Never discussed on CNBC is the fact that more people than ever before are requesting food stamps.  Bloomberg reports that 33.8 million people in the US are receiving food stamps.

Given that the US has a population of just over 300 million, this means over 1 out of every 10 Americans are currently getting food stamps from the government.

Keep in mind, Obama has acknowledged unemployment will “tick up” over the next several months.

Other economic facts:

  • California is unable to pay its bills and is paying with IOUs
  • Unemployment shows no signs of slowing down
  • Global wage competition for jobs means fewer well-paying jobs
  • City/State governments are at the brink of insolvency
  • Credit has dried up and consumer spending is dead

Now, what happens if:

  • There is a terrorist attack
  • There is a large natural disaster
  • There is a refusal to buy US Treasuries
  • There is a viral outbreak

Do you really think the economy can survive and still generate 8% returns per year?  Do you really believe this is just another run of the mill recession and that we are immune from a Depression?  Why?

Takeaway:  The rally from March – July has been based on nothing but speculation and groundless optimism that the “bottom is in”.  If you have your 401(k) in stocks, please be advised that your upside is e-x-t-r-e-m-e-l-y limited!  If you’ve been lucky enough to have cash invested through this rally from April, now is the time to get out.

The problem with corporate welfare is that, unlike personal welfare, the most sinister elements go unnoticed.  A government subsidized contract, bailout or tax break which rips off the taxpayer is far less obvious than the person cashing their welfare check or food stamps.

One of the biggest beneficiaries of corporate welfare is Citigroup.  Aside from TARP funds and asset buybacks (taxpayer buying their lousy loans at full value), there are even more nefarious examples of how Citigroup is ripping off the taxpayer.

Below you will find the Standard and Poor’s and Moody’s credit ratings for Citigroup.

Further down, you can see how these rating agencies gave Citigroup very safe ratings days before Citigroup would have gone bankrupt and gone out of business if not for the bailout.

In other words, these rating agencies, Moody’s and S&P, gave Citigroup ratings of AA- and Aa3, respectively, while Citigroup was days away from dying.

In their own words…

Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but “their susceptibility to long-term risks appears somewhat greater – Moody’s

An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong. – S&P


Current Citigroup ratings - click for a larger view

citi updates

Moody's ratings for Citigroup - note that the October 2008 bailout just put them on Credit Watch negative until December 2008

citi updates sp

S&P's ratings for Citigroup - again, only a slight downgrade before the 10/2008 bailout

You’ll notice that Citigroup’s ratings have never fallen below investment grade.  So, despite needing and continuing to need your tax money to operate, these credit rating agencies never saw the need to downgrade them significantly.

Normally an incompetent credit rating is nothing to get worked up about, however, Citigroup’s bogus credit ratings have consequences that ripple all across the capital markets, which subsequently affect the taxpayer.

Here is how:  With an artificially high credit rating and numerous government handouts, Citigroup’s cost of capital (the rate at which it borrows money), is artificially low. This allows Citigroup to borrow money at artificially low interest rates.

Since its credit rating and government handouts allow it to borrow money very cheaply, it sucks up productive capital from other enterprises competing for capital. This is called “crowding out“.

This means healthier companies and local governments have to pay higher rates of interest to borrow when they issue corporate bonds and municipal bonds, respectively.

Guess who pays the artificially higher interest payments on municipal debt?

The taxpayer.

So, in a sad way, Citigroup gets two forms of corporate welfare.  One is explicit, the other implicit.

Explicitly, your federal taxes pay to keep alive Citigroup via asset buybacks and other federal programs to “save the (inherently flawed!) financial system”

Implicitly, bogus credit ratings and government handouts give Citigroup a facade of safety, allowing it let it borrow cheaply, which force other, legitimate debt issuers (companies and municipalities) to pay more in interest to receive funding.

Even if the federal government were scared of a run on all the banks, they could have easily unwound Citigroup in a reasonable fashion.  They could have zeroed out all the equity (stockholders) and, in an orderly way, liquidated the firm to other institutions which could buy up productive assets cheaply and let the creditors take losses on the parts which no one wanted.

Since Washington is afraid to say no to the financial bozos that own Citigroup stock, this strategy was not employed.  Instead, they are flooding Citigroup with cheap money and hoping the money will be lent out or miraculously make Citigroup solvent.

A free market efficiently allocates capital and provides price transparency which allows individuals to make accurate decisions on how to best maximize their resources.  Government intervention is permanently damaging our economy by obscuring these valuable pricing mechanisms with bailouts, “liquidity facilities” and other forms of corporate welfare.

Intervention via corporate welfare all in the name of helping the little guy is a gross form of statism and market distortion.

Takeaway:  Government intervention to save banks is not a Democrat/Republican issue, it is a right/wrong issueMore intervention, bailouts and stimuli are not the answer.

