BOYS COOKING

February 14, 2011
A Tipping Point Is Nearing
By Jeff T. Allen
We are facing a tipping point. There will soon be a crisis affecting US citizens beyond any experienced since the Great Depression. And it may happen within the year. This past week three awful developments put a dagger into the hope for a growth-led recovery, which held promise of possibly averting a debt and currency implosion crushing the American economy.


The first was a little-noticed, but tragic, series of events in the newly elected House of Representatives. The speaker, Mr. Boehner, had given the task of fashioning the majority's spending cut agenda to Representative Paul Ryan (R-Wisconsin), a rising conservative star representing the vocal wing of fiscal conservatives in the House. Promising to cut $100 billion of government spending, Mr. Boehner spoke before the elections of the urgency to produce immediately when Republicans took control.


Out of a $3.8 trillion government spending agenda, the wonkish Mr. Ryan, considered by many to be the best hope for fiscal conservatives, revealed proposed cuts of a whopping $74 billion. After some tense meetings, (referred to as a "revolt" by some media) newly elected conservative congressmen convinced the leadership to commit to unspecified cuts of an additional $26 billion. The actual "cuts" from any such legislation will, of course, be less once the appropriate political log rolling and deal-making are done- let's call it $50 billion (while the deficit grows by $26 billion during the week it takes to discuss it). So go the hopes for serious spending restraint from our newly elected wave of rabid, anti-big government Republicans. They may deliver cuts 1.3% of total spending that is itself approximately 90% greater than collected taxes. Let's mark this spending reduction effort as an epic fail, at a time when epic success is almost required for survival.


The second awful development to occur last week was the employment report from the Labor Department, describing employment conditions in the U.S. economy in January, 2011. The report was packed with statistics, all pointing to anemic growth with a modest pickup in manufacturing employment. The little-noticed (not by the bond market) aspect of the report was the "benchmark" revisions, an attempt to get the total picture more accurate each year than simply adding up all the monthly change numbers. This year's benchmark revisions showed two alarming things: a decline from previously reported employment in December 2010 of nearly 500,000 jobs, and a reduction in the workforce of a similar amount.


Coupled with insistence from the Federal Reserve Chairman Ben Bernanke that the Fed intended to continue "quantitative easing" (a euphemism for monetizing the bonded debt of the federal government), the employment data caused bond holders to assume there will be no end to the red ink. Ten-year U.S. bonds lost a full percent of their value, declining a total of 18% since Bernanke announced the acceleration of Fed policy in August 2010. The yield on these bonds has increased from an ultra-low 2.4% in August to 3.65% today, as the Fed repeatedly describes inflation in the U.S. as too low.


In context, a 3.7% yield does not appear high by historical standards. In our current predicament, however, it is heading toward Armageddon. If interest rates on our debt rise by 1% it means our interest payments rise by more than $100 billion dollars annually (not including the interest payments owed to the Social Security Trust Fund--see below). As global liquidity and deficit spending have accelerated, food and commodity prices have skyrocketed, sending many prices up 25-50% worldwide since August. In some countries (Tunisia and Egypt among them) rice prices and cooking oil have doubled. Copper is up 40% in that time. If global inflation expectations take hold with tenacity, as they have many times in past periods of "easy money" by our Fed and Congress, interest rates may easily rise to 5-6%, an event which will blow an additional $300-500 billion hole in a budget already beyond sanity. Can our creditors give the U.S. a nod on $2 trillion of new debt each year without any plan to fix it? Remember, there is plenty of past experience with U.S. debt yielding 7-8%, a potential expenditure on our current debt of nearly 100% of tax receipts to pay interest alone should yields go there.


The third development of the last week which received much less press than the Egyptian crisis is the "new normal" in Social Security. The CBO released a report disclosing that the net cash flow for the Social Security trust fund -- excluding interest received from the book entry bonds it holds in U.S. debt -- will be negative $56 billion in 2011, and for every year hence even more so. This is the train wreck that was supposed to happen in 2020. It is upon us now. Any limp action by conservatives to bring t

Normal sighting at Pasar Pudu Wet market. I bump with my old friend I never met since High school. He own a restaurant or so called " food stall" located in Cheras. He often bought fish and other groceries at Pasar Pudu due to well known cheap price. But lately, he complained that the prices has gone up almost double and some of the main groceries such as cooking oil suddenly missing. He asked me whether I should know better because I'm a banker, what is happening to Malaysian Economic. I just smile and said to him...you should ask the politician....they know better.