No. 250: General Outlook and Trade Data Update
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JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
COMMENTARY NUMBER 250
General Outlook and Trade Data Update
October 9, 2009
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Bernanke Pushes Monetary-Base Panic Button
M3 Headed for Still Weaker Growth
Substance Behind U.S. Dollar Concerns and Gold Rally
FY2009 Government Obligations Likely Hit $75 Trillion
Trade Deterioration Should Be Minor Drag on 3q09 GDP
Economic and Solvency Crises Continue
Inflation Risk Ahead
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PLEASE NOTE: There has been a change in nomenclature with this communication, which otherwise would have been referred to as a Flash Update. Hereafter, all communications will be referenced as Commentaries, numbered sequentially from the onset of the SGS Newsletter in late-2004, and specifying the nature of the communication as to updates to specific economic series and/or the general outlook (such as today’s missive), unusual market or economic circumstances (an alert), full newsletter or special report. As I have become more reliant on using the weekly writings for broad comment, discussion of the general outlook will be more heavily emphasized in at least one weekly communication.
The next planned Commentary is for Thursday, October 15th. Due to travel, that update will cover the release of both September retail sales on October 14th, as well as the September CPI on October 15th. Firm dates for posting of both the Hyperinflation Special Report (2009 Update) and next full newsletter will posted with the October 20th Commentary covering September housing starts and PPI. The preliminary SGS-Ongoing M3 estimate for September will be published over the coming weekend.
– Best wishes to all, John Williams
Worst Still Ahead for Economic and Systemic-Solvency Crises. The U.S. economy continues in its longest and deepest downturn since the first downleg of the Great Depression in the early 1930s. This structural contraction already shows characteristics of a depression. Particularly protracted and deep, it will remain unresponsive to traditional economic stimuli.
Last week’s announcement of the pending payroll benchmark revision (see the Flash Update of October 2nd) indicated that a failure of the birth-death model had undercounted jobs losses by 824,000, largely in first-quarter 2009. Such would have been an ongoing problem up to present. The benchmark detail had to have been enough worse than expected to force both the Administration and the Federal Reserve to make negative adjustments to their internal economic forecasts.
The above graph reflects the likely benchmark revision to payrolls carried forward through September. Year-to-year percent contraction in payrolls now likely is worse than at any time since the shutdown of war-time production at the end of World War II. Even so, the current annual payroll contraction is close to rivaling that record decline seen at the end of the war.
In terms of current economic growth, payrolls still are in contraction, but inflation-adjusted retail sales, housing data, industrial production and new orders for durable goods have leveled off at record- or extremely- low levels of activity. They are not recovering and can tumble anew as short-lived boosts such as the cash-for-clunkers and the tax credit for first-time home buyers expire. With a six-to-nine month lead-time between stimulus efforts and any economic impact, the time is at hand for the politicians to generate any new stimulus package that they hope might mitigate impact on next November’s mid-term election from the negative economy.
Coincident with the economic crisis — but also related to the structural issues driving the economic contraction — a systemic-solvency crisis has unfolded during the last two years that has triggered extraordinary liquidity actions by the Federal Reserve and U.S. Treasury, in conjunction with extreme efforts at fiscal economic stimulus, all aimed at preventing a outright collapse of the banking system and the economy. Indications of current contraction in domestic liquidity suggest these actions have not had their desired impact. Instead, the systemic-solvency crisis appears to be intensifying anew.
Pre-crises fiscal malfeasance set the United States on course for a hyperinflationary great depression before the end of the coming decade. The severe economic contraction, and federal government and Federal Reserve’s efforts to debase the U.S. dollar, however, already have had impact and meaningfully have exacerbated the government’s solvency problems. As a result, the hyperinflation risk has moved nearer in timing, by 2014, with particularly high risk for this ultimate monetary crisis to unfold in the year ahead. I contend that the worst of the economic and systemic solvency-crises still lie ahead of us.
U.S. Dollar and Gold Activity. The last week has seen unusual activity tied to U.S. dollar weakness and higher gold prices. An October 6th article by Robert Fisk, published in the The Independent, reported secret talks, where "… Gulf Arabs are planning — along with China, Russia, Japan and France — to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese Yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."
Almost all purported parties to these talks denied the story.
William Engdahl, a political risk consultant and author with significant contacts in the oil industry, indicated on October 7th that, "I have confirmed from very senior and well-informed Gulf sources that the talks are in fact real."
I have known Bill for years, and have found his information to be highly reliable. He may be reached via his website: www.engdahl.oilgeopolitics.net.
