part of it would have to be used to pay the interest on what he borrowed before. Eventually, it was taking more than $6 to produce a single ounce of GDP.

“You can see that this won’t work for long. GDP is like national income. You can’t have debt increasing 6 times faster than income – at least not for long.

“But remember, the US economy depended on this debt-fueled growth. Without the extra credit, the economy will slip back…which is what is happening.

“We’ve reached a turning point. The financial industry has blown itself up. It realized that all those credits it had, from people who didn’t have the cashflow to repay their debts, weren’t worth what they were supposed to be worth. We’re now on the downhill slope of the credit cycle…and most likely, the imperial cycle too.

“What everyone wants to know is how long it will take before we have a genuine recovery. And then, everyone…everyone…seems to think that the government can stir up new growth by pushing more debt onto the public…this time, public debt. And get this…the feds are now adding debt to the system at a rate 4 times greater than the previous record.

“They…you…are running a budget deficit of $1.8 trillion this year. Could be higher. How much in extra GDP do you get from all that extra debt? Well, a good question…because GDP is now going backwards. The latest numbers show output going down at a 6% rate in the US. And that’s one of the world’s better rates. Exporters – notably Germany and Japan – are doing much worse. GDP is falling 14% in Germany. It’s going down at a 15% rate in Japan.

“So, the feds are adding trillions in new credit (debt) and getting no GDP growth from it — zero…zilch…nada. In other words debt is growing infinitely faster than GDP.

“How long can this keep going? No one knows. But one thing we do know is that the economy is not going to start up again and deliver good, old-fashioned, healthy growth. We’re in the process of de-leveraging. That is, we’re on the down-side of a credit cycle. We’re getting rid of debt, not adding to it.”

If we’d had today’s newspaper in front of us, we would have pointed at the headlines.

“Recession Turns Malls Into Ghost Towns,” says the Wall Street Journal. Malls are emptying out because they were built for a world that no longer exists. They were built for a world where people increased their debt and their consumer spending far faster than they increased their real incomes. Now that people are cutting back on spending – in order to reduce their levels of debt – they can no longer afford to go to the mall. As a business or an investment, malls have got to be bad places for your money.

“The private sector is not going to take on more debt,” we continued our explanation. “People know it doesn’t pay. And they’ve got too much already. The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

“And that’s why this downturn is not going to end tomorrow.”

If we’d had the mall example in front of us, we could have explained that a mall represents a kind of bubble-era investment that now needs to be restructured. After America’s industrial age was over, the country found itself with empty factories and warehouses. They were mostly written off and destroyed. Some were converted – into lofts and shopping malls. Now that the retail age is over, we’ll have to find new uses for malls too.

“This is going to take time,” we told them…and then we took a break to listen…and eat some shrimp.

Source: What We Told the Chiefs of ‘Bubble World’

Is it on… or off?

The bear market rally, that is? The Dow was down again yesterday, but by just a little… 52 points.

The short-covering rally is finished, says David Rosenberg, formerly one of Merrill’s top analysts.

“Everyone I know is laying people off… cutting back… and generally struggling to survive,” said a colleague from Florida. “I don’t believe this recovery story. The stock market might be up, but the real economy is still sinking.”

Yesterday, we went to get our teeth checked out.

“Hey… I’m a Daily Reckoning reader,” said our dentist. “So, I knew you were in town.

Asked about the state of the economy, he had this comment:

“Our business is a little counter-cyclical. People get laid off from work, but they still have their health benefits – at least for a while. They want to make use of them while they can. And they’ve got the time to do it. So, our business actually goes up.

“But then, when the recovery comes they go back to work… they’re busy… and they’ve already had their teeth fixed. We’re not seeing that yet.”

House prices are still falling. The average house in Southern California has fallen to $247,000 – a big drop from the top set two years ago. Toll Bros., one of the country’s biggest builders, reports revenues down 51%.

If the US economy is really following Japan, things are going to get a lot worse. Japan’s output is collapsing – at a 15% annual rate last quarter. The Land of the Rising Sun is a major exporter. For the first time ever, exports are falling… taking the Japanese economy down with it.

