Bruce Krasting's Contributions

Europe is cracking up (again), and the IMF and big guns of the G-20 will spout about “expanded firewalls” and “global co-ordination” in the final communique Sunday evening. If we don’t get a big dose of “happy talk” then the markets will crap out.

On Monday and Tuesday the market’s attention will be on the USA and the negative economic implications of the Nonfarm payroll (NFP) miss. Market eyes will also be focused on the bond markets in Italy and Spain.

I’m not surprised. Bernanke understands that upping the anti with more QE would send the price of crude through the roof. The deflationary effect on the consumer economy of another dollar increase for gas would far outweigh any positive consequences that another LSAP would have produced.

Jon Hilsenrath, at the WSJ, must have had a phone call with Ben Bernanke on Saturday. Accordingly, Jon put an article out just in time to influence the market on Monday morning.

A very big question mark hanging over the global table is what is going to happen between Iran and Israel. I spoke with a fellow in Europe I know who has an informed opinion. There were no secrets discussed, but his thoughts on some of the variables including Syria, bunker bombs and timing were interesting.

Ben Bernanke has said many times that Marriner Eccles, the head of the Federal Reserve in 1936/37 made a mistake by tightening credit (raising reserve requirements). Bernanke blames Eccles’s actions for the 50% stock market collapse in 1937 and the second leg of the depression that followed.

Bernanke’s testimony to the House last week and to the Senate yesterday held no surprises. Ben has promised to maintain monetary policy at DEFCON 4 levels for as far into the future as we can see.

As of today, there is an economic firestorm that is programmed to hit on January 1, 2013. It’s the kitchen sink - the Bush tax cuts (all of them), the payroll tax cuts, the AMT patch, the ending of extended unemployment benefits, the Sequestered Amounts (11’ budget deal), the debt ceiling, the need to pass a continuing resolution to fund the government and a bunch of other landmines.

The Congregational Budget Office (CBO) is out with its annual report. It’s a blockbuster. This 165 page monster is filled with dozens of charts, graphs and detailed projections. It will be talked about for weeks. The report provides a dismal outlook for the economy. There is one data point I'd like to focus on.

Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal.

The January 2012 numbers for Social Security (SS) show a mixed picture. The results mirror what is going on in the economy. There is clear evidence that revenues at SS are recovering; there is equally clear evidence that America’s social expenditures are rising at a rate that exceeds the rate of recovery.

Jackie Calmes at the NYT has a good summary regarding the last minute effort to get an extension of the 2% payroll tax reduction for 2012. (There is consideration this morning for a two month extension) There are some subtleties of the debate that are worth noting.

The possibility exits for the Fed to lose any credibility they may still have in the US and abroad. The completely unregulated Federal Reserve may lose its independence as a result. There are big downsides to significant revisions to margin rules. The upside is that the Fed’s supreme power over the global economy would be finally checked.

I watched Jon boy. I didn’t hear any smoking guns. That doesn’t mean there weren't any. Keep in mind that Corzine has the best lawyer (for this) that money can buy. Andrew Levander has been advising the former CEO of MFG on every word he says.

The 2011 numbers for SSA indicate that we are at least five years ahead of existing thinking on the SSA deficits. When this realization sinks in, it will break the hearts of the SS defenders. If we are, as I contend, five to six years ahead of “schedule” with cash deficits at SSA, there is no alternative besides cutting scheduled benefits.

Listening to the talking heads legislators in D.C. over the past few days confirms to me that a deal on extending the payroll tax cuts for another year is going to get done. Sure there will be some histrionics, but there will be no tax increase for American workers come January 1, 2012.

The Federal Reserve has taken an unusual step this week. To my knowledge the action is without precedent. There was no prior announcement or discussion preceding the new measures. By itself, this is atypical for Bernanke's Fed. Ben doesn’t like to surprise markets. He did this time (I'm sure he personally approved the move). Some details and thoughts on what it might mean.

I’m not surprised that the contagion has worked its way to France. After all, the ECB intervention policy insures that France becomes a target. “If you can't sell Italy, sell France”, is the market’s response. I’m not surprised that the halo effect of political changes in Italy and Greece had a very short half-life. Why would it? Nothing has changed.

I talked to someone in the shipping business this morning. He happens to be Greek and has substantial interests in the country. We never did get around to talking about ships.

Possibly the most significant consequence of the EU bailouts last week will be that the “solutions” to the problems in Europe will result in a global credit crunch. To me this outcome is a foregone conclusion. It's already happening.