California Fig Ball. Made for Harold Thoreson, California State Society
Ilargi: Yes, sure, Bernanke talked today, so did Neil Barofsky, and so did scores of Capitol Hill dwellers. But they didn't say anything, because none of them ever do in such settings. One thing I did find interesting to see is that the Treasury has launched an effort a while ago challenging SIGTARP's legal status, effectively forcing the agency to use a lot of its time defending itself. Against what? Against being under direct control of the Treasury, the very department whose actions SIGTARP was set up to evaluate. Mr. Barofsky looks like a brave enough man, the Congressmen and women talking to him do not. They should stand up for their man, but they don't. Well, enough of that, it’s after all just theater. And then there's a real world.
California's finest agreed on a budget today, which still has to be ratified by the legislature, and go through a slew of legal challenges. It would be a disgrace if it were pushed through, and it would be a disgrace if at least some plan were not. On top of the budget woes, California's two biggest pension plans lost about a quarter of their value, for a combined loss of almost $100 billion. In one year. That's about 4 times the budget cap that holds the entire state hostage and will all by itself cause a political crisis that California may never survive in its present shape. Too many people will become too poor.
In Britain, similar things are going on. The main difference is probably that an independent nation doesn't have to balance its budget, whereas a US state has to. UK federal tax revenues are down by £32 billion, the steepest decline since the 1920's, the nation's debt is £799bn, or 56.6% of UK GDP, and foreign capital has gone AWOL.
I’ll just put up some quotes from today's press below. The numbers should speak for themselves and paint a pretty clear picture. And when you get that picture, do please tell yourself how confident you are that this will not and cannot happen where you live. Soon.
California:
The nation's most populous state faces a $26 billion gap in a $92 billion general-fund budget through June 2010. Mr. Schwarzenegger and legislators have been wrestling over the budget for weeks, forcing the state's chief accountant to issue IOUs to many creditors, including some welfare recipients. As of Friday, the state had issued 153,711 IOUs, worth a total of $682 million. The office of Controller John Chiang said it would need to evaluate the budget proposal before determining when it could stop issuing the warrants.
Los Angeles County stands to lose $109 million in gas taxes and $313.4 million in redevelopment project funds next year. If redevelopment projects were extended 30 years, as some have proposed, the county could lose more than $8.2 billion. The state budget proposal would also cut millions in county health and social service funding, including $53.3 million from CalWorks, the welfare program for families, $22.1 million in substance abuse crime prevention, $21 million for mental health managed care and $5.7 million in AIDS/HIV treatment and prevention, county leaders have said.
The budget includes $6 billion in new cuts to K-14 schools, as well as $3 billion in cuts to higher education, some of which colleges can offset with federal stimulus dollars. Leaders used a retroactive $1.6 billion cut to avoid suspending the state's Proposition 98 guarantee for school funding. They also committed the state to paying an extra $9.8 billion to schools when the economy rebounds as compensation for 2008-09 budget cuts, in addition to $1.5 billion owed for 2007-08.
Leaders agreed to cut $1.2 billion in the state's corrections budget, but they would not discuss how they would realize those savings until after they meet with their caucuses. The state will take about $4.7 billion from cities, counties and special districts. The plan relies on $2 billion in borrowing the state promises to repay in 2013; local governments are expected to seek loans to compensate. It also takes $1 billion from gas tax money that now pays for local road projects, as well as $1.7 billion in redevelopment funds.
As much as $4.7bn will be taken from cities and municipalities, heaping more pressure on local efforts to fight the slump. Antonio Villaraigosa, mayor of Los Angeles, said it was a “moment of shame” for California, adding the state had “abdicated and abrogated its commitment to cities, school districts and counties”. CalWorks, the state’s welfare-to-work programme – the butt of much criticism from Mr Schwarzenegger – will have its funding cut by $528m, while Healthy Families, a programme that provides health insurance for 930,000 low-income children, will be cut by $124m.