Internally, the Japanese are still not big spenders. The population is not only ageing… it’s shrinking. That’s not happening in the US. Thanks largely to its immigrants and Hispanics, the US population is expanding. But this new population is not the same as the old one. At the top of the socio-economic pyramid in the US is a huge group of aging, mostly white baby boomers. Naturally, the geezers vote. And naturally, they vote themselves more benefits at the expense of the next generation.

In fact, you can look at the entire bailout/stimulus program and the $1.8 trillion US budget deficit for 2009, as a huge transfer of wealth. Benefits are provided to the present generation at the expense of the next generation. The white boomers borrow – through their elected federal representatives. The next generation – much more Hispanic and much more immigrant – is stuck with the bill.

But it’s not that simple.

The bailout/stimulus program is a scam on top of a scam. One generation may be trying to get something at the expense of the next – but they’re both losing. On the surface, the next generation gets stuck with the cost of bailing out the present generation. But underneath, the bailout is a sham; it doesn’t really work. It doesn’t revive the economy. All it does is move money from sensible households and good businesses to reckless spenders, mis-managed firms, and foolish projects. The losers are the winners.

What it doesn’t do is bring about a general recovery in the economy. It can’t – for all the many reasons we’ve described in these daily reckonings. The feds can spend money. But they can’t turn bad investments into good ones… nor turn hopeless, brain-dead companies into successful ones… nor erase $20 trillion of excess debt.

All the feds can do, in other words, is make a bad situation worse.

First, they mislead investors into believing the fix is in. With all that money coming into the market, people think the problems are going away. “Everything is under control,” they say to themselves. Then, they put their money into stocks, deluding themselves that a new boom is underway. Later, when it becomes clear that the boom is a long way off, they are deeply disappointed. Stocks fall… and the economy enters a long, dark period of workouts, defaults, bankruptcies, disgrace and suicides.

Then, as we have explained many times, the feds’ money actually delays the process of creative destruction. Instead of burning off the dead wood and making room for new growth, the smoke jumpers at the Fed parachute out of airplanes to smother the flames. Instead of a hot fire that burns itself out in 24 months… the economy suffers a slow burn for 10 years.

Another way they make the situation worse is by undermining the rule of law and the predictability of economic rules. When a corporation goes broke BOTH the bondholders and the stockholders should suffer. But in bumbles the Federal government with bailout money. The share price plummets as investors anticipate a clumsy takeover – wiping out the shareholders. But the bonds could even go up – as the firm is given easy credit, allowing it to stay out of bankruptcy and continue paying off the bondholders.

Worse, in the case of the Chrysler bailout, the feds jumped in and upset everybody. Instead of letting the markets sort out the stockholders and bondholders, they forced a political settlement that rewarded one class and punished another. Bondholders got less than they should have… and the autoworkers union got more.

What is this? A free-market country with the rule of law? Or a third-world basket case in which the politicians decide who gets what?

And more thoughts:

*** Are you watching the dollar? Maybe the unwinding of the dollar-based paper money system is coming sooner than we expected. Yesterday, the dollar fell again – now it costs $1.37 to buy a euro. And if you want an ounce of gold, it will cost you $937.

It looks to us as though gold is headed to $1,000 again. This is not what we expected… not yet anyway.

What we still expect is a broad, long rally in stock prices. We think the Dow might go back to 10,000 before it is over. This is the rebound we were waiting for. It should boost asset prices generally – including gold, commodities and oil – as well as stocks.

Oil rose $2 yesterday too. It’s back to $62.

But this trend is probably a fake out. Underlying the positive market news is an economy that continues to decay, degrade and deflate. Remember, this is a depression, not a recession. The bubble era is over. Because the transmission is broken. The financial industry has blown up. It won’t be repaired. Instead, it will be bailed out… nursed along… and mollycoddled.

Once a bubble blows up, it is never repaired and reflated. Instead, if new money is added to the system, it goes into a new bubble. Right now, the new bubble is in the US Treasury market. How long that will last, we don’t know. But currently, if you put your money into Treasury bills – short-term US paper – your yield will be negative. This does not happen very often. If it ever happens in our lifetimes again, it will be when the moon turns blue. And anyone betting on an indefinite continuation of this bubble is probably a lunatic.

