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Daily Dispatch: Debt-Money - Feb 05, 2010
Published:
February 05, 2010
by Nrtadmin
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| February 05, 2010 | www.CaseyResearch.com | Debt-Money
Dear Readers,
U.S. markets are not yet open as I settle in this morning. They are in Europe, however, where the sell-off in equities continues. The “rush to safety” back into the U.S. dollar is still underway, and so the greenback continues to rally and the commodities fall.
Observing the global flow of money, it seems important to consider the implications of a system built around the notion that debt is considered money. To wit, governments the world over fund their operations largely with money created by issuing debt. Even the payments made on great piles of debt are made using this “debt-money.” So, more debt begets more debt-money begetting more debt. Over time the system is, I hope you can understand, unsupportable.
Which brings us to the case of Greece and other “fringe” countries in the euro-zone. These failing states – and all the nation-states are failing, just at varying rates – need to sell a lot of debt in order to generate the debt-money needed to keep the government’s doors open, but investors, noting just how much debt has piled up, are wary of owning more.
And that gives rise to what is one of the thorniest problems resulting from a systematic reliance on debt-money – the demand for higher interest rates to offset the actual risks of owning the debt-money of an overindebted state.
But it’s even worse than that. To understand why, let’s reduce the situation to more human terms.
Imagine for a moment, being approached by your deadbeat cousin for a $1,000 loan. In exchange, he offers you an IOU that says he will pay you back in specie, with interest, at some point down the road. Now, consider the same situation, but in a world where debt is treated as money. Now, instead of lending him the $1,000 in exchange for an IOU that promises he’ll pay you back your $1,000 plus interest, he promises to pay you back, but only with another IOU.
This is the net result of using debt as money.
Investors are now looking at the mountain of debt looming over Greece and balking, causing that country to raise rates to attract their money – which, in turn, causes losses to existing debt holders and, over time, ratchets up the interest expense on the existing piles of debt. It doesn’t take a genius to see the potential for yet higher and higher interest rates being demanded, and that, dear reader, results in the need to gin up yet more debt-money.
You can see how this all gets quickly circular, and so I will put a period just here.
For the moment, the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.
But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money.
Money, in our view, should be a reliable store of wealth. It is hard to use that term when talking about an obligation that someone else needs to pay up on – especially when that someone else has proven themselves to be serially unreliable. That makes the debt-money now sloshing around nothing more, really, than a slip of paper representing an untrustworthy promise.
To understand how untrustworthy the issuers are, you need look no further than the steady decline in purchasing power of all of the world’s many variations of debt-money. Case in point, in 1939 the average house cost $3,800.
Do you think that a shortage in real estate and improvements in construction quality explain the one hundred-fold increase in prices over the past 70 years? Not hardly. It’s that the Fed and other central bankers, in close cahoots with the politicians and their cozy buddies in high finance, have used the ludicrous and dishonest debt-money system to flood the nation with more and more of the stuff, debasing the existing stocks of same.
As we now know, because we can see it in the brazen numbers pushed forward by the president and Congress, the debt-money game is heading for a wall. It was one thing when the size of the debt rose at a measured pace that left it largely unnoticed as it grew and grew. But in 2009, the façade fell away, and now the severity of the problem is there for all to see.
While there have been some whiffs of a recovery in the economy, it is important to recognize that what recovery there is, is based on yet more debt-money. A lot more.
In other words, the roots of the recovery, as tentative as they may be, are exactly the same as the roots of the crisis.
There are good reasons that gold and silver have been used as money through the eons. As Doug Casey often points out, it is because it they are durable, divisible, convenient, consistent, and valuable.
While I can’t say, sitting here in the early hours, what the stock market is going to do today or how the unemployment numbers are going to ring in, what I can say with some certainty is that the era of debt-money is going to pass in the foreseeable future.
It won’t be a simple or easy transition back to something tangible. When the average man learns that his debt-money is not worth much more than the paper it is printed on, we could even see riots in the streets.
For the time being, though, the money flow is headed back into the U.S., where, unlike the irresponsible Greeks who ran a budget deficit equal to 12.7% last year, our government’s 2011 budget shows deficit spending at “just” 10.6% of GDP. For the record, as recently as 2006, that deficit was only 1.2% of GDP. Even so, for the moment, our debt-money is considered to be better than the euro and, it appears by looking at their prices, gold and silver.
It’s all a matter of perspective. And from where I sit, I have a strong preference that my money to be no one else’s obligation.
Before long, I suspect a lot of people will come to the same conclusion, and the rush to convert debt-money into something more reliable will send gold and silver soaring.
As I wrap up that little diatribe, I notice that the U.S. stock market, which has been open for awhile now, is off – again. And so are gold and silver. Silver is looking particularly promising, but there’s no need to chase it – up or down. Interestingly, at least for the moment, the larger gold stocks seem to be holding up pretty well. That could be an important sign in the wind… but I think I’ll wait until Monday before doing anything else just now.
