From The Atlantic:

“Even the folks at Fox News, the network that employed Glenn Beck and signed Sarah Palin to a multimillion dollar contract as a news analyst, acts as if he’s too crazy to cover, even though he is sure to influence the race, whatever his prospects for winning.”

See the clip below, from The Atlantic’s post questioning what’s up with TV’s bias against Ron Paul?

See Mainstream Media Ridiculed for Refusing to Acknowledge Ron Paul originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

A new 30-page study released this month entitled, Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009 (PDF), out of the Centre for Economic Policy Research in London, looks at a number of countries over nearly a hundred years and finds that “societies become unstable after budget cuts.” Go figure. (Note: Whether or not the use of the word “anarchy” in the study’s title makes sense to us is another matter entirely.)

Here’s some discussion on the paper from The Atlantic:

“The theft and violence and street crime and lawlessness in London is shocking. But it’s not unique. Around the world, the burden of unemployment falls hardest on the young, who often respond with violence. The average jobless rate between 18-29 years was nearly 20% last year in OECD countries, the Wall Street Journal has reported. High unemployment was a factor in protests in Spain, uprisings in the Middle East and North Africa.

“The connection between joblessness and violence comes to life in a timely August research paper Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009, which found ‘a clear positive correlation between fiscal retrenchment and instability.’ Authors Jacopo Ponticelli and Hans-Joachim Voth examined the relationship between spending cuts and a measure of instability they termed CHAOS — ‘the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in a single year in each country.’

“Their conclusion: Austerity breeds anarchy. More cuts, more crime. This clickable graph helps to tell the story.

“‘Educated youth have been in the vanguard of rebellions against authority certainly since the French Revolution and in some cases even earlier,’ Jack A. Goldstone, a sociologist at George Mason University School of Public Policy, told journalist Peter Coy in February. If that’s true, we are only in the first chapter of a worldwide rebellion against lost opportunities for the young.”

The study highlights a few of its own limitations, such as the economic climate potentially driving both budget cuts and unrest at the same time, rather than the former causing the latter. Alongside the limitations proposed in the research, we would also question whether or not the budget cuts themselves are actually the real problem. The problem could be getting underway long before budget cuts, when the politicians originally promise services that the government simply won’t have the future means to deliver.

Politicians promise all sorts of handouts to get elected… sometimes even before citizens think to ask for them. Yet, those still in office when those promises come due should be forewarned. The fact that prior promises could have been highly unrealistic — and often simply impossible to keep — does little to calm the outrage of a citizenry suddenly thrust into austerity.

You can read more details in The Atlantic’s coverage of why London won’t be the last city to burn.

Best,

Rocky Vega,
The Daily Reckoning

New Study Informs Burning London That Austerity Breeds Social Unrest originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The maid in the case, Nafissatou Diallo, who was working at the Sofitel New York Hotel at the time of the incident and is originally from Guinea, has recently gone public with her accusation.

Her attorney, Kenneth Thompson, is a rather celebrity prosecutor in his own right. He has successfully represented a number of clients including Abner Louima, the Haitian immigrant that in 1997 was beaten and sodomized by police in a New York City precinct bathroom.

Strauss-Kahn, as it turns out, will be sued in a Bronx courtroom, a borough with a reputation for being hospitable to plaintiffs, and that is unlikely to show the elite French economist sympathy. This, of course, while DSK — as he’s also referred to — isn’t getting many breaks.

It turns out his reputation, already soiled at the IMF — where he had earned a different nickname from French media, “le grand séducteur” or “the great seducer” — has been brought under further scrutiny due to his potentially inappropriate behavior toward flight attendants on Air France.

He’s already been held once at New York’s Rikers Island prison… and while we don’t know exactly what may have gone down behind closed bars… you can view Saturday Night Live’s dramatized take below.

Dominique Strauss-Kahn From IMF to Rikers Island, Perhaps an Input Upgrade originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

In the unlikely event that you missed the video, you can witness his fury in all its glory in the clip below.