“We think this is grave,” said Frank Mecca, executive director of the County Welfare Directors Association of California. “Cuts of this magnitude undo what we think is 70 years of successful policy. We’re talking about 100,000 children whose parents aren’t going to work. Tens of thousands of kids are going to go on waiting lists to get healthcare; large numbers of people [will] end up in nursing homes.” The budget deal also cuts close to $3bn from the state’s university system, although Mr Schwarzenegger said education cuts would be fully “refunded”. An additional $1.3bn will be cut from Medi-Cal, the health programme for low earners and the poor. Another contentious part of the agreement will clear the way for oil drilling to resume off the coast of Santa Barbara. The prospect of drilling has attracted criticism and is likely to be fiercely contested by local residents and campaigners.
As part of a much larger plan to bridge the budget gap, the prison agreement would cut $1.2 billion from the prison system, which Melekian and other opponents fear could release more than 19,000 prisoners before their sentences expire.
Calpers:
Last fiscal year's losses, given the global recession, were not a surprise, said Dear. "The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger," he said. The teachers fund, which provides benefits for 833,000 public school educators and their families, reported investments worth $118.8 billion on June 30, down 25% from $162.2 billion a year earlier. The fund suffered severe losses across its portfolio, which was hard hit by a 43% decline in its real estate values, a 28.2% drop in stocks and a 27.6% loss in private equity holdings.
- During the fiscal year, the fund put about 23 percent of its money in U.S. fixed income and bonds; 55 percent in equities, including 14 percent in alternative investments; 12 percent in real estate; 2 percent in an inflation-linked class such as infrastructure and timberland and 9 percent in cash.
- In June, Calpers’s board approved a plan to change that allocation, putting 20 percent of its money in bonds, 49 percent in stocks, 14 percent in alternative investments, 10 percent in real estate, 2 percent in cash and 5 percent in a new asset class with investments linked to inflation.
Britain:
Tax receipts flowing into the Treasury fell by £32 billion last year as the recession hit Government finances, official figures showed yesterday. The perilous state of the national finances was made public as it was disclosed that the National Audit Office (NAO) has refused to sign off part of the Treasury’s accounts. The decline in Government revenue for the 2008/9 financial year – the steepest since the 1920s – included a £6.4 billion drop in VAT income following Chancellor Alistair Darling’s decision to cut the rate to 15 per cent last November, according to the HM Revenue and Customs annual report.
The Treasury was shown to have overspent by £24 billion on last autumn’s banking rescue. Its accounts were rejected by the official auditor because the insurance the Government granted to the troubled banks Lloyds and Royal Bank of Scotland was not approved by Parliament. The Treasury was among five government departments which had their accounts “qualified” by the National Audit Office for 2008-09. This means the auditors refused to sign off part of their accounts for the past year. The others are HM Revenue and Customs, the Department for Work and Pensions, the Ministry of Defence and the Home Office.
In total, the Treasury spent £45 billion on what was termed the Asset Protection Scheme under which the Government agreed to protect banks against future losses on bad loans in return for the public taking a stake in the business. Ministers had originally set the cost of the guarantees at £21 billion.
The UK's budget deficit rose to its highest level for any June on record last month, as tax receipts plunged in the wake of the financial crisis. The Office for National Statistics (ONS) said that the public sector posted a net cash requirement of £18.98bn last month, slightly lower than the £20bn expected by analysts but still a record high for the month. Public sector net borrowing, the government's preferred measure of the deficit, was £13bn – lower than analysts' expectations of £15.5bn, but also a record for the month of June.
The ONS said that the corporation tax take from the UK's distressed business sector plunged 14.1% from the same month last year, while VAT receipts fell 15.9% and income tax dropped 3.9%. Government spending rose to £49bn as it battled the recession, up from £44.2bn a year earlier, and payment of benefits – including unemployment pay – rose 9.7% to £13.3bn. Total receipts fell by 5.7% to £35.5bn.
Foreign banks, which in recent years have been substantial lenders to the UK economy, have withdrawn so as to fight their own battles back home. UK banks have meanwhile struggled to maintain their domestic lending at previous levels. With markets and depositors demanding their money back, banks have had little option but to liquidate lending positions and rein in credit wherever possible. An extreme shortfall, or "funding gap", has opened up which taxpayers have had to fill. These actions have prevented a full-scale collapse, but the system of private credit creation remains badly injured with no obvious way of repairing the damage.