And now for something entirely different, I’d like to share a link to a music video featuring one of my favorite actors, Christopher Walken, who, as you will see, is also a dancer. It’s a lot of fun and the music “Weapon of Choice” by Fat Boy Slim is pretty good, too.
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Moving along, because it’s all over the news, here’s Bud’s analysis of the latest jobs report.
Jobs Jamboree Confirmed
By Bud Conrad
Today’s report showed only 20,000 jobs were lost, which confirmed the expectations from ADP, as I reported yesterday, of 22,000 losses. There were other good signs; most notably, the unemployment rate dropped to 9.7% from 10% because household employment was up 541,000 and the pool of available labor dropped 771,000. Month-over-month change in average weekly earnings was up 0.6%, which is very good. Even manufacturing jobs were up 11,000. Construction being down 75,000 and government jobs increasing 33,000 should be no surprise.
The Bureau of Labor Statistics (BLS) does two surveys, one of the establishments and one of households. The establishment survey is larger and considered more reliable, and that provides the loss of 20,000 jobs. The household survey provides the number of people unemployed and results in the 9.7%.
So today one survey shows a decline in jobs and the other shows an improvement in the unemployment rate. If you are a little skeptical, you should be, as these numbers are also subject to big revisions, and one month shouldn’t be taken too seriously.
Which gets to the special problems of seasonal adjustment and annual revisions: This month the BLS revised its estimate of how many jobs there were by looking at unemployment insurance data for March 2009. The total nonfarm employment level for March 2009 was revised downward by a whopping 930,000, and the previously published level for December 2009 was revised downward 1,363,000, both on a seasonally adjusted basis.
The best I can say is that they haven’t learned how to count. This re-benchmarking is spread across all the months of the year, so the month-to-month changes are not large, but the conclusion that the number of jobs is actually a million less is a pretty ugly revision and should confirm that this is an unreliable source. One more tidbit: while all the measures of unemployment rates improved in the seasonally adjusted numbers this month, they were all worse in the non-seasonally adjusted data.
This is the picture that tells the story in its simplest form, just how many jobs there are:
David again. While I had planned on running a longer piece by Bud on the economic recovery, we agreed to keep that for next week – as this is more topical.
Here’s a timely piece from our own John Grandits, who has given some thought to how much the Super Bowl really does for the economy of the cities hosting it.
Super Bowl’s Economic Impact
By John Grandits
With almost 100,000,000 viewers expected to tune in for Sunday’s NFL championship game between the New Orleans Saints and Indianapolis Colts, the Super Bowl continues to be one of the most viewed sporting events in the world. This translates into millions of dollars spent by television networks, advertisers, and cities to capture the attention of this massive audience, even if for only a 30- or 60-second clip.
The CBS network will be collecting between $2.5 and $2.8 million per 30-second commercial, with 62 available slots. As of January 11, all but four slots have been sold.
The first championship in 1967 was broadcast on two networks, the only time this occurred, with a 30-second commercial fetching $40,000. Adjusted for inflation, this number is roughly $261,000 in 2010 dollars, with a 10-fold increase being necessary to purchase a similar spot this year. This is despite the number of viewers only doubling from 1967’s game, when 51.2 million viewers tuned in. From 1990 through last year, the Super Bowl has generated $2.17 billion of network sales spanning 1,400 commercials and 210 different advertisers, according to TMS Media Intelligence.
While the Super Bowl creates a significant windfall for the networks, the NFL, and a number of players that perform well, what happens in terms of economic impact for the host cities?
There has been much debate over the years as to the economic significance for cities that are awarded the BIG game. According to NFL studies, host cities stand to benefit from $300 - $400 million in taxable sales. However, several independent studies have found this figure to be grossly overstated.
Sports economists Dr. Craig Dopkin and Robert Baade have audited Super Bowls from 1968 to 2005 and concluded the actual economic impact is about 10% to 15% of league projections. And the 2003 Super Bowl in Houston was found to have generated only $3.2 million in sales tax after the controller’s office tallied the figures, with net profit coming in at $914,000.
This hardly seems worth the millions it will cost to obtain approval from the Super Bowl committee and hosting expenses. Cities often prepare and lobby the Super Bowl committee for years to obtain permission to host the game. Some cities, such as Detroit most recently, have even built a new arena in the hopes that it will help land the game. The NFL granted the game to Detroit in 2006 in part because taxpayers shelled out $125 million to defray costs of building Ford Field. This was the same time that budgets for schools and public transportation were being severely curtailed to deal with increasing budget deficits.
The Detroit Regional Chamber of Commerce felt the Super Bowl would be a catalyst for long-term economic growth and development. I’d be curious to know how the people in Detroit now feel about that assessment. My guess would be that most responders would suggest the money could have been put to more constructive uses. I doubt that many corporate executives who attended the game that year felt compelled to move operations to the Motor City after taking in the weekend festivities.