But when it blows… we wish we could tell you.

*** “Can I get a bottom of wine… ”

A drunk had wondered into the dentist office in downtown Baltimore while we were waiting to have our teeth cleaned.

“I’m sorry sir, you’re going to have to leave,” said the blond woman at the desk. “This is a dentist office. You come here to get your teeth worked on. This isn’t a liquor store.”

“Wha… .? I’m s’posed to be here… I think… .my mother sent me down here… ”

“What?”

“My mother… ”

“Wait a minute,” said an older woman behind the desk. “That’s Henry. That’s Ms. Rogers son.”

The man was very drunk. His eyes were out of focus. He was about 40 years old… wearing what looked like a hunting jacket. Wobbling as he stood before the desk.

“Okay… ” continued the blond woman. “Henry… we’re not going to work on your teeth if you’re drunk. You come back straight… and we’ll take you.

“Besides, your appointment is for tomorrow at 9:30… not today. You run along… and come back tomorrow at 9:30… and come back sober… okay?”

“Henry,” the older woman took up the conversation. “Do you have bus fare? How you gonna get home?”

“Bus fare… why? I’m not going anywhere… ”

“Yes you are… ” said the blonde woman… and she escorted him to the door and pushed him outside.

Source: The US Stimulus Program is a Scam on Top of a Scam

Angela Merkel to Eastern Europe: Drop Dead!

You remember that famous cover story of the New York Daily News? New York was nearly bankrupt in 1975. The city asked the feds for a bailout. To his everlasting credit, Gerald Ford had the backbone to just say ‘no.’

Had he given the city a bailout, Ford (NYSE:F) might have won his race against Carter. He believes that that headline cost him the New York vote…and the election. Then again, had he given New York a bailout…the city might be more like Detroit.

The kindness of strangers is one of life’s delights, but once you begin to count on getting something for nothing you are on the road to Hell. At least, that is our view here at The Daily Reckoning.

Welfare ruined the lives of millions of people. (More on that…below…)

Easy credit – coming largely from the Fed and the kindness of strangers in Asia – ruined the American consumer.

Bailouts, handouts, bribes and giveaways threaten to sink whole industries.

And now the whole world economy will be ruined by printing press currency – something-for-nothing money coming from the central banks.

But that will take time…maybe years. For the moment, we are enjoying the show…

Europe is plagued by debt too – just like the United States. Individual households are generally in better shape than those in America, but governments tend to have more debt than the United States. And in the fringe countries of Europe – Ireland, Spain, Greece, Italy, Poland, and the Ukraine – consumers borrowed far too much money to buy houses. Unemployment is soaring to 15% of the workforce in Spain. Irish banks are going under. And in Eastern Europe, the problems are worse. Typically, a man who wanted to buy a house found that he got a better interest rate if he took out a mortgage in euros than in his home currency. In Poland, for example, many homeowners must now make their mortgage payments in euros, while they earn their money in zlotys. As the financial crisis developed, the zloty fell against the stronger euro, by half. This leaves the Polish householder paying twice as much on his mortgage.

Not surprisingly, consumers are in trouble…so are the banks than lent them money…and so are the countries where they live. Nine of these nations – an Eastern European bloc – got together and asked the European governing council for help. They said they needed $380 billion to get through this crisis. Angela Merkel, speaking for the French and Germans, said no. She might have mentioned, too, that they had already spent $380 billion recapitalizing Europe’s banks.

In America, the government is more accommodating. It is spending trillions to try to bailout the entire global economy. And by the look of things…it is failing.

O! Bama! Where is thy bounce? The whole world needs it.

The Dow did not bounce much yesterday. It was up only 31 points. A disappointing showing. Usually, you can count on a healthy bounce after a big drop, such as stocks got on Monday. But this market has been short on bounces. After Obama got elected, we expected a big bounce. Instead, there was a feeble ricochet of about 15%…and then, stocks headed down again. In the United States, they’ve lost 20% so far this year.

