Friday, March 26, 2010

Greenspan: Recent Yield Surge a Canary in Coal Mine; Even a VAT Tax Won't Help US Catch Up to Deficits - But Lauds Free Money Bernanke Policies

While Alan "Bubble" Greenspan is not high on my list of economists, people still pay attention to what he says.  Even Alan is concerned about about the deficit situation, and agrees on our outlook about the danger of rising yields for a country that has no quit in it, when it comes to drunken sailor spending.  He even believes the VAT tax that I've opined will come to the US within a few years (and has been floated in the major newspapers for the first time this winter), [Dec 11, 2009: NYT - Many See VAT Option as a Cure for Deficits]  won't be enough to help us catch up with our rampant budget holes.

Remember, cost benefit analysis.  All the benefits now, but shhhh - no talk of the costs.  We're having a party, and I don't want to think out longer than 2010.

As an aside, I don't think the 10 & 30 year bonds are ready to go on a breakout - it's too early for that event to happen from this seat - but we just never know when the bond vigilalantes are going to finally extract any form of discipline on the US.  The more I think about it, I think the Chinese were simply showing America a very small hint of what can happen if you start calling them bad names like "currency manipulator".  But these are two charts we need to always keep our eyes on in the background.

Via Bloomberg:
  • Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.  Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
  • “I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
  • U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.
  • Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
  • I don’t like American politics and what’s happening,” Greenspan said.

As for the European VAT almost certainly headed our way within 1-2 election cycles ("shared sacrifice people!")
  • Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.   “I’m not convinced by any means that we can succeed in stabilizing this long-term outlook strictly from a value-added tax,” Greenspan said.
[Aug 26, 2009: US Federal Budget in Pictures]
[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]
[Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

That said, Greenspan is obviously wowed by what Bernanke pulled off.  It is like Yoda watching young Skywalker blossom:

The first economic 'recovery' in history not caused by the real economy but by the finance economy.  (I've pointed out in many pieces I am shocked so few bankruptcies have happened in the public space - but the ability to issue stock & debt, that is sucked up by banks - and their customres - who can buy at will with free money offered the Fed - is a trick I completely underestimated)  Asset inflation solves many ills (in a nominal world) - something the UK also is attempting as well but paying for it with their loss of purchasing power as their currency is in freefall.  As I repeat almost every week - the US can do things no other country can get away with due to the reserve currency.
  • The former Fed chairman said the U.S. economic recovery has been driven “to a very large extent” by a resurgence of stock prices.  “You can see the whole blossoming of finance,” Greenspan said. “As these stock prices have gone up, debt became far more valuable, and you can see this huge issuance, especially of junk bonds.”

Now for the most important part - brought to you by a former member of the Plunge Protection Team:
  • A continued rally in share prices could help sustain the expansion, Greenspan said.
Hint hint.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012