Accounting for the US Government

Good day, and a Happy Friday to one and all! The Friday before a 3three-day holiday weekend to kick off summer! That makes it a Fantastico Friday in my book! As with all Fridays that precede a three-day weekend, the liquidity in the markets will dry up around noon and the markets will be very thin with participants, especially the big swingers in N.Y. that are probably already headed to the Hamptons!

I just saw a story go across one of my screens that said, “Greeks run university professor out of the country for telling economic truths.” I immediately thought, Good thing that doesn’t’ happen here in the U.S., for I would be a man without a country, eh?

Let’s get to the tape of what happened yesterday and what we can look forward to today. I left you yesterday morning with the thought that the tourniquet had been wrapped around the deep wounds the currencies had received from the dollar the previous day, and it looked as though a handful of currencies would gain on the day. Well, that thought carried through for the day, but the trading ranges were very tight.

The euro (EUR) is getting a weak wind in its sails this morning on news that German Chancellor Angela Merkel is leaving open a potential compromise on debt sharing for the eurozone. Confused? Don’t be! That’s what I’m here for! What this is saying is that even though Merkel has dug her heels in on this eurozone bond issuance idea that I talked about yesterday, she’s leaving open that option. And that’s a good sign, if you believe that a eurozone bond issuance, instead of each country doing their own auctions, would be good and help restore the eurozone and euro.

I think, though, that a true “eurozone bond” will continue to meet strong opposition from Germany. But there’s a compromise that could be worked out, and that’s a general eurozone redemption fund. So each country could retain their sovereignty and issue their own debt, but they would have to contribute to this general eurozone redemption fund, from which bond maturities would be paid. So you see this would very well calm the markets and allow the eurozone countries the ability to scale back their debt. Now, that’s a very good concept, and one that should have been hammered into the skulls of the eurozone leaders at the EU summit… but NOOOOOOOOO! They would rather talk about stuff that’s not going to work!

As longtime fans and first-time callers, you all know that I don’t believe that the Japanese yen (JPY) should be as strong as it is versus the dollar. I believe I’ve made that perfectly clear. But I’ve also said that you shouldn’t throw yourself in front of a bus either. Which is akin to trading versus a trend. And the trend in place right now is to buy dollars and yen. Sure, the Japanese government doesn’t like to see this yen strength, for they have set out to achieve an inflation rate of 1% this year, and they won’t get there with the yen so strong. (They won’t get there either way, who the heck are they kidding?)

But the trend is your friend, right? So yen strength is here for now. I threw in the towel on yen a month ago (remember?). I gave up using fundamentals on yen. It’s a currency on its own course. Oh, by the way, Japan’s latest CPI (inflation) for April printed at +0.2%. That’s a long way from 1%, BUT better than a kick in the shins for the Japanese leaders.

Yes, one day the “debtor countries” like Japan and the U.S. are going to feel the heat. Obviously, that “day” isn’t today, or next week, or month. but I do believe that the dog days of summer are going to return the heat to these two. Especially if stories like the one I have for you coming up after the break get some attention. We’ll be right back!

Well, what do we have here? USA Today yesterday (thanks, John Min) had a front-page story titled “Red Ink 4 Times Official U.S. Tally.” Oh, haven’t I told you before about how our government tends to stretch the truth when it comes to real numbers? And I’ve complained about the fact that the government doesn’t have to account for things like corporations, small businesses or even states! But there it was in USA Today. When using accounting that would put corporate heads into jail, the U.S. reported a $1.3 trillion deficit last year. However, when using accounting that everyone else in the U.S. has to use, the deficit was really, truly and officially — drumroll, please — $5 trillion.

Now, from 2004 to 2011, government deficits would actually be six times the government’s figure of $5.6 trillion.

I can hear the fans of the government style of accounting saying that you shouldn’t include retirement programs in the budget, because — and get this — “Congress can change what it owes by cutting benefits or lifting taxes.” OK, tell me when you think THAT might happen! Are you kidding me? That’s a pretty weak argument. There’s no political will to do what needs to be done. There’s no political will to cut the discretionary spending, which is chump change compared with the Medicare, Social Security and Medicaid expenses.

Onto something else, I feel like the boy who cried wolf — only I’ve been crying wolf for over a decade now! Of course, the problems with the dollar did occur, so some of my crying wolf has helped people. But this debt thing here in the U.S. just continues to grow and grow, sort of like my waistline the past five years.

