[Swiftwater Gazette] The gov't doesn't get it

[Brad Haslett]

Rik,

Only a person who has had at least one employee, even if it was only
one's self, can truly understand the burden of meeting the 'gubmint'
regulations. Why we keep finding these so-called leaders who spent
their entire lives in government or academia and think they somehow
have a clue how the real world works if beyond me. It reminds me of
George McGovern being shocked to discover how overwhelming it was to
comply with government regulations after buying a hotel upon retiring
from politics.

In other news, nothing is safe (see below).

Brad

---------------------

    * DECEMBER 9, 2009, 12:49 P.M. ET

Are Your U.S. Treasury Bonds Safe?

    *
      By BRETT ARENDS



President Barack Obama has recently unveiled bold new plans for
government programs and tax breaks to try to boost the economy. These
initiatives have no price tag yet, but they will require significant
spending.

You can debate whether new highway and bridge projects and sundry tax
breaks will help the economy. That's a political question. But as the
U.S. government piles borrowing atop more borrowing, it begs a
financial question that is not utterly ridiculous: Are your U.S.
Treasury bonds safe?

On its face, the probability of the U.S. defaulting on its spiraling
debts seems highly unlikely. But that's not what the markets think.
The price of insurance against such a default—using derivatives known
as credit default swaps—has jumped by more than 50% in the private
market in recent months. According to CMA DataVision in London, a
specialist in these contracts, it will now cost you 0.34% of the
principal per year to buy default insurance on U.S. government bonds.
If you held $1 million in Treasurys, insuring against default would
cost you $3,400 for the year. A few months back, insuring those bonds
would've cost less than $2,000.
[roi129] Reuters

A protester dressed as a panhandling Uncle Sam stands in Times Square
in October. More than a dozen similarly dressed protesters have
appeared throughout New York to remind passers-by of the scale of the
United States' national debt.

That's not a lot, all things considered. U.S. paper remains among the
safest on the market. (Norway's is considered even safer.)

The cost of insuring government bonds has risen world-wide in the last
couple of months, partly over worries about deteriorating government
finances, and partly in response to the Dubai debt crisis. Insuring
British government bonds will cost you 0.77% for the year, while Dubai
bondholders will pay more than 5%.

Yet CMA DataVision calculates that professional investors with real
money in the game still think there is a 3% or so chance that the U.S.
might default within five years. And that 0.34% annual insurance cost
is pretty hefty compared to the gross yield on five-year Treasury
bonds, right now just 2.1% a year.

For decades, U.S. Treasury bonds have been considered risk-free.
Standard financial theory defines "the risk-free rate of return" on
money as the rate of return you can earn on Treasurys, typically over
10 years. Many money managers still preach the old gospel. The public
holds about $1.6 trillion in government bond funds, according to the
Investment Company Institute, an industry association. Widows, orphans
and retires are constantly reassured that such bonds are without risk.

They're not. The U.S. government has been living beyond its means by
borrowing ever more. Gross federal debt has more than doubled in ten
years to $12.9 trillion. The White House expects it to pass $18
trillion by 2014.

For investors, the greatest danger is not that America could formally
default on its debts, it's that the government may informally default
by unleashing inflation. It's hard to see another outcome. Anyone
holding long-term Treasury bonds should demand pretty high annual
interest rates to compensate them for the risk. The current yield on
30-year Treasurys is about 4.4%, and on 10-year bonds it's about 3.4%.
Anyone lending their money for that length of time on those kinds of
terms is taking a big risk.