Now, in the video, Ratigan recommends the president give a speech to “abandon the bought Congress,” and then begin the process of investing in solving the problem. How? He suggests that the US “begin an infrastructure bank with 2 percent lending.”

It sounds like an interesting kernel of an idea, so we dug around a bit to for a deeper explanation of what Ratigan may have been specifically proposing.

Here’s the concept, in more detail from Bloomberg:

“Creating a national infrastructure bank presents a harmonized solution to these two problems [US unemployment and failing infrastructure] that should be feasible even in austere times. Airports and transportation networks, levees and dams, water and energy systems are deteriorating. The American Society of Civil Engineers estimates that 25 percent of our bridges are deficient, 7 billion gallons of clean water are wasted each day because of leaking pipes, and a third of our major roads are in poor or mediocre condition. The costs of all this to U.S. businesses — in delays, accidents, lost productivity, red tape — are enormous.

“Yet improving such facilities adequately, the ASCE estimates, would require a five-year investment of $2.2 trillion. If you’ve been within shouting distance of Washington lately, you know that finding anything near such a sum is an impossibility. So a revitalization program that doesn’t rely entirely on federal munificence is crucial.

“Enter the infrastructure bank, which would provide loans or loan guarantees for big projects deemed to be in the public interest — and attract private investment by offering cheap access to capital and a path to profit from tolls, fares and other charges.

The bank could leverage the government’s outlay to lend more. An initial $5 billion a year for five years could result in $50 billion or more in loans. And because these loans would be paid back with interest, the institution could become self-sustaining [...] Every dollar spent on public infrastructure yields a $1.59 boost to gross domestic product, estimates Mark Zandi of Moody’s Analytics.”

According to Bloomberg editors, a number of suggestions for how the bank could be set up are already circulating through the halls of Congress. With current US infrastructure failings costing an estimated $2 trillion over a recent two-year period, you can understand the plan’s appeal. For more details see Bloomberg’s article on how a bank can get more Americans bank on the job and on the road.

Best,

Rocky Vega,
The Daily Reckoning

The (Infrastructure) Bank That “Abandons the Bought Congress” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The thesis of the clip is that economic growth as we know it is over… and when looking at new alternatives it makes sense to note which options are most sustainable.

It’s without a doubt touchy-feely, and it’s also light on detail to support a specific new economic pathway — which makes the whole exercise seem a bit unrealistic — but, it clearly notes that the economic problems we face are grounded in the overwhelmingly consumer- and debt-driven culture. As well as a political worldview that puts GDP growth ahead of almost all else.

Is there another yardstick worth considering? It’s the only reputable one we’ve got now, but perhaps there ought to be.

This is from a recent article by the video’s author Richard Heinberg:

“Although soaring numbers lead to financial euphoria, they can hide social ills like growing inequality; moreover, GDP fails to distinguish between waste, luxury, and the satisfaction of basic human needs. Perversely, GDP often rises during wars or after environmental disasters, due to increased government spending. Despite criticisms, economists and policy makers have stuck with GDP—perhaps because tracking a single number makes their jobs easier.

“But now, the US may have reached its practical GDP limit. The bursting of a once-in-a-lifetime credit bubble, the maxing out of consumer borrowing and spending capacity, and tightening global resource constraints (showing up as stubbornly high oil prices) have caught national economic output in an undertow. Much of the rest of the world is being drawn in, with Greece, Ireland, Portugal, Spain, and Italy swirling ever closer to the drain. During the past two years, Americans bought an anemic recovery—a few hundred billion dollars’ worth of GDP growth—but at the cost of trillions in added government debt.

“Now, as Washington descends deeper into partisan acrimony, efforts to generate further growth with yet more debt have become political orphans that no Republican and few Democrats will claim as their own. If the “recovery” was all smoke and mirrors, we’ve just run out of mirrors.”

And the video:

More on the potential alternatives to GDP that Heinberg considers — including the Genuine Progress Indicator, or GPI, which adjusts GDP for resource depletion, income distribution, crime, leisure, infrastructure lifespan, and so forth — can be found in his Just International post on how GDP is dead.

