Standard & Poor’s has downgraded France’s credit rating, French TV reported Friday, while several other euro zone countries face the same fate later in the day, according to reports.

Germany and the Netherlands aren’t among those facing a downgrade, a senior euro zone government source told Reuters. Another source confirmed “several” countries would be hit.

“Remain alert tonight when U.S. markets close,” said another euro zone source.

US stocks slumped in reaction to the report that S&P had downgraded France. European shares also extended their decline.

In December, S&P placed the ratings of 15 euro zone countries on credit watch negative— including those of top-rated Germany and France, the region’s two biggest economies—and said “systemic stresses” were building up as credit conditions tighten in the 17-nation bloc.

Since then, the European Central Bank has flooded the banking system with cheap three-year money to avert a credit crunch. At the time, the U.S.-based ratings agency said it could also downgrade the euro zone’s current bailout fund, the EFSF.

“The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating,” said Commerzbank chief economist Joerg Kraemer.

“That may irritate markets in the short term but wouldn’t be a big problem in a world where the U.S. and Japan also don’t have a triple-A rating anymore. Triple-A is a dying species,” he said.

S&P has said that if a downgrade did materialize, countries such as Germany, Austria, Belgium, Finland, the Netherlands and Luxembourg would likely see ratings cuts of only one notch.

The other nine countries—most notably triple A-rated France—could suffer downgrades of up to two notches.

A spokesperson for S&P in Paris declined to comment on the reports. A French financy ministry spokesperson was not immediately available for comment.

John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch told CNBC the confirmation of a mass downgrade would be another serious step in the crisis and would lead to a serious worsening of sentiment.

“To a large degree it’s widely anticipated,” Wraith said. “However, we think the reality of it is going to have a knock-on, ongoing impact on these markets.”

“It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.

A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.

“It’s been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction,” said Samarjit Shankar, Director Of Global Fx Strategy at BNY Mellon in Boston.

“But the Italian auction brought us back to earth and now we face the spectre of further downgrades.”

Italy’s three-year debt costs fell below 5 percent on Friday but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Lucas Papademos, Greece’s new technocrat prime minister, faces a race against time to secure a second financing package from the country’s international creditors if Greece is to avoid a disorderly default in March.

The country must redeem a €14.4bn bond on March 20. Almost all analysts agree it will be unable to do so unless its official creditors approve a second €130bn bail-out package and unless a deal is agreed to cut the country’s debt by imposing a 50 per cent haircut on €206bn of privately held bonds.

Greece has already received about €73bn from the first bail-out package of €110bn, financed by the European Union and the International Monetary Fund. That package was approved in May 2010 to help the country stave off default.

Government officials hope the terms of the bond exchange, known as private sector involvement, or PSI, will be finalised well in advance of the EU summit on January 30. By the same deadline, the government hopes to have reached an agreement on “conditionality” – the set of economic policies and structural reforms required by the EU, IMF and European Central Bank.

Only when these requirements have been met will the so-called troika of lenders agree to disburse a large amount of funds, estimated at €89bn, in the first quarter of this year. That will include money towards implementing PSI, since private creditors will most likely receive €30bn in cash or equivalent upfront, while Greek banks will also be recapitalised by some €30bn.

According to a government official, the ECB will also have to receive guarantees from the EU financial bail-out fund, the European Financial Stability Facility, to cover the few weeks that Greece will be in “selective default” after implementing PSI, if the bank is to continue providing liquidity to Greek lenders.

If everything goes well, the bond swap offer will be available to private bondholders in the first two weeks of February and the settlement will take another week, meaning PSI should be implemented by the end of that month, government officials say. If the participation rate among bondholders is insufficient, Greece and its EU partners say they will then decide what to do with the holdouts.

Part of the challenge facing Mr Papademos, the former ECB vice-president who took charge of a temporary coalition in mid-November, is to rally the disparate interests in his government, which includes the socialist Pasok party, the conservative New Democracy party and the smaller nationalist LAOS party.

He recently urged union leaders and employers to consent to some sacrifices to make the economy more competitive and to address the concerns of the country’s lenders.

But his coalition government, made up of 48 members, mostly former Pasok ministers and just three of his own choice, has been criticised for being less productive than some had hoped.

