bank-o-meter.com

Deficits, Militarization, Privatization, Financialization

by Sinclair Noe

DOW – 126 = 14,995
SPX – 13 = 1612
NAS – 36 = 3400
10 YR YLD + .03 = 2.23%
OIL + .38 = 95.76
GOLD + 10.20 = 1389.40
SILV + .10 = 21.89

Pretty much all markets looked a little weak today, except maybe precious metals, but its hard to call that market strong right now. Quantitative easing, the $85 billion per month shelled out by the Federal Reserve, comes down to the purchase of two kinds of securities: Treasury paper and mortgage-backed securities. The Fed buys the Treasury paper from the federal government and the mortgage-backed securities from commercial banks. The first is a direct form of monetization (money printing); the second is an indirect form since a good portion of those funds is in turn also used by the banks to purchase Treasury paper. The two together comprise the bulk of what appears on the Fed's balance sheet as "reserve bank credit"; that figure stands at just over $3.2 trillion; up about $2.4 trillion since late 2008. At first glance, it looks like reserve bank credit and the gold price are correlated, but what is really going on with this tandem is that they are both being pushed by the same force - a bad economy. It causes the Fed to print money and investors to buy gold.

The government reported Wednesday that the US budget deficit widened in May by $139 billion. But the annual deficit stayed on track to finish below $1 trillion for the first time since 2008. With the May increase, the deficit through the first eight months of this budget year totaled $626 billion, according to the Treasury. That's down $218 billion lower than the same period last year. And that means we are on track to the smallest deficit in 5 years.

Many analysts believed the huge revenue gains seen in the first few months of 2013 would fade away as we moved into spring. Higher taxes, and a big increase in dividends which were pushed forward to beat the fiscal cliff, and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197 billion, compared with $180 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.

The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. Thus far this year, spending is up about 1 percent.

Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.

One area of government that is growing is data collection, the amount of surveillance information that the government collects is enormous and growing really fast; in fact the new name for it is metadata, and we have no idea how it is used by the government, how long it is held and which agencies, or companies, have access to it. The culture of secrecy that pervades Washington borders on the absurd. American officials say they cannot discuss “classified” U.S. counter-terrorism tactics that are well-known worldwide, including data mining.

From drone strikes to eavesdropping to torture, the American public is not allowed to know the rules and results of U.S. counterterrorism policies. At the same time, a sprawling secrecy industrial complex does. More than 4.9 million Americans now have government security clearances, and another 1.4 million have top secret clearance.  Major U.S. civilian government agencies — from the CIA to State Department — have become dependent on contractors to operate. Today, the federal government pays contractors $300 billion a year, according to the Project on Government Oversight, a watchdog group. Many are believed to operate in intelligence agencies.

Contracting has become a huge profit center for defense contractors and Wall Street alike. Ed Snowden is the guy who leaked the most recent info about the government's data mining. Snowden worked for a private contractor, Booz Allen, which was purchased by the Carlyle Group in 2008. Last year, 99 percent of the Booz’s $3.8 billion in revenue came from government contracts. Booz Allen, which employs 24,500, had a net profit of $219 million on revenue of nearly $5.8 billion for the fiscal year ended March 31. For the same period ending in 2010, the year the company went public, the company earned $25 million on $5.1 billion in revenue. Whatever they do, they've figured out a way to improve the margins. Unfortunately, the margins are paid with tax dollars.

Snowden is now believed to be somewhere in Hong Kong, and he keeps releasing info; the latest is that the US government has been hacking the Chinese since at least 2009. The National Security Agency, Central Intelligence Agency and Defense Intelligence Agency, for example, all rely heavily on contractors to operate. Roughly 480,000 — one-third of the 1.4 million people with security clearances — are contractors.

Of course, private sector and public sector work in different ways. The major motivation for the private sector is profit. How does a firm increase profit? Do they mine more data? Do they promote more fear? Surely, complacency would be bad for business. You wouldn't want to make a mistake with your biggest client, which is what Booz Allen Hamilton did in the case of Snowden. But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts.

This is the way the government has grown the military industrial complex, and it doesn't seem to matter if Lockheed Martin overcharges for fighter jets, or if Boeing goes over budget on helicopters, or if Haliburton builds latrines for soldiers in Iraq and happens to electrocute a few in the process; in these cases, the new contracts continued to flow.

The reality is that these contractors have become part of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity. At least that's the argument of the contractors.

On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists and make campaign donations in order to work the system.

In its recent annual report, Booz Allen said that the main risks to its business includes changes to “U.S. government spending and mission priorities” (like the sequester) and “mishandling or the perception of mishandling of sensitive information, such as our failure to maintain the confidentiality of the existence of our business relationships with certain of our clients or a failure to maintain adequate protection against security breaches,” which “could harm our relationship with U.S. government agencies.”

Ed Snowden, the guy who leaked the stories, is a 29-year old, reportedly making $122,000 a year at Booz Allen, until they fired him this week. That means this guy made more than most Army Colonels.

Maybe another risk to the profits of these companies is that the public reconsiders the price we pay for privatization of national defense, and maybe we just get tired of paying companies to snoop into our phone calls and emails.

Yesterday I talked about the financialization of the economy, and how an ever-growing financial sector was actually hurting the economy and hurting the prospects for jobs growth. So, let's go back just a little bit; remember the Libor rate rigging scandal? About a year ago we heard that there was widespread manipulation of the London Interbank Offered Rate, which is the benchmark interest rate that affects borrowing costs around the world. A handful of big banks have already paid fines in that case, and some traders have been fired. Given that set of fairly manageable consequences, it's understandable that traders would continue to find different things to manipulate for fun and profit.

And then we heard about credit swap derivatives being manipulated via something called the ISDA Fix; then there was the gold and silver markets, and the British natural gas market, and the crude oil market. This is going to shock you; it's hard to believe, but there is even more manipulation. Bloomberg is reporting that the Forex market, which is where currency is traded, has been manipulated for at least the past ten years. One trader compared it to the Wild West, which I think is an insult to the Wild West.

One thing that makes the alleged currency-market manipulation especially unpleasant is that this apparently involved front-running client trades. So, they are literally stepping in front of someone's trade and stealing a little. And traders allegedly worked together with traders of other banks to do this, in order to spread the wealth around -- to everybody but the poor dumb clients, that is.