As the FSA's director of banking, Tom Huertas, has pointed out, the totality of this public support is already close to £1.3 trillion, or virtually as big as Britain's entire annual GDP. A bewildering alphabet soup of schemes has been put in place to counter the contraction in private provision of credit. Yet mind-boggling though these numbers already look, they still understate the true magnitude of the problem. In promising that nobody will lose a penny as a result of the banking crisis, the Chancellor has in effect underwritten the liabilities of the entire UK banking system, amounting to a multiple of several times the size of GDP.
California - Rufus Wainwright
California
California
You're such a wonder that I think I'll stay in bed.
Big time rollers, part time models
So much to plunder
That I think I'll sleep instead
I don't know this sea of neon
Thousand surfers, whiffs of freon
And big nights back east with Rhoda
California please
There's a moment
I've been saving
A kind of crucifix around this munchkin land
Up north freezing, little me drooling
That's Entertainment's on at eight
Come on Ginger slam
I don't know this sea of neon
Thousand surfers, whiffs of freon
And my new grandma Bea Arthur
Come on over
Ain't it a shame that at the top
Peanut butter and jam they served you
Ain't it a shame that at the top
Still those soft skin boys can bruise you
Yes I fell for a streaker
I don't know this sea of neon
Thousand surfers, whiffs of freon
Ain't it a shame
That all the world can't enjoy your mad traditions
Ain't it a shame that all the world
Don't got keys to their own ignitions
Life is the longest death in California
California
You're such a wonder that I think I'll stay in bed
So much to plunder that I think I'll sleep instead
You're such a wonder that I think I'll stay in bed
So much to plunder that I think I'll sleep instead
A deal -- at last
Gov. Arnold Schwarzenegger and legislative leaders agreed Monday to erase California's $26 billion deficit by cutting broadly across state government, shifting costs into the future and taking funds from cities and counties. State leaders believe their budget plan is good enough to end the state's issuance of IOUs, a practice California is using for only the second time since the Great Depression.
Standing with legislative leaders in front of his Capitol office Monday evening, Schwarzenegger called the deal "a really great, great accomplishment," and heralded the fact that the $88 billion general fund budget includes no tax increases. Legislative leaders spoke in sober tones about producing a plan with $15.5 billion in cuts they know will face scorn from millions of Californians who depend on state government for services, education or employment, as well as from local officials whose budgets were already teetering. Both Democrats and Republicans blamed the ongoing recession for the choices they made.
"This is, of course, one of the most difficult economic times to face our state since the Great Depression," said Assembly Republican Leader Sam Blakeslee, R-San Luis Obispo. "So none of these were easy choices. All of them entailed difficult options for the state." A floor vote is expected Thursday, and leaders plan to brief their caucuses by phone Tuesday. While leaders expressed confidence in Monday's handshake agreement, the last "Big Five" deal in February met resistance once it reached the Senate floor.
The budget includes $6 billion in new cuts to K-14 schools, as well as $3 billion in cuts to higher education, some of which colleges can offset with federal stimulus dollars. Leaders used a retroactive $1.6 billion cut to avoid suspending the state's Proposition 98 guarantee for school funding. They also committed the state to paying an extra $9.8 billion to schools when the economy rebounds as compensation for 2008-09 budget cuts, in addition to $1.5 billion owed for 2007-08.
The budget agreement also has about $850 million in cuts to three major safety-net programs – In-Home Supportive Services, CalWORKs and Healthy Families low-cost medical insurance. "For Democrats, I have to tell you that many of the cuts we had to make … in another time we would have thought were unthinkable," said Assembly Speaker Karen Bass, D-Los Angeles, who said that because of the recession she felt they "didn't have a choice."
Democrats said they protected CalWORKs and Healthy Families from being eviscerated by the governor, who originally had proposed eliminating the programs. Steinberg said that "frankly, we had one hand tied behind our back" because Republicans would not support tax hikes. Schwarzenegger and Republican leaders, however, highlighted permanent increases in sanctions designed to force more welfare recipients into work that take effect in July 2011. Those include more interviews and reviews of recipients, as well as benefit reductions if parents don't meet new requirements.
Leaders agreed to require fingerprinting of In-Home Supportive Services providers and recipients, excluding amputees. Providers would undergo background checks. The governor suggested it was part of "cutting the waste, fraud and abuse in some of the programs." But advocates said leaders should have raised taxes on tobacco and oil production to preserve benefits. "This is the biggest step back from protecting and investing in vulnerable Californians in a generation," said Frank Mecca, executive director of the California Welfare Directors Association.