“Time is money. More than six weeks have passed since this government was formed, but it has little to show for it,” says one senior official at a large Greek bank who requested anonymity. “I have respect for Papademos but I am a bit disappointed because I expected more.”

The interim government has secured the sixth instalment of €8bn from the first bail-out package, passed the 2012 budget and taken some significant decisions, such as approving a rise in electricity charges. But it has yet to pass important structural reforms and has not reached an agreement with private creditors, although both the Greek side and the Institute of International Finance, representing the leading banks, are optimistic that a deal is close.

An aide close to Mr Papademos admitted that time could have been used more efficiently, but said: “Deliberations between the political parties participating in the government lead to solutions, but take more time.”

He added that the government was determined to resolve all “pending issues” before the troika arrived in Athens in mid-January. An omnibus bill to be tabled in parliament this week should introduce further reforms required under the terms of the bail-out, including lifting barriers to entry for closed professions.

But some analysts, such as Takis Michas, a researcher at private think-tank Forum for Greece, point out that Greece’s problem has often been that bills are passed, but not implemented.

According to Mr Michas, political parties in government have fewer incentives to implement structural reforms when they know that elections will be held soon. This could be particularly true for the New Democracy party, he said, which leads in the polls by a wide margin over Pasok. Most observers expect an election in March or April.

Christos Staikouras, a spokesman on the economy for New Democracy, told the Financial Times: “We are committed to the implementation of structural reforms and privatisations along with other policy initiatives to restart the economy, but we also want to modify other [fiscal] policies which have not worked.”

International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives.

Concerned that Europe’s political leaders are failing to control the spreading sovereign debt crisis, business executives say they feel compelled to protect their companies against a crash that can no longer be wished away. When German chancellor Angela Merkel and French president Nicolas Sarkozy raised the prospect of a Greek exit from the eurozone earlier this month, it marked the first time that senior European officials had dared to question the permanence of their 13-year-old experiment with monetary union.

“We’ve started thinking what [a break-up] might look like,” Andrew Morgan, president of Diageo Europe, said on Tuesday. “If you get some much bigger kind of … change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.”

Executives’ concerns are emerging as eurozone finance ministers weigh ever more radical options to tackle the sovereign debt crisis, including the possibility of funnelling European Central Bank loans to struggling countries via the International Monetary Fund.

Car manufacturers, energy groups, consumer goods firms and other multinationals are taking care to minimise risks by placing cash reserves in safe investments and controlling non-essential expenditure. Siemens, the engineering group, has even established its own bank in order to deposit funds with the European Central Bank.

Some are examining expert advice on the legal consequences of a eurozone split for cross-border commercial contracts and loan agreements. By contrast, most small and medium-sized firms have made few, if any financial and legal preparations.

“Market participants and, increasingly, real businesses are pricing in a break-up scenario,” said Jean Pisani-Ferry, director of the Brussels-based Bruegel think-tank. “It is still hard to think the unthinkable, let alone to work out the details of it, but any rational player has to consider the possibility of it.”

Some businesses with global reach say a euro break-up would be grim but manageable. “We have made a first rough analysis about the consequences of the discontinuation of the euro as the Portuguese currency,” said Jürgen Dieter Hoffmann, finance director at Volkswagen Autoeuropa, the German carmaker’s Portuguese arm. “The conclusion is that overall the impact would not be so negative to our company, as we are mainly an exporter and belong to a worldwide group.”

Some French, Italian and Spanish executives say they have plans in place for severe financial and economic turbulence, but not specifically for a euro break-up. The risk, in their eyes, is that the region’s stability might come under even greater threat if it became known that companies were contemplating the worst.

Additional reporting by Peter Wise in Lisbon, James Wilson in Frankfurt and Alex Barker in Brussels

Copyright The Financial Times Limited 2011. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.

Fast forward one year and the same mechanism is firmly in place again and working very well – this time in Europe. Again, the abuse of debt has been the main villain. Couple that to greed, avarice, and unlimited access to power and you’re going to have problems. EU2010 is no different than USA2008 on a fundamental level. The only difference is the consumer-driven side of the Eurozone didn’t cause problems first – the sovereign issues roared to the forefront.

