Parasite on the World Economy

Addison Wiggin – August 2, 2011

  • Debt ceiling verdict: Putin declares Uncle Sam “parasite” on the world economy, Asians load up on gold
  • Americans’ income stalls, spending contracts: A deeper downturn and weaker recovery than the numbers first said
  • How the debt ceiling agreement could mean more new taxes and weird fees close to home
  • Readers inquire about Super Congress and patent trolls… plus your final chance at Vancouver CDs before the price goes up

   “The country is living in debt,” Russian Prime Minister Vladimir Putin said yesterday when asked about the Grand Bargain the U.S. Congress is voting on today.

“It is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite.”

History’s cruel irony: The deficit spending justified in the 1980s to defeat the Soviet Union became “business as usual” for the ensuing three decades.

Yeah, that was pretty much our reaction, too

The agreement cut yesterday to avert default “was not that great overall because it simply delayed the adoption of a more systemic solution,” according to Putin, who was addressing a youth camp in central Russia.

“If the U.S. encounters a systemic malfunction, this affects everyone,” he said. Thus does the prime minister suggest, and not for the first time, his own “more systemic solution.”

“There should be other reserve currencies.”

Russia holds $115 billion in U.S. Treasuries. That’s only a 10th of China’s holdings, but still nothing to sneeze at.

   For its part, South Korea — the world’s seventh-largest holder of U.S. dollars reserves — reacted to the “agreement” by announcing the Bank of Korea has tripled gold holdings over the past two months.

The $1.25 billion purchase is the first addition to Korean gold holdings since the Asian financial crisis of the late 1990s.

Thailand also made an announcement today. They added $900 million to their gold stash in June.

“The trend,” says the Financial Times, “means central banks, sovereign wealth funds and other so-called ‘official sector’ buyers are on track to record their largest collective purchase of gold since the collapse of the Bretton Woods system, which pegged the value of the dollar to gold, in 1971.”

   With that, gold is powering into record territory this morning, the spot price currently up $17, to $1,637. Silver, meanwhile, has pushed past $40 again, sitting at $40.11 as we write.

   Meanwhile, one of the “frontier markets” we follow is running away from the dollar in a different direction. Cambodia’s stock market, opened last month, will allow trading in U.S. dollars… but only for the next three years. Then the Cambodian riel will take center stage.

According to the Asian Development Bank, U.S. dollars account for 90% of the currency in circulation in Cambodia. But that’s due to change, says our contact on the scene — Leopard Capital chief and Vancouver speaker Doug Clayton.

“The U.S. dollar is losing its credibility from the reckless ‘quantitative easing’ programs of the U.S. Federal Reserve,” he tells MarketWatch. “It is becoming unsafe for Cambodia to delegate its monetary policy to the bankrupt U.S., which hopes to inflate its way out of its recession and huge debts.”

“Foreign investors would initially prefer to trade shares in dollars since that is simplest for them,” he continues. “But once there are enough riels in circulation and sufficient liquidity in the foreign exchange market, trading shares denominated in riels will not pose any problems for investors.”

   U.S. stocks are slumping again, the major indexes both down about two-thirds of a percent. The S&P sits at 1,275 — a level last seen in late June.

   One word for the Commerce Department’s monthly numbers on income and spending: Rotten.

Personal income rose 0.1% in June, the smallest increase since last November. Consumer spending, meanwhile, dropped 0.2% — the first contraction in two years and a result that literally no one among 77 economists surveyed by Bloomberg was expecting.

That said, the savings rate perked up again — people battening down the hatches for the double-dip recession the pundits insist can’t possibly happen.

   The figures out this morning include revisions going back several years. Incomes were revised downward for both 2009 and 2010.

This is a nice double-whammy to go along with another set of revisions the quants at Commerce gave us last Friday. As we mentioned then, one of the “highlights” was that GDP for Q1 2011, thought to be 1.8% only a month ago, turned out to be only 0.4%.

But those revisions extend further back in time. Going back five years, the quants have now determined the “downturn” was sharper, and the “recovery” was weaker.

   Three years ago, Wall Street Journal columnist Holman Jenkins suggested the government should bulldoze vacant homes to stabilize housing prices. Now it appears banks are taking him up on the subject.

Bank of America plans to demolish 100 homes in the Cleveland area and then donate the land to local governments. The bank has already donated 100 in Detroit and 150 in Chicago, “and may add as many as nine more cities by the end of the year,” reports Time.

It’s a convenient way to get out from under the maintenance obligations and property taxes. Heck, it might even be a corporate income tax write-off. And “local governments like these deals,” says the magazine, “because they get free land to develop or use for open space.”

Not that local governments have the resources to development any new vacant lots.

   The city government of Central Falls, R.I., filed for Chapter 9 bankruptcy yesterday. The unions representing retired police, firefighters and other city workers refused voluntary benefit cuts.

Now it’s up to the courts to figure out who, among the many entities owed money by the city, gets paid… and who gets the shaft. Effective immediately, city retirees must kick in 20% of their medical coverage.

Central Falls lavished subsides on the private companies that built a prison, hoping it would drive an economic revival that never materialized. With $80 million in retirement obligations, the city threw in the towel.

To keep basic services going, Central Falls might end up merging with nearby Pawtucket or Lincoln. “We will be exploring all options,” announced a confident-sounding Gov. Lincoln Chafee, “to provide quality services at an affordable cost to all taxpayers.”

Good luck with help from the state. Rhode Island ranks No. 9 on “The Debt List” — one of three indicators we compiled in preparing our special report American Oases. Central Falls is the fifth “municipal entity” to file for bankruptcy this year. There were six in all of last year.