Leaders agreed to cut $1.2 billion in the state's corrections budget, but they would not discuss how they would realize those savings until after they meet with their caucuses. The state will take about $4.7 billion from cities, counties and special districts. The plan relies on $2 billion in borrowing the state promises to repay in 2013; local governments are expected to seek loans to compensate. It also takes $1 billion from gas tax money that now pays for local road projects, as well as $1.7 billion in redevelopment funds.
A summary of key spending cuts included in Monday's budget deal:
- $6 billion: K-12 schools and community colleges over two years.
- Nearly $3 billion: University of California and California State University.
- $1.3 billion: Medi-Cal, the state's health care program for the poor.
- $1.3 billion: Three unpaid furlough days per month for state workers.
- $1.2 billion: State prisons.
- $528 million: CalWORKS, partly by increasing sanctions for families that fail to meet work requirements.
California Budget Deal Closes $26 Billion Gap
Gov. Arnold Schwarzenegger and California legislative leaders Monday said they reached a compromise to close the state's $26 billion budget shortfall. Under the plan, state lawmakers would cut $15 billion in spending. The rest of the gap would be filled by taking funds from local governments and through one-time fixes and accounting maneuvers. The deal must still be approved by rank-and-file legislators, who are expected to vote on it Thursday. "We have accomplished a lot in this budget," Mr. Schwarzenegger told reporters after lawmakers struck the deal Monday evening. "We dealt with the entire $26 billion deficit," he said.
The nation's most populous state faces a $26 billion gap in a $92 billion general-fund budget through June 2010. Mr. Schwarzenegger and legislators have been wrestling over the budget for weeks, forcing the state's chief accountant to issue IOUs to many creditors, including some welfare recipients. As of Friday, the state had issued 153,711 IOUs, worth a total of $682 million. The office of Controller John Chiang said it would need to evaluate the budget proposal before determining when it could stop issuing the warrants.
Economists said the spending cuts will bruise a California economy already slammed by rising unemployment and foreclosure rates. "It will certainly offset a fraction of the federal-stimulus effect this fall," said Roger Noll, a professor emeritus of economics at Stanford University. "That will mean the depth and duration of the recession [in California] will both be bigger than otherwise would've been the case," he said. The leaders of the Democratic-controlled state legislature said that of the $15 billion in cuts, $9 billion would come from education, $1.3 billion from state-worker furloughs and $1.2 billion from the prison system.
"For Democrats, I have to tell you that many of cuts we had to make, at another time, we would've thought unthinkable," said Assembly Speaker Karen Bass. Ms. Bass also said that local governments "will have to share the pain." The state will take away $4.3 billion from local governments by borrowing from them or redirecting funds that had been earmarked for them. Groups targeted by the cuts said the spending reductions would batter already-devastated essential services. "It's not a viable situation. As far as we're concerned, we do not have a functioning state government," said Sheila Jordan, superintendent of Alameda County schools, one of the state's largest at about 225,000 students, which has already seen sharp cuts.
"Class sizes go up, programs are being shut down, there are not enough supplies. Wherever you look, whatever we're doing, we're cutting back enormously," Ms. Jordan said. Local governments, already reeling from their own budget crises, could stand to lose billions in the deal. "That would just be catastrophic," said Don Knabe, chairman of the Los Angeles County Board of Supervisors. Los Angeles County's roughly $350 million "rainy day" fund stands to be decimated by the state budget cuts because it will be needed to replace the cuts being made to state health and human services programs, Mr. Knabe said.
He said Los Angeles County has enough money to last it through October, and by then it plans to implement deep cuts to county programs. Even if approved, the budget deal won't end California's financial problems. The state remains awash in home foreclosures and an unemployment rate of 11.6%—one of the highest in the nation. Some positive signs are emerging, such as a resurgence in housing sales in most of the state's markets. But most analysts predict California's recovery will be slow, and that state coffers will remain under pressure because they are highly dependent on personal income taxes, which are now down.