And what is happening to those leaders in the countries that are balking what are essentially multiple coup d’ etats? They’re summarily dismissed. George Papandreou in Greece has been replaced by Lucas Papdemos, a rabid central banker (ECB). Silvio Berlusconi in Italy is out, replaced (likely) by Mario Monti, a guy who has all sorts of insidious connections to the Rockefeller/Rothschild global banking syndicate. Aka, the same syndicate that is gutting America through its creature from Jekyll Island, the federal reserve system itself.

So two countries’ leaders toppled, and what of Portugal? Interestingly enough, Portuguese President Anibal Cavaco Silva has evidently learned how he is supposed to behave from the demise of Berlusconi and Papandreou. He is now a card-carrying water carrier for the syndicate. Check out his quote made on 11/10/11:

“The European Central Bank has to go beyond a narrow interpretation of its mission and should be prepared for foreseeable intervention in the secondary market, not as the central bank has done up to now,” Cavaco Silva said yesterday in an interview at Bloomberg headquarters in New York. He said government leaders are unlikely to move fast enough to find solutions.

“It has to be able to be a lender of last resort,” said Cavaco Silva, 72, who as Portugal’s prime minister presided over the 1992 signing of the Maastricht Treaty, which cleared the way for the euro common currency. “It has to be a foreseeable, unlimited intervention.”

The coup in Portugal has been effectively completed. Some people may question why I use the term coup d’ etat. The term essentially means takeover of a formerly sovereign nation in the context we most often see it in. Oftentimes, coups are military in nature with a rebel force conducting a coup to remove an existing government. Well, a financial coup is along the same lines where the control of a country’s financial system and/or its economy is taken from the people of that nation by a banking cartel or syndicate. The very creation of the EU itself was a mini-coup since those countries that entered gave up a large portion of their sovereignty and put their destiny in the hands of a regional government and central bank. These countries could no longer issue their own debt and when things got bad, then couldn’t maneuver, and are now at the whimsy of international banksters.

Don’t forget what Silva is really saying above, either. By making the ECB the lender of last resort, what he is advocating is that the ECB becomes owner of the failing countries within the Eurozone. This is precisely what is happening in America now: that the federal reserve is openly monetizing USGovt debt. Few take the next step and make the admission that in doing this, the federal reserve is becoming an owner of this country – and it is getting a larger share with every bond it buys. And all this happens with the blessing of the US Congress and various Parliaments in Europe. The dominoes are falling one by one into the complete financial and economic control of international bankers. These are men without a country, but men who seek to dominate all countries.

One thing forgotten in all this is that the USA is indeed headed for the second stage of its continuing financial crisis, this time in the form of a sovereign debt nightmare that will make 2008 look like a game of Monopoly. No doubt there will be calls for the federal reserve to again be the lender of last resort and another chunk of America will fall to the syndicate. These nasty cycles will continue until it is all gone. Sounds pretty gloomy doesn’t it? Just look at what has happened so far and then ask yourself if we’ve turned in another direction or are just headed for more of the same.

At the end of the day, hopefully we will all come to realize that we can gripe all we want about what has taken place thus far and what is to come, but sooner or later we are going to have to own up to the fact that we allowed it. Bankers couldn’t have packaged hundreds of billions of dollars of junk mortgage bonds and leveraged it up 40:1 if people who had no business buying a house hadn’t done so. Sure the system enabled it all, but I have not heard a single case of an American citizen having a gun put to their head and being forced to buy a house or participate in some other sort of largesse.

We have allowed our elected officials to cede our national sovereignty to bankers while we argue about steroids in baseball, American Idol, and the fate of various Hollywood lawbreakers. We were so busy swiping our credit cards that nobody paid attention to the fact that our government was doing the exact same thing – on a grandiose scale, its ego writing checks that the people of this country can never pay.

We did it all voluntarily. So have the Europeans. Nobody was complaining when the welfare state was in full swing and sloth and laziness were incentivized on a regional scale. Nary a word was said when exceptions were made so that Greece could enter the EU in the first place. Nobody paid any attention when it became obvious several years ago that the numbers weren’t adding up. The whole EU was too busy partying.

I’d like to leave you with a quote from a wise man in American history – Thomas Jefferson:

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks
discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”

Startling isn’t it? Look around you; his worst nightmare is becoming our reality – on a global scale.

