A Solution That Solves Nothing

Addison Wiggin – June 30, 2011

  • Corporate jets? Really? Why the latest “solution” to the national debt crisis solves nothing
  • QE2 wraps up: Lindsay Lohan weighs in on the consequences (seriously), while Dan Amoss peers into the “roach motel” of America’s future
  • Wait… isn’t Greece fixed? IMF adds to the chorus warning about money market funds
  • “Violent revolution” thread takes a new turn: Readers speculate on which side the soldiers will take (seriously)…

   It was so simple, we’re kicking ourselves for not seeing it. In fact, we now realize how much effort we wasted making I.O.U.S.A.

The president made it clear as could be yesterday — reminding us six times during a 14-minute span that essentially one factor lies behind the nation’s dire fiscal straits.

“The tax cuts I’m proposing we get rid of,” he said during a press conference, “are tax breaks for millionaires and billionaires; tax breaks for oil companies and hedge fund managers and corporate jet owners.”

   The president cited “corporate jets” or “corporate jet owners” three times during an eight-minute opening statement, and three more times during a six-minute response to the first question.

In other words, he said it enough times to plant the seed that if the corporate jet “loophole” were repealed, it would put a significant dent in the budget deficit.

Not so much. “Changing the provision would put $3 billion into the Treasury over a decade,” reports, Bloomberg, “said two congressional aides familiar with the proposal.”

So that’s an average of $300 million. Out of a $1.65 trillion deficit, that’s 0.018%.

Never mind that the loophole was part of the 2009 stimulus bill the president signed… on the theory that it would spur new purchases of corporate jets and help an ailing U.S. industry: Cessna and Gulfstream alone have plants in 15 U.S. cities.

And never mind that many of the executives who fly corporate jets were bailed out by this administration, and/or the previous one, in conjunction with Congress. Why the hullabaloo now?

   Perhaps we’re being harsh. After all, the president also cited “tax breaks for millionaires and billionaires.” Perhaps that’s code for returning to 1990s-era tax brackets for incomes higher than $250,000.

That would generate $700 billion over 10 years. Or $70 billion per year. Or 4.24% of the deficit.

We haven’t run the numbers for the oil production tax credit or the hedge fund “loophole.” But we’re reasonably certain they too amount to pittances in the face of a $1.65 trillion yaw.

   Speaking of which, let’s wet our index finger and see which way the wind is blowing: Uncle Sam has run up the national debt by $625,733,489,902 since Nov. 3, 2010. That seems like a lot, but what do we know…

The Federal Reserve bought up nearly all of it — $600,000,000,000 worth. Again, seems a little over the top.

We’re curious today, specifically, because June 30, 2011(today), is the day Pimco’s Bill Gross referred to as “Economic D-Day,” i.e., the end of “QE2” — the Federal Reserve’s second attempt at using easy money to counteract the prevailing trends of the Great Correction.

With our digit still in the air, we ask: “What did it accomplish?”

Before we respond to ourselves, it’s useful to recall what Fed chief Ben Bernanke wrote in The Washington Post the day after the Fed put QE2 into motion: “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.”

“Higher stock prices,” he continued, “will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Going back to when Bernanke telegraphed the onset of QE2 10 months ago during his annual speech at Jackson Hole, Wyo., here’s what stocks have done…

Of course, while the Fed controls how much money it creates, it cannot fully control where it goes. So we also have these results…

  • Commodity prices as measured by the CRB up 28%
  • Oil prices up 30%
  • Even the government’s own heavily massaged consumer price index is up 3.5% in the last 10 months — well outside the Fed’s 2% comfort zone

   Heck, even Lindsay Lohan is catching on… sort of.

The fallen Disney teeny-bopper sent out this tweet on Monday to her 2,132,086 followers…

…which caught the attention of a writer at The Atlantic, who customarily panned it. Yawn.

Then we learned the National Inflation Association (NIA) “sponsored” the tweet. Excuse us, paid her to send it.


Atlantic Monthly also believes LiLo, as she’s known by all the cool kids, spent some of the time during her recent house arrest reading Ron Paul’s End the Fed.

We’re still undecided. Is this intersection of our work with the paparazzi a good omen or a sign the impending apocalypse?

   “The Fed is stuck in a position that it won’t dare admit to,” says Strategic Short Report’s Dan Amoss, getting us back on topic. “I think QE2 (and 3, 4 and 5) will be like a roach motel: easy to enter and impossible to exit in a practical manner.”

“Say that the Fed doubles the size of its balance sheet yet again, all while the market’s expectation of future inflation is steadily rising. The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed’s balance sheet. On a market-to-market basis, the equity on the Fed’s balance sheet would be negative — by several hundreds of billions of dollars.

“Are we to expect, at that point, the Fed to start unwinding its Treasury portfolio, selling it back to the public at much higher yields? If so, such selling of Treasuries (a quick reversal of QE) would lock in hundreds of billions of losses, requiring taxpayers to recapitalize the Fed.”

One more complication: Most of the national debt sits in short-duration Treasuries. It would have to be refinanced at much-higher rates. “That,” says Dan, “would put the U.S. government budget in a position similar to that facing the Greek government today: It would have to choose between:

Totally inflating the value of the debt away; or
Crushing the private-sector economy by jacking up tax rates simply to pay interest on Treasuries.

“The market’s reaction to radical central bank policies is something we don’t see discussed very often. Yet in my mind, this single factor — the reaction to QE — will be the key driver of financial markets in coming years.