California spending cuts spark fury
California erupted in protest on Tuesday as teachers, local governments and public sector workers attacked the billions of dollars of spending cuts that form the basis of the state’s controversial budget deal. The agreement to close California’s record $26.3bn (€18.5bn, £16bn) deficit was reached after Arnold Schwarz?enegger, the state’s governor, agreed swingeing cuts, including $6bn off education spending. It comes as the state has been forced to write IOUs to creditors after running out of money. Public employees have had to take unpaid leave and the state’s credit rating has been slashed to near junk status, giving it the worst rating in the US.
The budget deal should alleviate some pressure. But opponents of Mr Schwarzenegger’s plan are likely to resist the billions of spending cuts he has identified. “We used to have the best schools in the country but education in California is taking 60 per cent of the cuts,” said David Sanchez, president of the California Teachers’ Association. Education spending is protected under California law so the state has agreed to reimburse the $6bn over a 12-year period from 2012. But that will not prevent the cuts from having a start?ling effect in the next school year, Mr Sanchez said. “This is going to mean higher class sizes, approximately 20,000 teachers losing their jobs and no music, arts or physical education.”
As much as $4.7bn will be taken from cities and municipalities, heaping more pressure on local efforts to fight the slump. Antonio Villaraigosa, mayor of Los Angeles, said it was a “moment of shame” for California, adding the state had “abdicated and abrogated its commitment to cities, school districts and counties”. CalWorks, the state’s welfare-to-work programme – the butt of much criticism from Mr Schwarzenegger – will have its funding cut by $528m, while Healthy Families, a programme that provides health insurance for 930,000 low-income children, will be cut by $124m.
“We think this is grave,” said Frank Mecca, executive director of the County Welfare Directors Association of California. “Cuts of this magnitude undo what we think is 70 years of successful policy. We’re talking about 100,000 children whose parents aren’t going to work. Tens of thousands of kids are going to go on waiting lists to get healthcare; large numbers of people [will] end up in nursing homes.” The budget deal also cuts close to $3bn from the state’s university system, although Mr Schwarzenegger said education cuts would be fully “refunded”. An additional $1.3bn will be cut from Medi-Cal, the health programme for low earners and the poor. Another contentious part of the agreement will clear the way for oil drilling to resume off the coast of Santa Barbara. The prospect of drilling has attracted criticism and is likely to be fiercely contested by local residents and campaigners.
Bonnie Castillo from the California Nurses Association said the budget deal would hurt “the most vulnerable and least politically connected people”. “This deal takes a meat axe to county budgets, which are the safety net for the most vulnerable people.” Unemployment in California is running at more than 11.5 per cent, while businesses are leaving the state, lured by more appealing tax regimes in states such as Colorado and Texas. Funding for the state’s in-home support services programme for the frail and disabled will also be slashed. Mr Schwarzenegger has maintained that the system is a hotbed of fraud.
California police groups fear budget will release inmates
Police groups began flooding the Capitol with telephone calls Monday in an effort to derail any early release of felons in a fierce campaign that shifts the budget battleground from legislative leaders to targeting rank-and-file lawmakers. The California Police Chiefs Association and numerous other groups plan to fight on the Assembly floor a portion of the budget they say could result in early release of thousands of felons from prison.
The basic agreement struck Monday evening by Gov. Arnold Schwarzenegger and legislative leaders to close a $26.3 billion budget gap is likely to produce intense lobbying by a variety of powerful special interests. Pasadena Police Chief Bernard Melekian, president of the California Police Chiefs Association, said his group would be among them because "wholesale release of inmates simply to achieve a fiscal end is not good public policy." "Quite frankly, I don't think the public is fully aware of just how close this is to becoming reality," Melekian said.
The campaign, expected to consist of thousands of phone calls, targets Democrats who plan to run for higher office next year, represent hotly contested districts, or who have been sympathetic or outspoken about law enforcement issues in years past. "Frankly, it will not be possible for anyone who votes for the early release of felons to ever be taken seriously on public safety issues again," the campaign said in a memo to participants. As part of a much larger plan to bridge the budget gap, the prison agreement would cut $1.2 billion from the prison system, which Melekian and other opponents fear could release more than 19,000 prisoners before their sentences expire.