The health of the euro zone’s third-largest economy has come into focus despite Berlusconi accepting IMF monitoring and surviving several confidence votes in recent months.

Italy’s size makes the potential consequences if it were to fail more wide-ranging than the much smaller Greece.

“Italy has much more systemic implications,” Thanos Vamvakidis, Head of European G10 FX Strategy, BofA Merrill Lynch Global Research, told CNBC Monday.

“It’s too big to fail, too big to save.”

The problems facing Italy include the euro zone’s second-highest debt-to-GDP ratio, and the lack of a credible alternative to Berlusconi’s government.

Italian MPs will vote Tuesday on the country’s public finances, with a number of rebel MPs from Berlusconi’s party threatening to vote against the government in protest at the way it has managed the country’s finances.

Yields on Italian 10-year bonds surged last week, and are now dangerously close to the unsustainable 7 percent level. Other euro zone countries such as Portugal and Ireland had to seek bailouts after their yields rose to over 7 percent.

“The markets don’t believe Berlusconi,” said Vamvakadis.

“When other countries were faced with pressure, they introduced more reforms. In Italy, you don’t have a clear structural reform agenda.”

Yields on short-term 2-year Italian bonds have also been surging.

“When yields on short-term debt start increasing at a faster pace than long-term debt you have a problem on your hands because it signals that investors have no faith that you can pay back the money you owe,” Kathleen Brooks, research director UK EMEA at Forex.com, wrote in a research note. “It looks like Italy has gone for the bailout-lite option, but will it need to go the whole hog? The bond markets certainly think so, and it could happen sooner than we think.”

There were also signals that the European Central Bank (ECB) will not continue its bond-buying program, which has helped keep bond yields at sustainable levels since the summer. Yves Mersch, a member of the central bank’s Governing Council, warned in an interview with Italian newspaper La Stampa on Sunday that it could stop buying Italian bonds if Italy fails to take appropriate action over its debt.

“They are trying to put maximum pressure on the Italian government to deliver,” said Vamvakidis.

“It’s a risky move but I think it’s the right decision at this point.”

“It is probably only the ECB’s SMP (Securities Markets Program) program that has prevented Italian bond yields from climbing to even more punitive levels,” analysts at Deutsche Bank wrote in a research note. “So it will be a test of ECB firepower and will to keep Italian bond yields under control while the Greek story boils over.”

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued a strong warning to the Italian government over the weekend.

“We will go quarterly [to Italy],” she told reporters.

“We will check that what Italy has promised Italy is delivering. And if it is not delivering I will say so.”

The Latest Ploy

The fed is expected to announce this week that it is going to reach back 50 years into its bag of tricks and pull out some manipulations that will save us. This latest cockamamie scheme is to shift its $1.7 Trillion in short term USBond holdings (monetized debt) to longer-term holdings in an effort to drive down the long end of the yield curve even further. Apparently, the current monetization efforts haven’t been good enough. They have been driving the long end down for three years now, either directly through direct rate intervention or by subsidies aimed at the end products resulting from those rates such as mortgages.

The obvious rationale is that driving down rates on debt will rescue the economy, since people will be able to take on even more debt to spend more money on more imported trinkets from China and elsewhere. Again, haven’t we heard this before? We still haven’t really felt the full impact from the last raft of malfeasance when the fed went on an overt $600 Billion bond-buying spree. For those who haven’t yet connected the dots, that is called monetization of debt. A very inflationary measure. The dollar has paid the price. Don’t be fooled by the ridiculous assertions that the dollar is ‘stronger’ because the dollar index has gone up. The only reason that has happened at all is because Europe is on the brink of total collapse and disintegration. There is no way anyone can conduct a sane examination of the dollar’s fundamentals and conclude there is anything that represents ‘strength’ at this point. At best it is status quo and the capitalization of another’s even more dire circumstances.

