Yale Economist Robert Shiller says the U.S. economy is at a tipping point and a Japan-like recession may be possible along with a decline of 10 to 25 percent in home prices.

May we remind our readers of Shiller’s long term chart…..

Our self proclaimed “expert” on the Great Depression, Ben Bernanke, seems to be feeling the pressure. His theories worked so well when he modeled them in his posh corner office at Princeton. He could saunter down the hallway and get his buddy Krugman to confirm his belief that the Federal Reserve was just too darn restrictive between 1929 and 1932, resulting in the first Great Depression. I wonder if there will be a future Federal Reserve Chairman, 80 years from now, studying how the worst Federal Reserve Chairman in history (not an easy feat) created the Greatest Depression that finally put an end to the Great American Military Empire. Bernanke spent half of his speech earlier this week trying to convince himself and the rest of the world that his extremist monetary policy of keeping interest rates at 0% for the last two years, printing money at an astounding rate, and purposely trying to devalue the US currency, had absolutely nothing to do with the surge in oil and food prices in the last year. Based on his scribbling since November of last year, it seems that Ben is trying to win his own Nobel Prize – for fiction.

“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.” Ben Bernanke – Washington Post Editorial – November 4, 2010

Anyone impartially assessing the success of QE2 would have to conclude that it has been an unmitigated failure and has put the country on the road to perdition. In three weeks, the Federal Reserve will stop pumping heroin into the veins of Wall Street. The markets are already reacting negatively, as the S&P 500 has fallen 6% and interest rates have begun to fall. As soon as Bernanke takes his foot off the accelerator, the US economy stalls out because we never cleaned the gunk (debt) out of the fuel line. Jesse puts it as simply as possible.

Bernanke and his Wall Street masters want to obscure the truth so they don’t have to accept the consequences of their actions. The economy and the markets will decline over the summer. Bernanke is a one trick pony. His solution will be QE3, but it will be marketed as something different. He will appear on 60 Minutes and write another Op-Ed. Ben Bernanke will go down in history as the Federal Reserve Chairman that brought about the Greatest Depression and hammered the final nails into the coffin of the Great American Empire. (Courtesey, The Burning Platform)

Full article,

http://www.theburningplatform.com/?p=16831

Washington Post has a great article on Geithner and his dominance among the decision makers. Instead of bringing down unemployment, Geithner has been all about increasing the debt. How will this hysteria end? Geithner keeping his job is a miracle. He has been wrong about pretty much everything, and is still the guy dictating what to do. Washington Post reports;

In the summer of 2009, Geithner was asked by a television interviewer whether tax hikes would be needed to rein in the nation’s debt. Geithner responded it was too early to tell, an early hint of the priority he put on cutting the deficit.

Political strategists at the White House were mortified. Obama had promised not to raise taxes on the middle class. This had been a centerpiece of his election campaign. At a White House briefing a day after Geithner’s remarks, he was publicly chided by Obama’s top spokesman for engaging in a “hypothetical.”

But Geithner already had the president’s ear. Privately, Obama offered reassurance. “I’d have said the same thing,” Obama told him, according to two people familiar with the conversation.

By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009.

Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.

Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue.

Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt, according to current and former administration officials. Some spoke for this article on the condition of anonymity to discuss internal deliberations.

Even before the president had been inaugurated, Geithner had been urging him to set a target for the budget deficit that would require shrinking its size to 3 percent of the U.S. economy. At that level, the national debt would eventually become manageable.

Geithner, however, believed the tax cuts were a waste of money at a time of growing deficitsand began giving speeches about the importance of letting them expire. When the Republicans won the midterm elections, Obama negotiated a deal with GOP leaders to extend the tax cuts in exchange for other measures that would stimulate the economy.

By April, Geithner had gotten Obama to sign on to $4 trillion in deficit reduction, but not quite as fast as the Treasury secretary hoped. Obama’s advisers thought it would take too many cuts in government spending — or compromise the president’s pledge to maintain middle-class tax cuts — to achieve the reductions in 10 years. They decided they would announce a framework to chop $4 trillion over 12 years.