Several factors the league does not take into account contributes to the lower-than-projected economic benefits. In regards to the Super Bowl, two sources of spending will contribute to the host city’s bottom line, direct spending and the multiplier effect from those dollars spent.
Direct spending includes new spending by local residents and out-of-towners that would not have been spent otherwise, such as on hotel, rental cars, taxis, etc. An accurate estimate of direct spending must take into account the substitution effect. This compensates for the money spent by attendees that would have otherwise been spent somewhere else in the local economy. In this case the sporting event simply results in a reallocation of expenditures in the economy, rather than real net increases.
League revenue studies also ignore the “crowd out effect.” Since most Super Bowls are hosted in already popular tourist destinations, such as Miami and New Orleans in mid-winter, hotels would most likely be close to full capacity without the game. This will result in Super Bowl guests supplanting those guests only at a modest increase in room rates. The indirect benefits to a community are derived from the multiplier effects that result from a portion of locals’ dollars spent to be re-spent locally by business owners and employees. However, most out of town guests will spend a good portion of their money with corporations based outside the area, which will mute the multiplier effect. This also the case for ticket revenue in which a large portion goes to the league as opposed to local organizers.
Lastly, the cost of added services such as overtime for police and fire staff, and non-economic costs such as traffic congestion, vandalism, and disruption of residents’ lifestyles are rarely reported but contribute to drag on profitability.
Despite the bullish overtones that we often hear from corporate executives and government officials when speaking of the economic recovery and corporate profits, these sentiments can run counter to reality and realistic expectations. Human psychology and financial /political incentives are critical when making personal and financial decisions.
Similar to overly optimistic Super Bowl projections, NFL and municipal officials have motivations to paint the most positive picture for the event. Perhaps if cities vying for the game were to consult an independent advisory group, their expectations would be more in line with actual economic activity created by the event.
[Ed. Note: I’m not exaggerating when I say that almost everyone at Casey Research is obsessed with digging up the truth about the feel-good stories and fairytales we hear on politics, the economy, and the markets. Speaking of which, check out the brand-new February edition of The Casey Report for the latest “need to know” analysis… such as Bud Conrad dissecting risk and potential investment opportunities in Japan… James Quinn wondering whether the Chinese recovery may be a fraud… and 3 of our star editors from other Casey newsletters revealing their current favorite stock picks in metals, energy, and tech. Get it here – risk-free, with 3-month money-back guarantee.
Friday Funnies
Caught in the Act. Did you see the financial commentator whose computer was seen on camera flashing up pictures of topless women? Would you like to?
– note how the cameraman, spotting what’s going on in the background, helpfully zooms in…
Wired
Study these 3 photos closely, then read the message at the bottom.
It will explain lots and lots of things... as if you didn't already know.
This is India. It’s where you call when you have a technical problem with your computer.
Joke of the Week
(Thanks, Dennis! Note: Feel free to replace Pelosi with the name of any politician you choose – it will still apply.)Father O'Malley rose from his bed. It was a fine spring day in his new Washington DC parish. He walked to the window of his bedroom to get a deep breath of air and to see the beautiful day outside. He then noticed there was a jackass lying dead in the middle of his front lawn.
He promptly called the U.S. House of Representatives for assistance.
The conversation went like this: "Good morning. This is Speaker Pelosi.
How might I help you?"
"And the best of the day te yerself. This is Father O'Malley at St. Brigid's. There's a jackass lying dead in me front lawn. Would ye be so kind as to send a couple o' yer lads to take care of the matter?"
Speaker Pelosi, considering herself to be quite a wit, replied with a smirk, "Well now, father, it was always my impression that you people took care of last rites!" There was dead silence on the line for a long moment.
Father O'Malley then replied: "Aye, that's certainly true, but we are also obliged to first notify the next of kin.”
That’s All for Today
There is an old saying in show biz, that you should “leave ‘em laughing.” And so, with the Friday Funnies now delivered, I will sign off for the day. As I do, I see that stocks are again off by close to 100 points. While a glance at my own portfolio shows more damage to some of my core resource stocks, I am very comfortable owning them and confident that they will revert to their true value over time. I also placed a stink bid on a particular energy stock we are following in The Casey Report, and I may get filled. But thanks to a back-stopping position in EDZ – a triple inverse emerging markets fund that I bought early last week – all in all I am flat on the day.
I can’t stress enough how important it is to be cautious in constructing and managing your portfolio, especially now. And don’t be afraid of holding higher levels of cash just now. Even if it is just debt-money, it still has a role to play – at least for awhile longer.
Until Monday, when we will certainly be treated to a lot more in the way of fun and games, thank you for reading and for being a Casey Research subscriber.
David Galland
Managing Director
Casey Research
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