On the surface, all this might look very appealing. Lower interest rates across the board. Sure, there will be another wave of refinancing of mortgages. If you can qualify. If you’re not underwater. Maybe. The subsidies aimed at the housing market so far have been an absolute and total failure. That dog won’t hunt anymore. Game over for real estate for at least a decade. So as usual, we’re left to ask Cui bono? Who benefits. Well the bankers of course. The fed dropped short-term rates into the basement in 2008 and has held the hammer down. This punished savers around the country. All those baby boomers who are retired/retiring (maybe) are going to need income from their meager savings to make up for the rising prices that have resulted from the fed’s malfeasance and lack of stewardship of the dollar. They won’t get much in the way of income from traditional low-risk investment vehicles, that is for sure. The proverbial ‘riskless’ asset pays nothing after taxes. Nothing. And it isn’t riskless. Put it another way – would you be willing to give the USGovt a loan for 90 days? 180? 10 years? How about 30 years? At maybe 2.5% per annum? That is a foolish proposition on even the best of days. The savers get creamed again. Bernanke is so worried about the economy, but yet he’ll purposefully and deliberately undertake policies that will gut the one component of the economy that is capable of spurring growth – savers. And this is not the first time either. And he is not the first guy to do it. This has been a pattern for quite a long time now.

The All-Important Question – Cui Bono?

So who benefits again? The banks, obviously. The lower the yield curve, the higher the spread, the higher the profit margin. All actions done so far have been to protect and enrich the banks and their precious financial system – all at the expense of the economy and all done intentionally, in my opinion, with malice and aforethought. Just think back to TARP, TALF, TSLF, and the other multi-trillion dollar rescue packages. Think about the $500 billion (minimum) in swaps done between the fed and the ECB in 2008-09 that Bernanke was grilled on and claimed not to know the recipients thereof. Think about the latest harebrained stunt aimed at saving European banks. More unlimited dollar bailouts for foreign banks. More protection of the financial oligarchy. More inflation. Less purchasing power for the dollar. More pain for consumers. Less economic growth.

At the bottom of this issue is that the Keynesian way is still in full force, which guarantees that things will not get any better. Two of the biggest pillars of the Keynesian way are to punish savers because saving is a bad activity – all monies should be spent on consumption to maximize current ‘growth’. Never mind future growth; all actions are to be geared towards the short run. The second big pillar is deficit spending and debt accumulation at all levels of the economy. Again, forget about the long-term consequences. All focus is dedicated to the short run. That is the Keynesian way in a nutshell.

The Consequences

We’re already seeing firsthand the catastrophic failure of that policy pathway in Europe. It is an unmitigated disaster. We’ll reap the full whirlwind here in America before too long. Instead of focusing on debt reduction across the board, the central planners, our new economic politburo, are undertaking policies that will accelerate debt accumulation at all levels. Consumers are back on the credit card big time as unemployment remains high and people are forced to continue borrowing to make ends meet. They were in over their heads to begin with and now for many, there is no way out. The house is underwater. The job is gone. The unemployment check isn’t enough and it is going to run out soon anyway. These people end up running full speed to the bankers who are more than willing to accommodate with rates of usury that would make the mafia blush.

The ‘cuts’ that are forthcoming from our new unconstitutional ‘super congress’ will almost certainly be from social programs, not the sacred cows such as the Pentagon budget, bank bailout monies, or subsidies paid for keeping jobs out of America. The lobbyists have already guaranteed that. I’ll say it again – the American people are the only ones who don’t have someone lobbying for them to the members of that ill-conceived and very illegal group. It is terribly ironic that the one group who is going to bear the full burden of all of this does not even have one representative in the process. We know what Jefferson said about that. If we don’t, then shame on us for not knowing our history.

The bottom line is that our debt is already unpayable. Our bonds are junk. Our country is several orders of magnitude deeper into this mess than Greece. According to Laurence Kotlikoff, the net present value of our obligations relative to GDP is 14 times greater. Greece’s multiple is only 12. Yet we had people surprised when our debt rating was cut by one single notch. It was an affront to our perception of American superiority. That is gone, people. We’ve allowed it to be squandered – all for the satisfaction of short-run desires and an economic philosophy that was brought into the world in the worst possible manner: half improvised, half compromised. The policymakers of the day provided the compromise; Keynes was more than happy to provide the rest. In a way, he got off easy; his demise came long before that of a world that decided to throw away prudence in pursuit of his unattainable utopia.