Used to be we stole the trade secrets in the form of automated looms textile manufacture, or pillaged a patented steam harnessing device. This must be the ultra postindustrial state. Trade secrets are computer algorithms which make automated low latency entrance and exit to markets with no intent of ever taking delivery of any physical product nor are making purchases/sells based on any business, but are merely exploiting market rules to ratchet numerals to their gain.

How did we get here? How sick is that person who draws a paycheck and has neither produced, manufactured, distributed, or made any useful service? Isn’t that the very definition of a Babylon? An economy so distanced from agriculture, mining, manufacture that it provisions life with intangibles? Please wake me up. Please let me out of such a vacuous existence.

– Ben Frananke, Zero Hedge comment (emphasis Inthon)

“No warning can save a people determined to grow suddenly rich.” – Lord Overstone

Is the Human Capital Bubble a failure of the free market or a failure of government mismanagement? 

In his article on Yahoo Finance, Charles Wheelan makes the claim that the market sent out faulty signals.

While I agree with the premise of the article since I share Wheelan’s sense of disappointment that some of the brightest minds in the world clicking green and red buttons in front of monitors rather than building alternative energies and infrastructures, I strongly disagree with the notion that this phenomenon is solely the result of free-market forces.

The human capital bubble is not a reaction to free market forces, but rather the reaction to government influence on market forces.  Can anyone honestly claim we have a free market when:

The government controls the money supply by buying and selling securities in the open market?

Legal tender laws prohibit competing currencies?

The former CEO of an investment bank becomes the watchdog of the very organization he used to run?

A government literally creates money out of thin air to attempt to CONTROL the expansion of the economy?

Supposed regulators are asleep at the wheel… Harry Markopoplous tipped off the United States Securities and Exchange Commission repeatedly both verbally and in writing starting in 1999, when he argued that it was not legally possible for Madoff to deliver the returns he’d claimed to deliver.  The SEC took no action.

The government sets short term interest rates via committee?

The government jawbones to strengthen or devalue its currency at the whim of whoever is in charge?

Banks leveraged 30:1 borrow from the government at below market interest rates?


The message Mr. Wheelan neglects to mention is that an economic system which is constantly manipulated cannot possibly send out accurate signals.  If we want to avoid bubbles and misallocation of resources, we need a truly free market.  This means a private money system, a private banking system, competing currencies and a government that cannot obfuscate economic reality with accounting tricks.

This bubble was a perfectly natural outcome from the market responding to supply and demand.  When there is massive demand (for housing, caused by low interest rates), you can be sure that profiteers/businessmen/entrepreneurs will do everything they can to satisfy that demand by providing plenty of supply.

Markets are unavoidable since humans are always seeking to maximize their happiness and maximize their resources; it is for this reason that markets exists in prisons, elementary school cafeterias and even amongst people that don’t speak the same languages.

The genius of the free market is that it converts greed into consumer-satisfying productivity – Gary North

Takeaway:  Those of us that believe in individualism, freedom, liberty and no corporate welfare need to enunciate that the human capital bubble is not the result of free market forces, but the market reacting perfectly to politicians/economists meddling unnecessarily with interest rates.

Let us hope that as our economy contracts, the power government exerts on our economy will contract as well.

The market rallied in the face of some awful news today and my level of discomfort has never been higher.

A plethora of disturbing news:

In a nauseating display of government worship and corporate welfare, CNBC anchors act positively indignant that Bernanke could be fired over his handling of the Merrill Lynch/Bank of America (cough) merger.  Fast forward to 3:20 to hear the insanity.  Have they forgotten Bernanke’s record?

More auto fallout – Lear will soon file for bankruptcy protection.

California, eigth largest economy in the world, days away from bankruptcy is downgraded by Fitch, I have CNBC on all day at work and this was not mentioned even once.  I guess we are supposed to believe it wasn’t as important as the manipulated 7-year note auction (see below).

From Karl Denninger:  (paraphrased)  The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.  Iin a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners…..  The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before.  Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.

My eyes and ears – The amount of people reliant on government aid is staggering.  I am all for helping the poor and underprivileged, but is free breakfast and lunch year round (courtesy of the Federal Gov’t, last paragraph) lifting people out of poverty or creating a serious dependency?

Valuations are through the roof with a puffy P/E ratio of 60, yet no one seems to care.

This sense of complacency, level of deceit and crumbling fundamentals are setting the stage for another crash.  I hope and pray that this dislocation in the market unwinds in an orderly fashion, rather than a painful drop which would lead to mass irrationality.

The only reason I am hopeful that Barack Obama is President is because he seems to be the only human on Earth eloquent enough and seemingly genuine enough to talk people through a crisis and deliver the truth to people, even if they don’t want to hear it.

So far, he’s shown no interest in changing things up from Bush, but maybe a crash will force his hand in the right direction.

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