Republicans wanted much more. They are now threatening to block an increase in the debt ceiling, leveraging the prospect of a government default in hopes of forcing deeper spending cuts.

Last week, a day after Obama received Republican lawmakers at the White House, Geithner met with Republican freshmen to make the administration’s case. Many were unconvinced.

“After meeting with both President Obama and Treasury Secretary Geithner this week, I and my colleagues are not confident that the Administration has a credible plan to reduce our debt, so it’s time to demand one,” freshman Rep. Diane Black (R-Tenn.) said in a statement. “Clearly a package of significant spending cuts and structural reforms are necessary.”

http://www.washingtonpost.com/business/economy/geithner-finds-his-footing/2011/05/24/AGY0CSLH_story.html

Market is bouncing off support levels, just like we argued yesterday. We expect the market to pop up further, with SPX reaching 1300 at the most. Then we want to see if sentiment is strong enough to take us higher, or if another black swan will knock on the door.

On the same theme we wrote about some days ago. Too big to fail, or to stupid to stop. Below from NYT,

In a major speech earlier this week to the American Bankers Association’s international monetary conference, Treasury Secretary Timothy F. Geithner laid out his view of what went wrong in the financial sector before 2008, how the crisis was handled 2008-10 and what is needed to reform the system. As chairman of the Financial Stability Oversight Counciland the only senior member of President Obama’s original economic team remaining in place, Mr. Geithner’s influence with regard to the banking system is second to none.

Unfortunately, Mr. Geithner’s speech contained three major mistakes: his history is completely wrong, his logic is deeply flawed, and his interpretation of the Dodd-Frank reforms does not mesh with the legal facts regarding how the failure of a global megabank could be handled. Together, these mistakes suggest that one of our most powerful policy makers is headed very much in the wrong direction.

On history, Mr. Geithner places significant blame for the pre-2008 excesses on Britain and other countries that pursued light-touch regulation. This is reasonable – though surely he is aware that the United States has led the way in lightening the touch of regulation, at least since 1980. A senior British official retorted immediately, “Clearly he wasn’t referring to derivatives regulation, because as far as I can recollect, there wasn’t any in America at the time.”

More broadly, Mr. Geithner seems to have forgotten how big banks were saved — by government intervention, at his urging. He should probably watch “Too Big to Fail,” now playing on HBO, or peruse the book by Andrew Ross Sorkin of The New York Times, on which it is based –- just look in the index for Geithner and trace the arguments that he made for repeated and unconditional bailouts of big banks and their creditors from mid-September 2008. (Mr. Sorkin’s book ends in fall 2008, while Mr. Geithner was still head of the Federal Reserve Bank of New York; for more on what happened after he became Treasury secretary, see my book with James Kwak, “13 Bankers.”)

On logic, Mr. Geithner’s thinking includes a major non sequitur, as he continues to deny that the size of our largest banks poses a problem. “Some argue that the U.S. financial system is too concentrated, which could promote systemic risks,” he said. “But the U.S. banking system today is less concentrated than that of any other major country.”

Full article,

http://economix.blogs.nytimes.com/2011/06/09/the-banking-emperor-has-no-clothes/

Gold is marginally lower while silver is showing strength again today after yesterday’s ‘worst ever’ OPEC meeting ended in disarray and saw oil prices surge. The ECB has kept rates on hold and markets await signals as to whether interest rates are set to rise sooner rather than later. Signs of an interest rate rise in July should see the euro and gold rally versus the dollar. The precious metals are also likely to be supported by further sharp falls in peripheral markets bonds, particularly Greece, this morning.

There was a reminder late yesterday that it is not just the Eurozone that is struggling with debt. Fitch Ratings said it would put US debt on watch in early August if Congress fails to raise the federal debt limit.

Oil in US Dollars (WTI) – 12 Years (Weekly)

OPEC, the oil cartel’s increasing impotency was seen yesterday when Libya, Iraq, Angola, Ecuador and Algeria sided with increasingly influential Iran and Venezuela rather than Saudi Arabia and its allies Kuwait, Qatar and United Arab Emirates.