Irrespective of what really is going on at the moment, the concept makes sense for the parties involved. It could be initiated quickly, if desired, not over decades as some are contending. As discussed in recent newsletters, such a move would be highly detrimental to the U.S. dollar and highly inflationary for the United States. It also could be a proximal trigger for heavy dollar dumping and dumping of dollar-based assets. Despite near-term volatility and intervention in the gold and currency markets, the long-term outlook remains extremely bearish for the U.S. currency and extremely bullish for gold and silver.
Broad Money Growth Contracted Again in September. Although last night’s (October 8th) reporting on M3 components (seasonally adjusted) M2 and institutional money funds showed some weekly rebound, annual growth appears to have slowed across-the-board for M1, M2 and the SGS-Ongoing M3 estimate. Formal monthly estimates will be published this weekend on the Alternate Data tab at www.shadowstats.com, following the release of updated banking statistics tonight.
On a year-to-year basis, September M1 growth slowed to about 14.2% from 18.6% in August; September M2 growth slowed to about 6.6% from 7.8% in August; September SGS-Ongoing M3 growth slowed to roughly 2.3% from 3.9% in August. On a month-to-month basis, both M1 and M2 rose, while the M3 estimate appears to have contracted for the third consecutive month. These patterns continue to signal an intensifying systemic liquidity crisis, and there is nothing in the current data that would alter the content of the September 2nd Alert.
Fed Chairman Bernanke noted yesterday, that "… the quantity of bank reserves held at the Federal Reserve has risen dramatically as the Federal Reserve’s balance sheet has expanded, and reserves are likely to continue to grow as the Federal Reserve purchases additional agency-backed securities. Currency and bank reserves together are known as the monetary base; as reserves have grown, therefore, the monetary base has grown as well. However, because banks are reluctant to lend in current economic and financial circumstances, growth in broader measures of money has not picked up by anything remotely like the growth in the base. For example, M2, which comprises currency, checking accounts, savings deposits, small time deposits, and retail money fund shares, is estimated to have been roughly flat over the past six months."
Of some significance, he did not mention in his last comment that the Federal Reserve reports seasonally-adjusted M2 has contracted an annualized pace of 2.3% for the past three months. Mr. Bernanke has a systemic problem, and he is boosting monetary base at a pace not seen since the stock market sell-off earlier this year.
Monetary Base Pushed to Record High. Reflecting action that could be described as near-panic, the Fed boosted the monetary base to a record high $1.88 trillion in the two weeks ended October 7th, at an annualized 112.8% rate of growth in the last two months, a pace not seen in six months. Such is reported in the St. Louis Fed’s Adjusted Monetary Base (seasonally-adjusted), as shown in the accompanying graph. Year-to-year growth in the monetary base has started to slow, down to 85.3% in the October 7th period, from 93.5% and 104.3% in the two prior periods. The slowing annual growth here reflects nothing more than year-ago comparisons against the post-Lehman crisis and the Fed’s initial panicked spiking of the monetary base.
GAAP-Based Federal Deficit Likely Hit $8.8 Trillion in 2009. Based on an estimate by the Congressional Budget Office (CBO), the official federal deficit rose to roughly $1.41 trillion in 2009 (fiscal year-end September 30, 2009), up from $455 billion in 2008. Accounting gimmicks, introduced mid-fiscal year, knocked off roughly $500 billion of additional 2009 deficit reporting tied to the government’s economic stimulus package.
Gross federal debt in 2009 rose by $1.9 trillion to $11.9 trillion, having risen by $1 trillion in 2008.
I estimate that GAAP-based accounting (generally accepted accounting principles), including annual changes in the net present value of unfunded liabilities (such as in Social Security and Medicare) will show an actual 2009 deficit of about $8.8 trillion, up from $5.1 trillion in 2008, with total federal obligations, including debt and net present value of unfunded liabilities at roughly $75 trillion. Such is more than five times the level of U.S. GDP. Taxes cannot be raised enough to balance spending. One-hundred percent taxation still would leave the U.S. fiscal condition in deficit. I’ll also contend that the political establishment in Washington lacks the will to slash its programs by an amount necessary to contain the extreme excesses of spending. As was discussed in last year’s Hyperinflation Report (and as will be reiterated in the pending update), it is this circumstance that assures the ultimate debasement of and hyperinflation in the U.S. dollar.
U.S. Government - Alternate Fiscal Deficit and Debt
Reported by U.S. Treasury |
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Dollars are in either billions or trillions, as indicated.