(AP:BOSTON) America’s biggest corporations continue to spend more money on stock repurchases, with buybacks up 41 percent in the second quarter compared with a year ago.

Standard & Poor’s on Tuesday said stock repurchases by companies in the S&P 500 index totaled $109 billion in the April-June period. That’s up from nearly $78 billion in last year’s second quarter. Buybacks also rose compared with this year’s first quarter, when the total was nearly $90 billion.

Stock repurchases have now risen eight quarters in a row.

Information technology companies continue to be the most aggressive at buying back stock, accounting for more than one-fifth of all buybacks in the latest quarter. The company with the biggest buyback total in the second quarter was energy heavyweight Exxon Mobil Corp. with $5.5 billion.

Ben Bernanke, the official spokesman for Bankers, Inc. was quick to pontificate from Jackson Hole Wyoming that the second half of the year bodes very well for GDP and economic growth in general. This is where the shuck and jive starts. What nearly all commentators are missing here is that USGovt borrowing nearly ceased in the second quarter. On the surface, that might look positive, because it would indicate that a greater percentage of that 1% growth was real; that the economy was actually able to stand on its own, if even in a very small way. This is where the price deflator comes in. The GDP price index came in at a very tepid 2.4% in the second quarter of 2011 after coming in at 2.3% in the prior quarter. This number is a complete fabrication in that it certainly doesn’t properly discount the impact of price increases experienced on Main Street. Inflation metrics have been understating inflation for years in order to rip off transfer payment recipients. For example, the last SocSec cost of living adjustment came three years ago. Does anyone believe that the cost of living has remained unchanged in 3 years? The CPI, Core CPI and GDP price index have been manipulated to discount inflation and by definition, to overstate economic growth. Failing to properly discount for inflation is more than likely responsible for all of the 1% growth experienced in Q2 – and then some. I’ll provide more substantiation for that opinion a bit later.

Now the second part of the shuck and jive. Bernanke and everyone else knows what happened when the debt ceiling was raised. The government went on a borrowing binge, adding around $400 billion to the public debt within days of the bill’s signing. This bolus of new debt was pumped into the economy, and will go right into Q3 GDP calculations. When Q3 GDP shows a boost, Bernanke will get up in front of Congress, smile, and talk about how the Fed’s policies actually work, how government action is the best way to generate economic growth, and, by the way, please give us more power to create even better GDP results moving forward. Washington politicians who are hooked on the idea of a centrally planned economy will do the same. Think I’m cynical? Watch what happens. The overall lack of jobs will only be of minor concern, but enough to likely justify another ‘stimulus’ attempt at some point before the elections next year. They’re already cooking up something to bail out underwater homeowners, calling that a stimulus.

Let’s go out a bit further. There is now an economic kill-switch built into our economy in the form of massive (and allegedly mandatory) spending cuts. These cuts need to be agreed on and passed before Thanksgiving or else automatic cuts will be triggered. So either way, some of the cookies and candy ought to be coming out of the equation in Q4. Has anyone noticed that very little attention was given to this reality? The debt ceiling deal has long been forgotten and we haven’t felt even a single nudge from the negative consequences yet. So we see a boost of GDP in Q3, and likely Q4 as well from the increased borrowing. The massive budget deficits are still firmly in place and are being built on daily. Once the mandatory cuts take place, GDP drops, depending on the timing of the cuts. However, it is very likely that through manipulation of the GDP price index, that an official recession will be avoided – in governmentspeak at least.

The Consequences of a Fraudulent GDP

The entire notion of including government spending in economic output is tainted to begin with. Mainline economists will argue that it must be counted since the dollars are real and end up on Main Street where the vast majority of them are spent into the economy. My assertion would be that if the government butted out and left the dollars on Main Street, they would be spent anyway, and horror of all horrors, some might actually get saved. Keynes was quick to point out the evils of savings, though, and his followers are quick to maintain the tradition. If mainstream economists can make a case for including government spending in GDP, how about when half of that money is borrowed? Count it anyway, they say! Never mind that the debt must be paid back with interest, thereby reversing the infusion (plus a little extra for interest). There are plenty of folks who will quickly point out that ‘by accounting definition, borrowing makes us rich since the money goes into the economy’. You guys know who you are. You never tell anyone about what happens when the money must be repaid though. These folks are following Keynes to the letter – forget the long run – it doesn’t matter.