And the more the government tries to pump up the ball, the flatter it seems to get.

HSBC (NYSE:HBC) said it was cutting 6,100 jobs…closing offices all over America…and trying to earn back the $10 billion it lost in the US consumer finance business.

AIG is getting another $30+ billion – after burning through the last $133 billion. ‘Can’t let this insurance giant go under,’ say the pundits, “or the whole insurance business will go down.’

AIG was “irresponsible,” said Ben Bernanke in his little chat with Congress yesterday. He said they made speculative bets that they shouldn’t have made.

But what did he expect? The Fed – under the leadership of Alan Greenspan – threw the biggest financial party in world history. What did they expect the pros to do…stay home and watch TV?

And now the IMF says the global banking system needs another $500 billion. The real figure is probably two to three times that amount. But who knows? We’re still in a period of aggressive price discovery. Until we find out what’s in their vaults…and what it is worth…we won’t know how much it will cost to save them.

Ford and GM (NYSE:GM)sales have been cut in half – sales fell to a 27-year low in February. Blockbuster is eyeing Chapter 11. And skilled immigrants are leaving the US.

*** Obama has, of course, announced his $3.6 trillion budget…and all that goes with it. Including a $1.7 trillion deficit. But his estimates were based on a recovery in the last part of this year. That seems increasingly unlikely. Our guess: the deficit will go over $2 trillion.

Congress has hunched over the numbers. The solemn chicanery of federal budgeting is underway, in other words, as politicians pretend to weigh the merits of the spending plan…

Of course, they are spending other peoples’ money…and none forgets it. The idea is not to reduce spending, and certainly not to return it to its rightful owners, but to make sure it goes to the groups most important for re-election. Besides so much of this money is borrowed from future generations…and foreigners…and who-knows-whom…it is like money from Heaven.

As any system of government matures, more and more people are able to get a purchase on it. It could be a tax break…a licensing requirement that keeps out competitors…a tariff…a subsidy…a job…free food or a welfare check. And as more and more people get something from the government, more and more have a stake in making sure the government stays in business. This phenomenon contributes to the stability of the institution in the short run…in the long run, it guarantees its failure. For each little hustle is a cost…like a leech on the back of a water buffalo. The animal may be strong and fit; but put enough leeches on him and he’ll wither like a dried up grape.

Of course, after a while, the beast begins to stagger and people notice something is wrong. Then, the reformers come out…promising change. But change is just what people don’t want and just what the system won’t permit. There are too many leeches – and the leeches vote.

Obama’s new budget is the biggest bag of leeches to come along since the Roosevelt Administration. We have not seen it in detail. But from what we’ve gathered from the press reports, it has something in it for almost every bloodsucker.

The raw numbers are breathtaking. Whereas the feds have taken about 21% of the nation’s income in recent years, now they’re going to take 28%. The deficit alone will equal more than 12% of total GDP.

Put the feds together with state and local hacks, altogether they will consume 40% of the nation’s total output. Whoa…that’s put it close to the levels of such free-market bastions as Zimbabwe and Algeria, both with 43% of spending done by government…and Hugo Chavez’s Venezuela, where the government spends 41% of GDP.

By contrast, in France, that socialistic, bureaucrat-saturated country with the croissants, 53% of GDP is spent by the government. But wait…in France healthcare is a government industry and so is the passenger train system. In America, 17% of GDP is spent on healthcare. As for the passenger trains…forget it…in America, we scarcely have any. So, if you add the 17% spent on private healthcare to the 40% you actually get a total higher than that of France. Ooh la la…the age of big government is back!

Who pays?

Ah…that’s an interesting subject in itself. Obama says he’s going to soak the rich. But the rich are already pretty well marinated. Reagan’s tax cuts freed them to earn more money – and pay more taxes. Now, the top 5% pays 60% of the costs of government. The bottom 40% pay no taxes at all. They get all government ‘services’…which is to say their boondoggles…for free.

Until tomorrow,

Bill Bonner

Source: The Downfall of the American Consumer