Oil had already been consolidating over $100 a barrel (WTI) and $110 a barrel (Brent) and further signs of the increasing lack of importance of OPEC may lead to higher oil prices.

Geopolitically, the failed OPEC meeting yesterday is important as it signals the declining power of the U.S.’ primary ally, Saudi Arabia.

It also shows Russia’s increasing power on the world stage. Russia is the only country to have increased oil production in recent years, as OPEC exports have fallen.

Leading OPEC nations including Saudi Arabia seem to be reaching or have reached their peak oil production, in what is termed “peak oil.”

Oil in US Dollars (Brent) – 12 Years (Weekly)

Cartels can be successful in the short term but attempts at price fixing or keeping prices near a certain level are always ultimately futile as ultimately supply and demand will always be the final arbiter of price.

The crisis in OPEC comes at a difficult time for oil markets as emerging market demand for oil, particularly from Asia, continues to grow.

Also, Japan’s nuclear crisis is leading to a decline in nuclear energy production, possibly long term in nature, and China’s massive drought has led to marked decline in hydroelectric energy production.

There is increasingly the real risk of an oil crisis especially given the very tense geopolitical situation in North Africa and the Middle East.

It has also increased tensions, which were already very tense, between the U.S. and Venezuela and more importantly Iran.

Gold Adjusted for Inflation (U.S. Urban consumers price index – CPURNSA) – 1971 to Today (Weekly)

“Opec, led by Iran and Venezuela, has snubbed its nose at the United States and the rest of the western nations addicted to Opec oil,” Democratic congressman, Mr Edward Markey said. “This is a clear sign that America must engage in a long-term plan to break our ties to this Opec-controlled market, and prepare to deploy America’s oil reserves now to head off an economic collapse from continued high gas prices.”

Separately, Iran announced it planned to treble its capacity to produce highly enriched uranium which alarmed western powers and was deemed ‘provocative’ by one international relations analyst.

There is the increasing possibility of a 1970’s style oil crises and stagflation which saw gold prices rise 24 times from $35/oz to $850/oz in just 9 years.

Courtesey, Goldcore

We read about Austerity, big cuts, what politicians will do etc. Austerity and reducing debt are two very different things.

Debt also matters in this context, when Greece last implemented austerity (1989-1994), the public debt level started at 64% of GDP (1989) and stood at 96% in 1994, highlighting the important point that achieving a primary balance surplus is not the same as reducing the debt-to-GDP ratio. For this to happen, the primary balance must also be able to cover the snowball effect (the difference between nominal GDP and the debt interest rate). Taking the difference between the spot 10-year yield and the average nominal GDP growth forecast for 2011-15, we estimate the Greek snowball effect at almost 13%. For Ireland and Portugal, the snowball effect is estimated at just over 6% and 7% respectively.

Well if you’re talking about racy austerity, Spain has halved its budget deficit in a year as it happens. But we’ve seen before how Greece’s 2010 adjustment was mostly in spending cuts, and it’s completely failed to reform revenues in the crunch year of 2011. Just as much as an issue surrounding collection and culture as actual receipts, but still. Lombard Street Research’s Stefano di Domizio pointed out something worth airing about Spain’s fiscal adjustment on Thursday, however.

Revenues to central government are €10bn lower than in 2010. There’s a controversy here actually, because this may partly or perhaps largely be explained by the regional governments taking over collection of much tax. However, we think it’s important as there’s not really going to be a sudden tax renaissance from the slowly imploding property market, especially as it hits regional administrations quite a bit.

In any case, di Domizio even reckons Spain’s 2011 deficit target is already starting to show signs of coming in €10bn below forecast:

Let’s see what happens in Spain, especially with the slowdown in property transactions and the new “hidden” debt problems. Espana, everything under the sun.

