Record Budget Deficit, Income Inequality, A Dubai Experience and More!

by Addison Wiggin & Ian Mathias

  • Uncle Sam vs. Joe Six-pack: Government debt triples, private debt pulls back by record margin
  • Bill Jenkins paints a compelling picture for coming deflation
  • U.S. income inequality at historic high… has the rise of the rich peaked?
  • The one stock that’s lifting the whole market
  • Plus, Addison Wiggin on his “over the top nutty” adventures in Dubai


  If there’s one batch of data that will embody 2009, this is it:

$1.4 trillion.

That’s the official budget deficit for the fiscal year 2009, which ended last week. According to Congressional Budget Office stats released late yesterday, the deficit is the highest in dollar amounts ever, more than triple last year’s record high. It’s 9.9% of our annual GDP, the highest since 1945. In short, our government is spending as if a war of superpowers were choking the world economy… though hardly a shot has been fired.

Combing through the fine details, Uncle Sam is guilty of the most basic accounting flub: He spent more and earned less. Outlays increased 18% from last year while government revenues crashed 17%.

Over 60% of the annual spending growth came from four sources: the Bush administration’s TARP, the Obama clan’s stimulus bill, Fannie Mae and Freddie Mac. No surprise there.

But this is shocking — to us anyway. Those extraordinary expenses are just as insane as our government’s ordinary spending, which is up across the board.

· Social Security: $659 billion, up 8.6%

· Medicare: $428 billion, up 9.8%

· Medicaid: $251 billion, up 24%

· War spending (oh, sorry, “Defense expenses”): $636 billion, up 7%.

The only area with significant declines were interest payments on public debt, down 23% from last year… only because we’ve monkeyed short-term interest rates to near zero.

  And while the government puts the fiscal pedal to the metal, the average person continues to slam the brakes. Consumer credit fell for the seventh month in a row in August, the Fed admitted yesterday. Led by a 13% decrease in revolving credit (credit cards, mostly) total consumer borrowing excluding mortgages fell at a 5.8% annual rate, or $12 billion.

Total consumer credit has contracted seven months in a row only twice since the Fed started keeping track in 1943: This year and 1991. Since February, we’ve reduced credit lines by over $100 billion, more than 10 times the seven-month streak in 1991.

Heh, but lest we get too rosy on the fiscal prudence of John Q. Public… the total amount of American credit outstanding still exceeds $2.46 trillion.

  “There’s still 100 times more consumer debt floating around than what’s been cut over the last seven months,” adds our currency trader Bill Jenkins. “Just keep in mind, we have a long, long way to go in order to erase this burden. And what little private debt is being eliminated is being overtaken by public debt. This is likely to be the case for several years into the foreseeable future — which is a strong deflationary factor.

“Prices fall because of demand. Demand begins with consumers who have coins jingling around in their pockets. If pockets full of money are not to be found, neither is demand.

“Debt has completely infused the American economy. When debt prohibits spending because consumers are out of cash or credit, deflation occurs.”

“Inflation cannot resume until more debt is purged from the system or until personal incomes rise to keep pace with increasing debt levels. At the present rate, it will be a long, long time before the public debt begins to be reduced. That means deflation for years to come.”

  The credit crisis has forged an even larger gap between the rich and poor, though it might not last for long. The richest 10% of Americans made at least $138,000 each this year, according to Census data released last week. That’s a record-high 11.4 times the average income for the opposite end of the spectrum: the poverty line around $12,000. Pre-crisis multiples were closer to 11.2.

The middle class is getting credit crunched too. The median household income has fallen $1,860 over the last year — wiping out a decade of slow gains — to $50,303.

But if history is any guide, this trend may be near its peak. At present, about a quarter of America’s total income is earned by 1% of its population (amazing, eh?). That level has only been attained once in U.S. history — ironically, 1928, right around the start of the last economic depression. What followed then was a 50-year trend in the other direction.

We suspect history will rhyme this time around, if not flat out repeat… between Wall Street, Washington and even Hollywood, it’s open season on the uber rich.

  The stock market today can be summed up in one word: Alcoa.

The Street expected the U.S.’ largest aluminum producer to post its fourth straight quarterly loss this morning. Instead, it eked out a $77 million profit. As the unofficial forerunner of the third-quarter earnings season, Alcoa gave markets all the reason they needed to rally again today. Better-than-expected results from Costco and Monsanto helped out, too. Major indexes opened up about 0.75%.

Just one caveat: The method in which Alcoa beat estimates is worrisome. The earnings beat was mostly attributed to sooner-than-expected cost cutting, much of which will be very hard to repeat (you can only fire somebody once). Alcoa’s smelting capacity is down 20%. The price of aluminum is still down 35% from the average $1.27 a pound in 2008, while global stockpiles have almost doubled this year. And like everyone else in the world, Alcoa’s forecast for an 11% recovery in global aluminum demand is almost entirely pinned on the Chinese.