Sources: U.S. Treasury, Shadow Government Statistics. |
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Fiscal
Year(1) |
Formal
Cash-Based Deficit ($Bil) |
GAAP
Ex-SS Etc. Deficit ($Bil) |
GAAP
With SS Etc. Deficit ($Tril) |
GAAP
Federal Negative Net Worth ($Tril) |
Gross
Federal Debt ($Tril) |
Total(2)
Federal Obligations (GAAP) ($Tril) |
2009(3)
|
$1,409.0
|
$2,800.0
|
$8.8
|
$68.1
|
$11.9
|
$74.6
|
2008
|
454.8
|
1,009.1
|
5.1
|
59.3
|
1c0.0
|
65.5
|
2007
|
162.8
|
275.5
|
1.2(4)
|
54.3
|
9.0
|
59.8
|
2006
|
248.2
|
449.5
|
4.6
|
53.1
|
8.5
|
58.2
|
2005
|
318.5
|
760.2
|
3.5
|
48.5
|
7.9
|
53.3
|
2004
|
412.3
|
615.6
|
11.0(5)
|
45.0
|
7.4
|
49.5
|
2003
|
374.8
|
667.6
|
3.0
|
34.0
|
6.8
|
39.1
|
2002
|
157.8
|
364.5
|
1.5
|
31.0
|
6.2
|
35.4
|
(1) Fiscal year ended September 30th. (2) Includes gross federal debt, not just "public" debt. While the non-public debt is debt the government owes to itself for Social Security, etc., the obligations there are counted as "funded" and as such are part of total government obligations. (3) Except for the formal cash-based deficit (preliminary) and for the gross federal debt, which are government estimates, fiscal 2009 data are estimated by SGS (Net Worth corrected). Please note that mid-year accounting redefinitions for TARP knocked off roughly $500 billion from the reported formal cash-based estimate. (4) On a consistent reporting basis, net of one-time changes in actuarial assumptions and accounting, SGS still estimates that the GAAP-based deficit for 2007 topped $4 trillion, with negative net worth of $57.1 trillion and total obligations of $59.8. So as to maintain consistency with the official GAAP statements, the "official" numbers are shown. (5) SGS estimates $3.4 trillion, excluding one-time unfunded setup costs of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (enacted December 2003). Again, in order to maintain consistency with the official GAAP statements, the "official" numbers are shown in the table for 2004. The 2009 GAAP statement is due for release in mid-December 2009. Link to the 2008 statements: http://www.fms.treas.gov/fr/08frusg/08frusg.pdf
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Third-Quarter Trade Deficit Shapes Up as a Negative for GDP. This morning (October 9th) the Census Bureau and Bureau of Economic Analysis reported that the seasonally-adjusted August trade deficit narrowed slightly to $30.7 billion, from a revised $31.9 billion (was $32.0 billion) in July. As the BEA adjusts for inflation (also as not adjusted for inflation), both the July and August deficits were worse than the average for second-quarter 2009. The "advance" estimate of third-quarter GDP (due for release on October 29th) will be based on just the two months of trade reporting. The net export account, which had provided a relative boost to GDP reporting in recent quarters, accordingly should be a net negative contributor to the third-quarter GDP estimate, despite consensus forecasts for a quarterly GDP pickup.
August exports declined by less than imports did. Oil imports fell, based on higher oil prices ($64.75 average per barrel in August versus $62.48 in July) being more than offset by reported lower physical volume (8.7 million barrels per day in August versus 9.6 million in July). Once again, irregular paperwork flows through Customs may be impairing the reporting accuracy of imports.
More Disappointed Market Expectations in the Week Ahead. Given the underlying reality of a weaker economy and a more serious inflation problem than expected by the financial markets, risks generally are for higher-than-expected inflation and weaker-than expected economic reporting in the week ahead.
Retail Sales (September). Due for release on Wednesday (October 14th), September retail sales should be down on a monthly as well as a year-to-year basis, both before and after adjustment for inflation. With the reversal of the cash-for-clunkers program that spiked August auto sales, expectations of a 2.0% September monthly decline (Briefing.com) in retail sales, versus a 2.7% gain in August, are reasonable but are at some risk of a downside surprise.
Consumer Price Index (September). Due for release on Thursday (October 15th), a monthly increase of 0.2% is expected (Briefing.com) for the seasonally-adjusted CPI-U, versus a monthly gain of 0.4% in August. An upside surprise here likely would reflect higher new auto prices, which were depressed artificially by the poor-quality handling of the cash-for-clunkers impact in the August CPI calculations. Negative year-to-year inflation in the CPI-U should narrow from August’s pace.
Annual inflation would increase or decrease in September 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the "flat" (0.04% increase) adjusted monthly change seen in September 2008. I use the adjusted change here, since that is how consensus expectations are expressed. The difference in growth would directly add to or subtract from August’s annual inflation rate of negative 1.48%. CPI-U annual inflation likely hit its trough for the current cycle in July 2009, with accelerating upticks in annual inflation likely in the months ahead, particularly in October.
Industrial Production (September). Due for release on Friday (October 16th), September industrial production is expected to show a 0.1% monthly gain (Briefing.com). While such is reasonable following a 0.8% clunkers-spiked gain in August, again, reporting risk again is to the downside of expectations.
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