“For right now, I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields) as more bond investors look ahead to a future of endless U.S. budget deficits and decide to hit the Fed’s ‘QE bid.’”

   If Greece, meanwhile, is supposed to be “fixed” now, someone forgot to notify the new lady chief at the International Monetary Fund (IMF).

Yesterday, even as the Greek parliament passed new tax increases and budget cuts, the IMF picked up on our warning about the risk Greece poses to U.S. money market funds.

“If there is… a spillover [from Greece] to the core European banks,” warns IMF economist Gian Maria Milesi-Ferretti, “then you could see a resurfacing of tensions in U.S. money market mutual funds.”

   Last week, institutional investors pulled out of money market funds at the fastest pace since March 2010.

Prime money market funds saw an outflow of $39 billion in the week ended Tuesday, and $36 billion the week before. Money market funds that buy only U.S. Treasuries, on the other hand, saw a net inflow of $27 billion.

Institutional investors know what we discussed two weeks ago: Half of the prime money market funds’ assets are invested in the short-term debt of European banks.

But why, you might wonder? “The funds are out chasing yield like everybody else,” says Christopher Whalen of Institutional Risk Analytics, “because the Fed low interest rate policies are starving the investment community to death.”

“We’re shifting hundreds of billions of dollars worth of income away from savers and corporations to finance and subsidize the banks,” Mr. Whalen tells King World News.

“The funds have had to look globally for returns because it’s very hard for them to compete with the banks right now. People are so afraid that they would almost rather have their funds in a noninterest-bearing account at a bank rather than the money market fund that has exposure to market volatility.”

If the notion of hiding in cash frustrates you… there’s a different approach you can take in the face of any spillover from Greece. It’s a six-part plan laid out for you here.

   Stocks are sloughing off Greece and pretty much everything else this morning. The Dow has zoomed past 12,400… the S&P is in sight of 1,320. An ISM report on economic conditions in the Midwest turned back up this month, after slipping in May.

   Hot money flowing into stocks is flowing out of gold for the moment. Still, the Midas metal is again demonstrating its resilience, falling only a few bucks from where it was 24 hours ago, to $1,506.

   Spot silver goes for $34.79 this morning… and once again, bargain hunters have swooped down on the U.S. Mint to buy Silver Eagles this month. Sales for June totaled 3,374,000 — only a touch behind May’s figure of 3,653,000.

Through the first six months of 2011, sales totaled 22,275,500. Assuming the pace keeps up, the year-end number will smash last year’s record of 34,662,500.

Collectors, please note our friends at First Federal still have a small supply of “Early Release” 2011 Silver Eagles graded MS70 by the independent grading firm NGC. Previous issues of this kind sell for as much as $5,690. You can get this year’s model right here. As always, we’re likely to be compensated if you buy.

   “The issue of a violent revolution is moot,” writes a reader, carrying on a discussion that got started last week. “Without a conversion of hearts and minds, nothing will happen with or without an armed revolt.”

“The issue is as simple as it is clear: Thanks to Dewey, FDR, Saul Alinsky, George Soros, ad nauseam, our schools and our media have been usurped, leading to the brainwashed masses today that folks from the Greatest Generation would not even recognize.”

The 5: Hmmn… seems like there’s plenty of blame to spread. Why these folks in particular?

   “Hey, Pops,” writes a reader addressing the fellow reader who wrote yesterday that the government would swiftly deploy the military to put down any revolt, “There are more guns in the hands of civilians in the U.S. than exist in the rest of the world.”

“And if you know anything about revolutions, the military has many buildings with lots of automatic boom-booms… plus, many military guys are patriots. I would not want to be commanding a squad of guys and order them to shoot down civilians.”

   “The writer assumes,” chimes in another, “that the military will blindly follow the governments orders. Will soldiers fire on groups of people who contain their own fathers, mothers, brothers, sisters, etc.?”

“As has happened in so many countries over many centuries, they will turn their weapons against the government that is also oppressing them!”

   “Some more writing on the wall?” writes a reader in California who caught our warning about how state governments will “pickpocket your wealth through new taxes… propose weird new fees.”

“We received this notice from Amazon yesterday,” the reader continues. “Just in case you haven’t already seen it, I thought you’d find it interesting.”

The notice describes how Amazon is cutting ties with its thousands of California affiliates — businesses and nonprofits that earn commissions by referring customers to Amazon. Overstock.com is doing the same thing.

That’s because a new Internet sales tax became law yesterday in California. Amazon did the same earlier this year when similar measures passed in Illinois, Connecticut and Arkansas.

Of course, talk of Internet sales taxes is hardly new. But the Great Correction and resulting crash of state tax revenue is turning the talk into reality.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. Even with today’s rally, the S&P is up a skimpy 2.5% year to date. At this moment, with exactly half the year over, stocks aren’t keeping pace with rising prices.

Inflation is eating you alive. If you’re only S&P-exposed, your 2.5% gain might as well be a magic trick. Because it’s not doing you any good…it’s just a distraction.

How do you craft a second half of the year that makes up for the sham of the first?

You book 70% gains in 12 days on stocks like the tiny “organ transport” firm Greg Guenthner delivered to his readers just a few weeks ago.

Greg issues his next alert Tuesday morning, just in time for the market open after the Independence Day weekend. He’ll recommend an impressive little stock poised for a huge move. You can make sure you receive this recommendation by acting here.


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