But hey, Q3 numbers were great, so just buy now and worry later… right?

  Two bits of data today: Initial claims for unemployment benefits fell to 521,000 last week — still way above the norm, but the lowest level since January. About 6.04 million people are currently receiving benefits, also historically bad, but off highs from this summer.

  Mortgage applications surged last week to the highest level in four months. The Mortgage Bankers Association reports its application index jumped 16.4%, to 756, its highest since May. Like Alcoa’s numbers this morning, it’s hard to get too excited… the MBA says applicants were drawn in by ultra-low, government-manipulated lending rates and the government-manipulated first-time homebuyer tax credit, which expires soon.

  “This is over the top nutty,” writes Addison Wiggin, reporting on housing on the other side of the world — The Cityscape 2009 real estate expo in Dubai. “Even for a city that has seen a 50% drop in property values in 18 months, the projects they have planned are limitless in their imagination.

“Not content with one giant archipelago of man-made islands in the shape of a palm tree… they built three. But even that wasn’t enough; they built a replica of the Earth in islands… surrounded by the sun, the planets and the universe, 300 high-end real estate islands. The only trouble? They’ve run out of money and investors. Two of the palm islands are washing away in the waves… to say nothing of the Earth, sun, solar system and universe. But that doesn’t stop the dreamers from trying to fund new projects.

“We’ve spent the week essentially living in an ultra-chic mall. Our hotel is connected on one end to the largest mall in the world. In this part of the city, New Dubai, everyone — the expats, the imported workers, the Emeratis and their guests — basically live inside because it’s too hot to go out. It’s quite literally the desert. The whole new city is comprised of tall buildings with dusty construction zones in between. Each parchment of land that isn’t under construction is a patch of shifting sand. Yet something like three out of four building projects have stalled completely… the contractors have just walked off the job.


“The mall we’re attached to has every high-end store in the world. It has a Galeries Lafayette bigger than the one in Paris. Then every brand name you can imagine. BCBG Max Azria. Versace. Bloomingdales is opening a four-story store in January. Armani has a catwalk right in the middle of the mall. There’s an ice rink and aquarium in it, too.

“Outside sits a faux lake surrounding the Burj, the world’s tallest building. Every night, there are fountain displays choreographed to Arabic, Indian and African music. The fountain shoots water 50 stories in the air. Boats will be installed to help you move around the lake, like a water taxi in the Inner Harbor in Baltimore.

“It’s a fantastic design, in the pejorative sense. While meandering about the place, it’s hard to stop asking basic questions: Who will be sitting in the French, Italian, South African, Lebanese restaurants being opened along the shores of this new paradise? Who will be shopping in these “fashion forward” boutiques? Who will occupy all the thousands of units of office space, and what kinds of business will they be engaged in? Who will live in the hundreds of tall dark glass towers?”

For more of Addison’s anecdotes from Dubai, read today’s Daily Reckoning.

  Speaking of Dubai, gold is up to yet another record high today. The spot price climbed to $1,059 early this morning, and is just a few bucks lower as we write.

  Sigh… and the lowly dollar is down yet again. The dollar index fell to 76 even this morning, just a few tenths of a point above its 2009 low.

   “I would vigorously dispute the Chris Mayer’s comparison of the dollar to the German Deutsche mark,” a reader responds to yesterday’s 5.

“The DM disappeared because German politicians were sucked into the great euro idea, and willingly disbanded their strong economic currency in favor of what is clearly a political one with more holes in its concept than a block of Swiss cheese.

“Most Germans rue the passing of the DM. The fact is that just before the euro existed, you could buy a cup of coffee in Germany for 1 DM. The official exchange rate at switchover was 2 DM to 1 euro. Today you will be lucky to find a cup of coffee in a German restaurant for less than 2 euro. That is 300% inflation!

“Other eurozone countries like Spain and Greece have also suffered rampant inflation because of the euro, which is at least 20% overvalued today. The only country using the euro that has not suffered such inflation is Malta, where the government threatened to heavily fine traders who rounded up prices at currency changeover time. As a result, Malta has a considerably lower cost of living than the once-cheap Spain.”

The 5: All good stuff… but you may have missed the point. We weren’t that interested in why the DM disappeared — though it’s certainly worth studying — but simply providing an example of how swiftly a currency can fall from grace. For one generation, the DM was one of the world’s most stable monies, and much of the next generation has never even heard of it… puts this whole dollar fiasco in perspective, we hope.

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Want to make an audible acquaintance with Whiskey & Gunpowder’s Gary Gibson? Tune in to The Big Biz Show at precisely 4:10 EST today for his nationally syndicated interview. Be warned — venom will likely be spat!


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