Best,

Rocky Vega,
The Daily Reckoning

There Is No Recovery… It’s All Been Just More Debt originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Comments from the likes of Kenneth Rogoff — the Harvard economist who has referred to the downgrade as “very courageous” and “the right call” — and others, show there’s a willingness… out there somewhere… to skip the denial phase and to jump right into directly addressing ever-increasing US fiscal challenges.

Some particularly well-articulated comments came from journalist and author Fareed Zakaria. A few highlights are included below.

• “The actual cut to the 2012 budget, the only budget over which this Congress has control, is $21 billion out of total expenditures of $3.7 trillion – a pittance. Everything else can and will be changed by future Congresses.”

• “The manner in which the deal was produced added poison to an already toxic atmosphere in Washington, making compromise even more difficult. Democrats now feel they need to mirror the Tea Party’s tactics and are becoming unyielding on any cuts to entitlement programs like Medicare. Republicans, emboldened by the success of their bullying, have closed ranks more solidly around a no-tax agenda.”

• “We need to pare spending in areas like health care and pensions but invest in others like research and development, infrastructure and education in order to grow. In an age of budgetary limits, money needs to be spent wisely and only on projects that are effective. But in area after area – energy, immigration, infrastructure – government policy is sub-optimal, a sad mixture of political payoffs and ideological positioning.”

The full video clip, which came to our attention via a Global Public Square post on how we’ve downgraded ourselves, follows.

Zakaria: US Policy is Sad Mixture of Political Payoffs and Ideological Positioning originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Today, Joshua Brown served up a thoughtful eight-part true/false quiz on how he makes sense of the current post-Standard & Poor’s downgrade world. Three of the eight items follow…

According to The Reformed Broker:

S&P has no credibility anyway: TRUE

As Paul Krugman reminds us in his piece on chutzpah this morning, S&P was one of the prime contributors to the credit bubble that got the US into this position in the first place, it was also rating Lehman Brothers bonds as “A” up until the day Lehman filed for bankruptcy.

The Downgrade to AA+ will force institutions to dump Treasurys: FALSE

Virtually no one running institutional money will be selling treasurys as a result of S&P.  They are owned as a highly-liquid instrument and the downgrade does not affect that feature.

Borrowing costs will shoot up for the US government and its related entities: FALSE

S&P is just another opinion, albeit a widely-heralded one.  In the long run, the market forms its own opinion and acts accordingly.  My friend Vitaliy Katsenelson reminds us that “Japanese debt was downgraded to AA- in January 2011.  It was a nonevent.  Despite being the most indebted developed nation, Japan is still borrowing at the same pre-downgrade rates, which are half of the rates the US government pays on its debt.  On the other hand, Italy’s 10-year bond rates jumped to 6% in August without any downgrade by credit agencies: the markets did their own credit analysis.”

Krugman — and others like quadruple-A Warren Buffet himself — are pointing fingers at S&P for the mess. Both, of course, following in Treasury Secretary Timothy Geithner’s footsteps… blaming S&P for $2 trillion math mistakes, rounding errors, and “a stunning lack of knowledge about basic US fiscal budget math.”

Be the math as it may, there’s no way around the simple idea that — in addition to the huge budget deficit — there’s a massive leadership deficit in Washington, and the downgrade largely reflects “political disharmony” in the US, as Brown phrases it. You can read five more components of The Reformed Broker’s true/false quiz in its post on Wall Street AD (…After Downgrade).

Best,

Rocky Vega,
The Daily Reckoning

Reformed Broker’s True/False on Wall Street After Downgrade originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Since the US credit rating downgrade the Chinese yuan is flirting with 17-year highs.

Are we witnessing a major global economic turning point? Is it only a matter of time before China’s credit rating matches the US? Or, before a yuan is worth more than a dollar?

You can laugh now, but, when the euro’s value surpassed the dollar’s in the early 2000s, it never looked back.