"The concern is that the only way that you get to that amount of money is to release people from prison," Melekian said. He said police chiefs are also concerned that there is no money available to help with prisoners' return to society. "There's no money for job training – there's no money to do anything to transition these folks from institutional life to life back in the community," he said. "It's more than just releasing them. It's releasing them with no real plan for dealing with them." Legislative leaders declined to comment on that part of the plan Monday evening.
Aaron McLear, Schwarzenegger's spokesman, also declined to comment on details, but said that "while the governor will always protect public safety, there will be difficult cuts made across the board in this budget." Schwarzenegger's May budget proposals included a smaller early-release proposal that included electronic monitoring of nonviolent offenders who were not convicted of sexual offenses. Hoping to prevent majority-vote passage of any early-release bill, the law enforcement campaign is targeting 28 Democrats and Juan Arambula, who quit the Democratic Party last month to register as an independent. Republicans consistently have opposed early-release legislation.
"I believe there will be ways to achieve savings without releasing prisoners on the street," Assembly Republican leader Sam Blakeslee said Monday. "That's something that's very important to me." Sen. Tom Harman, R-Huntington Beach, said GOP lawmakers should "view any dumping of prisoners as a poison pill if incorporated into any budget proposal." If the Assembly's GOP caucus remains firm, law enforcement groups would need to win support from at least 10 other Assembly members to kill any early release proposal. Melekian contends that public safety could be endangered by early release, and that any savings would be illusory because many of the convicts would commit new crimes.
Potential impacts are exacerbated by budget cuts that have left communities with fewer peace officers or programs to supervise or train convicts for jobs, he said. "It's horrible public safety policy and it's horrible fiscal policy," said Tim Yaryan, a law enforcement lobbyist. The California Police Chiefs Association is joined in the fight by the Association for Los Angeles Deputy Sheriffs, the Los Angeles Police Protective League, and the Riverside County Sheriff's Association. Lobbying began late last week. Several Democrats targeted by the campaign expressed reservations Monday about early release. Assemblyman Ted Lieu, D-Torrance, said that "any short-term cost savings are outweighed by their long-term cost in increased crime."
"I'd say it's a delicate issue for me," said Assemblywoman Joan Buchanan, D-Alamo. "Whatever we do, we need to be sure that we're protecting public safety." Assembly Majority Leader Alberto Torrico, D-Newark, said the potential for early release of inmates is a strong argument to include revenue generation in any final budget pact. "(Police) should be going back to the governor and to Republican legislators and saying, 'These cuts are too deep. It can't be an all-cuts budget. We have to have some revenue,' " Torrico said. But Arambula, of Fresno, said cutting prison costs may be inevitable. "I don't blame the law enforcement people, but these are very unusual times," he said. "It may be with difficulty that I will have to support the budget, including the corrections piece."
L.A. supervisors to sue to block state budget cuts; other local governments expected to join
The Los Angeles County Board of Supervisors voted to sue state lawmakers if they pursue plans to seize local redevelopment and highway taxes to cover the state budget deficit. Other local governments are expected to take similar actions to prevent major cuts proposed in the budget deal reached last night. This morning, Supervisors Don Knabe and Zev Yaroslavsky proposed that county counsel sue to block any effort by the state to illegally withhold gas taxes or extend redevelopment projects, effectively redirecting taxes from the county to the state.
All of the supervisors approved the proposal except Supervisor Mark Ridley-Thomas, who was absent. “You’d think they’d be making better decisions than this,” Supervisor Gloria Molina said. If the county sues to block the state from extending redevelopment projects, it will likely trigger a provision in the proposed legislation that allows the state to take $301 million in county Proposition 1A funds. Knabe, who chairs the board, said state legislators inserted the “poison pill” provision so that they will not be on record as taking county funds outright.
“It’s their cover so they don’t have to deal with the issue,” Knabe said. Under the budget agreement state leaders reached Monday, Los Angeles County stands to lose $109 million in gas taxes and $313.4 million in redevelopment project funds next year. If redevelopment projects were extended 30 years, as some have proposed, the county could lose more than $8.2 billion. The state budget proposal would also cut millions in county health and social service funding, including $53.3 million from CalWorks, the welfare program for families, $22.1 million in substance abuse crime prevention, $21 million for mental health managed care and $5.7 million in AIDS/HIV treatment and prevention, county leaders have said.