Unfortunately, GDP numbers are used in many financial activities, from capital spending decisions to financial asset purchases. Distorted numbers lead to distorted assumptions, which lead to bad financial decisions. Is it any wonder that corporate debt is at an all-time high? These folks are borrowing money in anticipation of a boom that never arrives. Granted, GDP isn’t the only metric they use, but I spent enough time in budget meetings to know that it is the biggie when next year’s budget allocations are on the table.

Those seeking to purchase financial assets often look at GDP for an insight as to how a particular company might fare in its quest for increased profits. A solid economy is likely to generate better profits, thereby increasing stock prices, etc. I don’t need to lay out the rationale; everyone understands it. Perceptions about the economy play into many other consumer decisions as well, although one thing I am noticing is that people are paying less attention to government numbers than they are to their own personal economic realities these days. This is one of the reasons why consumer confidence can be at recession levels despite the fact that the government doesn’t own up to it.

One thing a flagging economy also tends to do is drive people out of stocks and into bonds. This action lowers interest rates and allows the government to borrow money more cheaply. In that regard it is certainly in Washington’s interest to keep the idea of the never-ending recession going. Phony GDP numbers prevent accurate price discovery in the bond markets, although, admittedly, this isn’t nearly the issue it was a few years ago. Back then there was actually a bond market, as opposed to now where we have a group of primary dealers laundering bond market monies for the fed and little in the way of other activity taking place.

In a normal world, the fed wouldn’t have to conduct all these illicit bond-purchasing activities. The recession would do it for them, driving investors to grab USGovt debt in a flight to safety. However, the magnitude of USGovt borrowing has overwhelmed the savers of the world. Erosion of confidence in the dollar hasn’t helped matters. The realization that the US will never get its house in order has prompted savers around the world to seek out other safe haven assets, notably commodities, which people are learning don’t come off a printing press. The recently passed debt deal and the plan to switch to a chained-CPI are two landmark initiatives that lay bare the intentions of the powerbrokers to keep the Ponzi scheme going a little while longer.

An Alternative to Traditional GDP Metrics

With these matters in mind, one of the items of high priority should be discovering an authentic measurement of output. There will be no perfect measurement, since the definition of output varies depending on whom you happen to be conversing with. So I’ll frame this part of the essay by stating that my goal in seeking an alternative was to find a measurement that allowed capital, labor, and productivity to assume their proper roles in the determination of output. My earlier assumption that government shouldn’t be in the economics business means that I will not count any government spending in this definition of output. Government monies either arrive by taxation or borrowing. Taxed dollars would have stayed in the economy anyway if they hadn’t been taxed out of it, so there is no reason to count the taxed portion of government spending. There is definitely no sane reason to count the portion of government spending that arises out of debt accumulation. It must be paid back and constitutes a drag on future output. I also believe that corporate debt and bailout dollars don’t represent authentic capital and cannot be used to determine output. These are my biases; I’m being forthright and honest about them, rather than trying to use subterfuge to cover my motives.

That said we could simply revise the existing GDP formula to exclude all government spending and be done. That would be one way of doing things for sure, and people have done it. Another way would be to take labor and capital inputs, understanding the relationship between the two as they relate to output, then adjusting for changes in multifactor productivity. The Cobb-Douglas output function is a rather simplified way of doing that.

I am not going to get into the nitty-gritty of the methodology in this article, as this is not the forum. Frankly, we have subscribers and clients who pay good money for this information and there is way too much work involved to just hand out anything recent. What I will do is provide the graphic below and submit to you that (and I have said this many times) the great recession began in late 2006 – a year before my original call of the recession on 11/25/2007 – and has yet to end, despite what the Commerce Department has to say. This in itself should not be an earthshattering statement; it dovetails with what so many of you are experiencing. The real value is that we have empirical evidence to connect with our perceptions. Better yet, we have another tool in the toolbox for making financial and economic determinations.

There is an old adage that figures lie and liars figure, and I am sure there are those of you that will call me the latter because this empirical evidence doesn’t match up with your particular worldview. That is fine; the traditional measurement of GDP certainly doesn’t match up with mine – or the vast majority of Americans.