Fr, Alphaville, FT

•ECB SEES “UPWARD PRESSURE” ON EURO AREA INFLATION
•COMMODITY, ENERGY COSTS DRIVING PRICE PRESSURES; UNDERLYING PACE OF MONETARY EXPANSION RECOVERING
•SEES 2011 INFLATION AT 2.5% TO 2.7% VS PREV 2.0% TO 2.6% *TRICHET SAYS HIGHER INFLATION FORECASTS REFLECT ENERGY COSTS
•”STRONG VIGILANCE” NEEDED ON INFLATION RISKS; ECB WILL ACT IN FIRM AND TIMELY MANNER; ECONOMIC UNCERTAINTY REMAINS “ELEVATED”
•UNDERLYING PACE OF MONETARY EXPANSION RECOVERING; MONETARY STANCE IS “ACCOMODATIVE”
•GREECE NEEDING ABOUT EU45B OF NEW LOANS; GREECE WILL GET EU57B OF LOANS UNTAPPED FROM 2010; RAISE EU30B FROM ASSET SALES THRU ’14
•ECB TO SECURE FIRM ANCHORING OF PRICE EXPECTATIONS; ECB “WILL DO ALL THAT IS NEEDED” ON INFLATION

Focus has shifted from Spain protests to Greece lately. Yes, Greece has huge problems, and lacks cash. A potentially much bigger problem is the situation in Spain. Beside the low growth and high unemployment, a new problem has arised. The “hidden” debt of local municipalities, is a new situation, that risks becoming a huge problem. Watch out for Spain. From today’s Editorial, El Pais;

Given the changeovers in local and regional governments as a result of the May 22 elections, and the state of the Spanish economy, the Socialist government and the opposition Popular Party (PP) must do exactly the opposite of what they have been doing so far. Instead of mud-slinging and threatening to wreak mutual damage on one another, they need to show a little statesmanship, and agree on an inter-party state pact that would establish clear guidelines for economic policy over the next few years.

Spain’s weak economic growth, the high rate of unemployment and the latent risk of new speculative attacks on Spanish solvency all combine to make this an urgent requirement. The European Commission demands it too. Spain has to guarantee the fulfillment of the deficit-reduction objectives set in Brussels; and to this end must impose ? in both national and regional governments alike ? a norm to keep growth of spending below the nominal growth of GDP, something that cannot be achieved without a political pact.

There are serious reasons for such an agreement. While the national government is scrupulously complying with deficit objectives, has more or less managed to effect a reform of the pension system, and is working on other changes to the financial system and the labor market, Spanish debt is still burdened by factors that can only be solved within the framework of coordinated economic policy.

On the one hand, investors fear that with growth rates as low as 0.8 percent, it will be impossible to fulfill the objective of reducing the deficit to three percent by 2013. This fear can be read between the lines of the Commission’s reports.

But now a new problem has arisen: that of local and regional debt and deficit, a subject about which a conspicuously small amount was said during the recent electoral campaign. In Castilla-La Mancha, the PP has sown suspicions over an allegedly huge hidden deficit that would, among other things, prevent the payment of civil service salaries. Nor is it hard to extrapolate these accusations to other regions of Spain, thus pointing to a state of bankruptcy in Spanish regional finances.

The consequences of this kind of accusation could be devastating. It supports the pessimistic view that regional debts may become national ones, resulting in a Spanish default.

Quarrelling at the helm

It is essential, then, that the PP set aside its irresponsible accusations and explore the path ? already suggested by its leader Mariano Rajoy ? of reaching an inter-party agreement on regional spending cuts. The PP’s participation in such a pact would quell the apprehension, also hinted at in the Commission’s reports, that the government is unable to impose a drastic austerity plan on the regions. The PP seems to have understood that its management, if it comes to power in the next general election, will be far more difficult without the stable political consensus needed for such an austerity plan.

A political pact on regional financing, and perhaps on some other economic measures, must convey a clear message: the Spanish economy is now just as capable of coping with its problems, and of complying with its international commitments to finance the national debt, as it was before the May elections. This readiness must be manifest in the determination to take the measures necessary to reduce the public deficit to the required levels, whether by additional spending cuts or by tax hikes if necessary.

The last two legislatures have not been fertile in such state pacts. But the difficulties of the Spanish economy do not allow for any more quarreling at the helm of the ship of state. Common sense, and responsibility, demand respect for the basic lines of economic policy, on which there is little room for discrepancy. The agreement must provide for smooth continuity, as long as the delicate economic situation lasts.