“For the State to balance its budget on the backs of the state residents most in need of help, and the counties that serve them, is fiscally reckless and morally bankrupt,” the supervisors wrote in their proposal, set to be introduced at their weekly meeting this morning. “State spending and significant tax giveaways, among other things, have brought us to this precipice. Transferring local funds into the State treasury does nothing to address these policy failures. Taking advantage of counties that serve the elderly, ill, mentally ill, disabled and the impoverished is wrong on its face, and it is illegal,” they wrote. The county chief executive's staff has been researching the legality of the proposals, which could hurt county fire district funding.
“We’re told that it’s likely not legal,” said Ryan Alsop, assistant to the county’s chief executive. “There are very specific criteria on making decisions on extending redevelopment outlined in statutes.” It has been difficult for even high-ranking county officials to get details of the state budget plan. “The information has been essentially embargoed,” said the county’s chief executive, William T. Fujioka. “We’ve been trying every possible resource we have to get that information.” Fujioka told supervisors he expects to learn more about the state budget plan’s impact on county funding by tonight.
Calpers Lost 23.4% in 2008, Worst One-Year Decline
The California Public Employees’ Retirement System, the largest U.S. defined-benefit public pension, lost 23.4 percent last year as the global financial crisis and the worst recession since the Great Depression erased six years of earnings and produced its worst year. Assets totaled $183.7 billion, Calpers, as the fund is known, said. Declines totaled 28.5 percent on stocks, 35 percent on real estate and 31 percent on alternative investments, such as private equity and hedge funds, Calpers said. Bonds grew by 0.6 percent. The $118 billion California State Teachers’ Retirement System, the second-largest U.S. public pension, said today that the value of its investments fell 25 percent last year.
Calpers, which manages retirement and health-care benefits for 1.5 million current and retired public workers, has said its losses for the fiscal year ended June 30 are so severe that it likely will ask taxpayers to contribute more to ensure it has enough money to pay benefits. The state and hundreds of local governments pay a percentage of their payrolls each year into the pension. “This result is not a surprise; it is about what we expected given the collapse of markets across the globe,” said Joseph Dear, the fund’s chief investment officer. “The good news is we have the opportunity to capture future returns because of our long- term investment horizon.”
- During the fiscal year, the fund put about 23 percent of its money in U.S. fixed income and bonds; 55 percent in equities, including 14 percent in alternative investments; 12 percent in real estate; 2 percent in an inflation-linked class such as infrastructure and timberland and 9 percent in cash.
- In June, Calpers’s board approved a plan to change that allocation, putting 20 percent of its money in bonds, 49 percent in stocks, 14 percent in alternative investments, 10 percent in real estate, 2 percent in cash and 5 percent in a new asset class with investments linked to inflation.
The record decrease for the pension came as it was rebuilding its management team after four senior executives, including Chief Investment Officer Russell Read and Chief Executive Officer Fred Buenrostro, left for the private sector during 2008. Dear, former head of the $68 billion Washington State Investment Board, took over for Read in March. Anne Stausboll, who had been interim chief investment officer, became chief executive in December. The global financial crisis, which began with the collapse of the U.S. subprime lending market in 2007, has produced $1.52 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
The Standard & Poor’s 500 Index of stocks declined 28.4 percent during the fiscal year; the Dow Jones Industrial Average fell 25.8 percent. The MSCI World Index, excluding the U.S., was off 32 percent. Calpers’s value reached a high of $260 billion in October 2007. It dropped to $164 billion last January before heading back up. It stood at $180.9 billion as of June 30. The fund says it needs to earn as much as 7.75 percent each year to ensure that there is enough money to pay benefits. It lost 4.9 percent in the fiscal year ended June 30, 2008, and earned 19.1 percent in the previous year. Calstrs, as the teacher’s fund is known, said investment declines included 28 percent for stocks, 43 percent for real estate and 27.6 percent for alternatives, such as private equity and hedge funds. The fund earned 4.5 percent on its bonds.
Almost $100 billion in losses for California's biggest government pension funds
CalPERS reports its portfolio has shrunk 23.7% in the last year while the State Teachers' Retirement System says its holdings are down 25%.
California's two huge government pension funds reported whopping annual losses today of about one-quarter of their portfolios. The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion. The loss for CalPERS is the second in a row for the country's largest fund. A year ago, CalPERS reported an $8.5-billion loss as the severe recession began to take hold.