“Sandra Zambrana,” reports Ted Nesi of WPRI-TV, “a 13-year resident of Central Falls, said she was frustrated by the presence of drug dealers and idle young people in the city. She’s thinking of moving to Massachusetts to access better Medicaid benefits.”

Oy.

   “Among the biggest items on the chopping block in Congress,” reports The Washington Post as if commenting on our latest forecast, “are education and Medicaid spending — federal dollars that make up the largest parts of most states’ budgets.”

You’ll recall 80% of money in the 2009 stimulus bill was sent directly to state and local governments. Most states have already passed their budgets with assumptions about how much new money will be doled out by Congress. Given the mess in Washington, that money isn’t likely to materialize.

Because they can’t print money, states “are going to have to eat [the shortfall] in some way, and many will pass [the costs] onto local governments,” says Frank Shaforth, director of the Center for State and Local Government Leadership at George Mason University. Local governments will likely slash services, jack up property taxes… and add weird new fees. We’re confident you’ve seen the trend in your neighborhood already…

“Aside from already collecting property, sales and income taxes,” we write about a small few, “they’ve also put in place separate streetlight fees… fire hydrant fees… and new booze taxes. Nevada is even considering a new $5 surcharge on prostitution.”

Alas, our forecast is picking up speed. It didn’t require the government to crash the debt ceiling, officially “default” on its debt or even delay a payment. All that is required is for the next crisis is Congress to keep doing what they’re best at: kicking the can down the road.

For a foretaste of where this all leads… and what you can do about it… give our presentation a good look.

   “At root, there’s a hard-core level of U.S. environmental opposition to pipelines,” writes Byron King, examining the holdup of a project that would bring oil from the sands of Alberta into the United States.

It’s called Keystone… and would stretch all the way down to Texas. “Problem is,” says Byron, “the Obama administration is blocking construction of the new Keystone line. The State Department and EPA are studying the line, and studying it and studying it some more.”

“I’ve looked hard at the arguments against the system expansion. I’m simply stunned at the level of mendacity and bad faith on the part of some of the opponents. One whopping whopper is that, somehow, the Keystone line will carry ‘acidic’ Canadian oil (darned Canadians!), which will eat through the steel of the pipe and thus pollute the Ogallala Aquifer of the U.S. Midwest. Huh? You’ve got to be kidding me.”

“Pipelines have been carrying oil since the days of Titusville, and the oil industry is well aware of how to build safe lines. Of course, recent spills in older lines in Michigan and Montana don’t help the cause. Then again, well-maintained pipelines, outfitted with modern safety features, almost never leak. And if there is a leak, it’s easier to identify, isolate, contain and clean up than, say, spills caused by tanker collisions.”

“There’s nothing more “acidic” about Canadian oil than anyone else’s oil. That argument is just a form of throwing stuff against a wall to see what sticks.”

The obvious parallel is with the “permitorium” that continues to stifle offshore development in the Gulf of Mexico.

   “I know I am getting older, so dates and times tend to slip away,” writes a reader who notes that a special committee of 12 congress members is supposed to hash out the majority of “budget cuts” under the Grand Bargain.

“Did we not just get the results of a committee last December on what to cut and where to save? Retreads Simpson and Bowles plus Kent Conrad and about a dozen other congressmen from both parties already spoke. If we are not going to listen to their recommendations, why bother with another committee?” “Are the memories in D.C. that short, or are they counting our memories being that short?”

The 5: The real problem with this “Super Congress” is the concentration of power. “It cedes power to draft legislation to a special commission,” writes Rep. Ron Paul, “handpicked by the House and Senate leadership. The legislation produced by this commission will be fast-tracked, and members will not have the opportunity to offer amendments.”

“Approval of the recommendations of the ‘Super Congress’ is tied to yet another debt ceiling increase. This guarantees that members will face tremendous pressure to vote for whatever comes out of this commission— even if it includes tax increases.”

The same authority was granted to the Simpson-Bowles commission to which you refer last fall. If a bill had been drafted, all it would have required for passage was an up-or-down vote in the House or Senate.

To become a bill, the commission needed a “yea” from 14 of its 18 members. They didn’t get it.

   “In view of the man who is suing over the Hilton Garden Inn’s hidden fee,” writes another reader, “people will find any reason to sue today…

“You may be aware of a new trend called ‘patent trolls.’ They’re quite lucrative if they can bring it off. A company will contact you if you have a small startup and kindly inform you that you are being sued for $300,000 because you infringed on their idea. Doesn’t matter if you did or not, calling them won’t clear it up — they’ll see you in court.”

“Naturally, they want you to get nervous and settle out of court, thus actually saving money. Most nervous startups settle, no questions asked. Heard this on the radio.”

The 5: Yes, This American Life had a segment on patent trolls recently.

In a similar vein, Gary Shapiro, skipper of the Consumer Electronics Association (CEA) and himself a patent attorney, tells of a newsletter company whose revenue stream consists of lawsuits pressed against firms who forward their newsletters on to nonpaying customers.

The strategy works apparently because the firm, as a matter of strategy, plants ‘bugs’ in the issues to track those forwarded online. They then wait five years while subscription fees and penalties rack up before bringing their suits. Dirty business.

Cheers,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. Bill Bonner’s speech on Friday blew both attendee records and appreciation levels in Vancouver. You can catch a glimpse of it here, but if you want the full monty — “whither destiny leadeth us” — you can still gain access to the MP3s and/or CDs of all 27 main hall lectures, here… at the symposium price anyway.

The package also includes a complete write-up of every investment recommendation from the small-group “breakout” sessions. You get names, ticker symbols, the works. The audio files and a PDF of the investment recommendations will hit your inbox as soon as our production team has wrapped ’em in a bow… but only if you purchase them here. The post-symposium price kicks in at midnight.

rspertzel

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