These landmark moments seem unlikely in the near term, but then again to many… not so much here…  so did the US’ first ever credit downgrade in about 70 years. Bank of America already thinks another downgrade is possible by November.

The above are but a few of the key questions worth considering, and you can rest assured we’ll be watching the next developments closely. Because — as Ben Franklin explained, and the cartoon below goes to highlight — “The definition of insanity is doing the same thing over and over and expecting different results.”

China’s Currency Flirting With Highs on US Credit Rating Downgrade originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Congress “cut”… using the term loosely… about $1 trillion over ten years and has only tenuous plans to “cut’ another $1.5 trillion through its newly-developed Super Congress. A far cry from the $4 trillion recommendation.

On the other hand, 17-year-old Dagong Credit Rating Co. — based in Beijing — hardly skipped a beat. What China’s leading credit rating agency lacks in international influence it makes up for in gusto and pummeling downgrades. According to Dagong, the US was already on negative outlook last month and, as of this past Wednesday, it has downgraded US sovereign debt from A+ to A… and still with a negative outlook to boot.

According to CNN:

“The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy, announced a further downgrade to A, indicating heightened doubts over Washington’s long-term ability to repay its debts.

“It said the gloomy assessment — much lower than the AAA ratings given by the so-called ‘big three’ Western agencies Moody’s, Fitch, and Standard and Poor’s — was inevitable given the level of market concern generated by the stalemate between Democrats and Republicans over the debt ceiling.

“‘The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,’ Dagong Chairman Guan Jianzhong told CNN. ‘The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,’ he said…

“‘…Our downgrade simply reflects reality,’ Guan said. ‘Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.’”

Partly because Dagong is still not a Nationally Recognized Statistical Rating Organization (NRSRO), its downgrade is unlikely to have any impact on the bond markets. That said, it’s a good thing for the US that China’s State Administration of Foreign Exchange (SAFE) — which holds about $1.2 trillion in US debt — isn’t required to only invest in sovereign debt considered “safe” by its own hometown credit rating agency. The Chinese downgrade really wouldn’t seem so trivial then.

You can read more details in a CNN article on China’s Dagong Global rating agency downgrading US debt.

Best,

Rocky Vega,
The Daily Reckoning

S&P Dithers While Dagong Global Cuts US Credit Rating, Again originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Joshua Brown over at The Reformed Broker has targeted what he sees as the single exchange-traded fund (ETF) that has absolutely “owned” this moment in time. The FactorShares 2X: Gold Bull/S&P500 Bear (NYSE:FSG) ETF is double-long gold and double-short the S&P 500.

From The Reformed Broker:

“Yesterday I spoke with the creator of the fund, FactorShares’ Director of Operations Matt Brown (who is no relation but is a TRB reader). He explained the mechanics of how the fund operates and what it’s meant to accomplish. $FSG is registered under the 1933 Act (commodities pool) as opposed to the exemptive relief provision of Investment Company Act of 1940 (like most ETFs). It uses futures (e-mini for S&P 500 and rolling GSCI for Gold).

“Like any futures-based product, it is subject to contango risk (although hopefully less than a UNG-type fund because of how liquid SPX and Gold futures markets are) and it obviously works best in trending markets (today is the 8th straight day of down stocks and up gold, how about that for a trend?).  Matt tells me there is a daily rebalance to ensure dollar neutrality.

“The all-in management fee gets up to about 1.13% but when you consider that the fund is 2X leveraged on both the long and short side, that works out to a more reasonable number when all is said and done.”

As Joshua Brown points out, FSG has been trading since February of this year and now has about $6 million in assets. It’s, of course, subject to its own unique risks that require sorting through, but it could be interesting to the most hardcore of gold enthusiasts. Much like Joshua Brown also indicates in his comments, this post is no endorsement of the ETF… it’s simply a fascinating specimen. You can read more details in Brown’s post on the current market’s belle of the ball.

Best,

Rocky Vega,
The Daily Reckoning

FactorShares 2X (NYSE:FSG): For Only the Most Hardcore Gold Enthusiast originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.