The Swiss franc (CHF) continues to hold onto the 1.2010-15 cross to the euro, just keeping its head above water enough to keep from taking on water. At any time, traders could very well take out that 1.20 level, leaving the Swiss National Bank (SNB) no course but to react and sell francs and buy euros. And that’s why I tell people at conferences to steer clear of the franc. But what happens if the SNB has no resolve and the traders call their bluff? Then the franc strengthens and I’m wrong.

The Australian dollar (AUD), which on Tuesday was nearing 99 cents again and then experienced what all the other currencies experienced on Wednesday, is back on the rally tracks for the second consecutive day this morning. Maybe those measures we’ve talked about showing the A$ was oversold were correct. But then, in previous turnarounds by the A$, the bounce was more significant than what we’ve seen the past two days. So maybe there’s more to come? If near-term history since 2010 is any indication, that would be a yes, there’s more to come. But I’m not banking on anything from the past holding true these days, fundamentals having been thrown out the window with the bath wash.

Gold also has found its way to the green numbers for two consecutive days. I’ve got to say that the performance of gold (and silver) has been very disappointing this year. But people like Bill Bonner told us all that this could be the first year in the past decade that gold takes a breather, and if we had listened, this would not be so disappointing. And earlier this week, I told you what I believed about the price action from $250 to $1,200 and then from $1,200 to $1,900 and then back to $1,555. The year isn’t half over, so we could still see gold recover this year. But if not this year, then 2013 should be the year of recovery. I say that because I truly believe that the commodity bull market is not over. It has just taken a breather. The challenges to the global economy remain and will remain for years to come. This uncertainty will be the match that lights the fire. And before the legal beagles prepare to slap my wrists, that’s all my opinion, and I could be wrong!

The euro did bump up to 1.26 briefly while I was writing, but is back down a bit. This will be an interesting day with the thin volume in the markets. So be prepared for a wild ride, but then the past couple of Fridays before three-day weekends have been lackluster. So what’s it gonna be, markets?

I completely forgot to mention the incomparable newsletter writer Richard Russell, an absolute must-read for me. I’ve used so many of Richard Russell’s snippets and quotes over the years, you would have thought I would pull that name out without thinking about it!

And I actually heard from the Mogambo Guru yesterday! The Mogambo sent me an email. Longtime readers of the Mogambo Guru know how good he is with his descriptions of government blunders, so you can only imagine an email from him! Thanks, Richard… you are a real friend!

The Chinese renminbi (CNY) has been on a three-week losing streak as the Chinese government guides the currency weaker in an effort to keep their exports on pace to support the slowed-down economy. I’m not too concerned about this three-week move, which has only really been less than 1%. China left the renminbi unchanged for over almost two years during the financial meltdown in the U.S., and then they went back to allowing appreciation. We could very well see that again as the U.S. prepares to enter the backside of the financial hurricane. But remember, the Chinese want desperately to remove the dollar standard, and have publicly said so. They won’t get that to happen with their currency at current levels.

As I’ve told you many times in the past, the Singapore dollar (SGD) mimics what the Chinese renminbi does. So with the three-week losing streak in renminbi, so too do we have a three-week losing streak in the S$. But again, its loss during that three-week losing streak has been less than 1%.

Then, in keeping with my call that the U.S. is preparing to enter the backside of the financial hurricane, I saw this on You can always find stuff like this there:

“Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development. This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action. Instead, what has happened is that the global Ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of central bank money. The debt burden is too large, the malinvestments too pervasive, the corruption too systemic. The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing. So what do you think they are going to do? If I am correct and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental central bank policies. The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing. They are way behind the curve, and by the time they realize this, it will be too late to stem the momentum. That said, I do expect them to respond, and the fact that things will have gotten much worse than they expected will mean a major response. I’m not talking Operation Twist part deux. I mean a serious print. Potentially, the BIG ONE.”

See, I’m not the only person crying wolf on this economy. It makes looking to gold and silver as safe havens an interesting thought.

To recap: The calm that was in the currencies yesterday morning held through the day, and is still prevalent this morning. The tourniquet has been wrapped around the currencies and metals for now. There’s news out this morning that German Chancellor Merkel is open to a compromise on the eurozone bond issuance idea. Chuck offers up his idea of a compromise. The U.S. fails to account for its expenditures like it demands corporations do. Our deficit last year was really $5 trillion, as if the reported $1.3 trillion deficit weren’t bad enough!

Chuck Butler

for The Daily Reckoning