Write to Brett Arends at brett.arends at wsj.com

On 12/10/09, Rik Sandberg <sanderico1 at gmail.com> wrote:
> Good morning All,
>
> There are a few reasons why I am retired now. Some have nothing to do with
> the gov't, but, one of the biggest ones is, I was just plain tired of being
> a babysitter to my employees for the gov't. The added expense and
> frustration with each new gov't regulation made me so glad to be away from
> being an employer that .... well I just can't describe what a relief is was
> to be away from all that when I quit. And yet, the gov't can't understand
> why nobody wants to expand.
>
> I doubt we'll see much real, robust economic growth until the gov't figures
> out that they need to get the hell out of the way. Not much chance of that
> any time soon with this bunch of statists running the show.
>
> Rik
>
> >From the Daily Reckoning
>
> *The Credit Crunch Continues*
> By Douglas French
>
> The credit crunch continues, with businesses large and small finding that
> their bankers remain exceedingly stingy in the wake of the 2008 financial
> debacle.
>
> "We need to see banks making more loans to their business customers,"
> Federal Deposit Insurance Corporation (FDIC) Chairwoman, Sheila Bair, told
> reporters recently after the FDIC released figures showing that the amount
> of loans outstanding in the nation's banks fell $210.4 billion in the third
> quarter of 2009. That is the largest quarterly decline since the FDIC began
> tracking loans in 1984.
>
> If we dig inside these data, we see that business lending has contracted at
> a much faster pace than consumer lending. This trend is not merely a
> function of contracting economic activity, it is also a function of the fact
> that banks have been deemphasizing business lending for many, many years.
>
> Numbers from the FDIC reflect this shift over the past decade. At the end of
> the third quarter of 1999, the assets of the nation's banks totaled $5.5
> trillion. As of September 30 of this year, bank assets had grown to $13.2
> trillion. But commercial and industrial loans outstanding barely budged,
> only growing from $947 billion a decade ago to $1.27 trillion by September
> 30 this year. Meanwhile, loans secured by real estate increased from $1.43
> trillion in the fall of 1999 to $4.5 trillion this fall. And investment in
> securities doubled, rising from $1.03 trillion to $2.4 trillion.
>
> This secular shift away from "productive" lending to businesses toward
> "nonproductive" lending to consumers creates a new kind of structural
> weakness for the American economy.
>
> Robert Prechter makes the
> point<http://clicks.dailyreckoning.com//t/AQ/uM4/vpE/AAEOfA/AQ/Ab2aug/Pfo9>in
> the November edition of the
> *Elliott Wave Theorist* that banks have lent sparingly to businesses for the
> past 35 years. Businesses report that since 1974, ease of borrowing was
> either *worse* or *the same* as it was the prior quarter, meaning that - at
> least according to business owners - loans have been increasingly hard to
> get the entire time.
>
> Unfortunately, from a macroeconomic perspective, lending to consumers rather
> businesses is a suboptimal emphasis/counterproductive exercise.
>
> Prechter writes in his book *Conquer the Crash* that the lending process for
> businesses "adds value to the economy," while consumer loans are
> counterproductive, adding costs but no value. The consumer may call his
> borrowing "productive," but it surely does not create capital, i.e., build
> shops or factories or manufacture tools and dies that enhance the
> productivity of human labor. The banking system, with its focus on consumer
> loans, has shifted capital from the productive part of the economy, people
> who have demonstrated a superior ability to invest or produce (creditors) to
> those who have demonstrated primarily a superior ability to consume
> (debtors).
>
> Total household debt peaked in 2008 at $13.8 trillion, with $10.5 trillion
> of that being mortgage debt. And as Sean Corrigan
> explained<http://clicks.dailyreckoning.com//t/AQ/uM4/vpE/AAEOfQ/AQ/Ab2aug/EPt1>,
> "Houses are nonproductive assets, financed with a great deal of leverage."
> And while homeowners reap the services provided by homes slowly over time,
> houses "deliver a large dollop of uncompensated purchasing power up front to
> their builders or to those cashing out of the market," making housing "the
> ultimate engines of created credit on the upswing, and...among the more
> dangerous deflators on the way down."
>
> In the last decade, the US system of fractional-reserve banking has created
> what Frank Shostak
> calls<http://clicks.dailyreckoning.com//t/AQ/uM4/vpE/AAEOfg/AQ/Ab2aug/Dy6O>"empty
> money," which masquerades as genuine money when in fact "nothing has
> been saved." This explosion of money was created through the banking system,
> as consumers gorged themselves on nonproductive assets like houses, autos,
> and big-screen TVs. These purchases gave the illusion of economic growth and
> good times, but in reality weakened the process of wealth formation; instead
> of building capital, this system wasted it.
>
> Meanwhile, businesses that create wealth-producing jobs have stagnated. The
> workforce was induced into working for enterprises that represent
> malinvestment: home and commercial construction, as well as other real-
> estate-related jobs, and businesses dependent on consumer consumption.
>
> Unfortunately, the federal and state governments constantly enact
> legislation that makes the employment of workers more costly and in turn
> makes business expansion riskier. So wealth-producing businesses, like metal
> fabrication and the like, have every incentive not to borrow money from a
> bank to expand their operations and not to wander into a wider thicket of
> onerous employment rules by hiring more workers. Instead, the entrepreneur
> puts energy into obtaining a low-interest mortgage and buying a big house,
> or dabbling in real-estate development and speculation. Besides, up until
> this current meltdown the entrepreneur could obtain a real-estate loan much
> more easily than a business loan.
>
> Those in Washington are doing all they can to promote the continued
> destruction of capital and wealth. Policies like "cash for clunkers"; tax
> credits for home buyers; the bailing out of the big banks, Fannie, Freddie,
> and the auto companies; and keeping interest rates near zero only serve to
> promote speculation and consumer consumption. Instead, Washington should be
> lowering taxes and the costs of hiring employees, especially in industries
> that produce capital and wealth.
>
> Regards,
>
> Douglas French,
> for *The Daily Reckoning*
>
> --
> Many colleges claim that they develop "leaders." All too often, that means
> turning out graduates who cannot feel fulfilled unless they are telling
> other people what to do. There are already too many people like that, and
> they are a menace to everyone else's freedom. ...Thomas Sowell
>