The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families. As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension obligations.At the end of the previous fiscal year, CalPERS' holdings in stocks, private equity, real estate and commodities positions were worth $239.2 billion. They fell to $180.9 billion at the end of June 2009, a loss of 23.7%, according to preliminary results. CalPERS hit a record-high balance of $247.7 billion two years ago after earning double-digit returns for the five fiscal years ended June 30, 2007. Without those kinds of flush years, CalPERS could have a difficult time getting the average annual return of 7.75% that its actuaries say it needs to meet obligations to retirees without drastically raising employer contributions.
To ease the damage on already cash-strapped cities and counties, CalPERS' board has approved a plan that would spread the latest fiscal year's deep losses over the next 30 years, beginning in mid-2011. CalPERS has modified its investment mix and risk-management policies in an effort to boost earnings, said Joseph Dear, the chief investment officer. The fund, he noted, already has rebounded by $20 billion since dipping to a recent low of $160 million in March.
Last fiscal year's losses, given the global recession, were not a surprise, said Dear. "The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger," he said. The teachers fund, which provides benefits for 833,000 public school educators and their families, reported investments worth $118.8 billion on June 30, down 25% from $162.2 billion a year earlier. The fund suffered severe losses across its portfolio, which was hard hit by a 43% decline in its real estate values, a 28.2% drop in stocks and a 27.6% loss in private equity holdings.
Short-Term Municipal Market Continues to Show Strains, Fed Says
The market for municipal bonds whose interest rates reset daily, weekly or monthly exhibited “substantial strains” in the first half of 2009, in contrast with long-term municipal debt, according to a report to Congress by the Federal Reserve. Local governments, nonprofits and hospitals that issued the debt, which offers borrowers short-term interest costs on longer-term bonds, are paying more for bank backstops that ensure bondholders can redeem their investment, the Fed’s Monetary Policy Report said. The cost to insure these variable- rate demand obligations, or VRDOs, is also increasing.
“Some municipalities were able to issue new VRDOs, but many lower-rated issuers appeared to be unwilling or unable to issue this type of debt at the prices that would be demanded of them,” the report said. Even as U.S. states and local governments are facing the biggest declines in tax revenue since World War II, the Federal Reserve is opposing a U.S. House Financial Services Committee proposal to guarantee repayment of variable-rate bonds.
The Federal Reserve has “important misgivings” given “the potential for decisions about the provision of credit to states and municipalities to assume a political dimension,” said David Wilcox, deputy director of the Fed’s research and statistics division in May 21 testimony to the House Financial Services Committee. State tax collections fell 11.7 percent in the first three months of this year compared with the same period in 2008, the largest drop in at least 46 years, according to the Albany, New York-based Rockefeller Institute of Government.
Yields on more than $90 million of A+ rated bonds issued by East Baton Rouge, Louisiana are 0.55 percent compared with 0.32 percent for top-rated debt whose interest-rate resets every seven days. Short-term bonds issued for Cathedral High School, a nonprofit college preparatory school in Indianapolis, Indiana, yield 5 percent. The Cathedral High school bonds are backed by a letter of credit from Fifth Third Bancorp. The letter of credit carries a BBB+ rating from Standard & Poor’s.
The market for the short-term municipal debt collapsed last year, when the insurance companies guaranteeing the bonds lost their top credit ratings because of losses on securities tied to residential mortgages. Auction-rate securities fell apart in February 2008 as banks that provided support for two decades abandoned the market, stranding investors with notes they couldn’t sell and borrowers with interest rates as high as 20 percent. The Securities Industry and Financial Markets Association seven-day swap index, which is used to measure top-grade, floating-rate bonds, rose to 7.96 percent in the wake of the Lehman Brothers Holdings Inc. bankruptcy last September. It had been 1.79 percent.
The SIFMA index has fallen to 0.32 percent as of July 15, suggesting the short-term market is functioning for higher-rated issuers, the Federal Reserve said. In contrast to the short-term market, the market for traditional, fixed-rate municipal bonds is healing. Issuance of long-term debt rose to $110.6 billion in the second quarter from $84.4 billion in the prior quarter, while 20-year municipal borrowing rates fell to a 17-month low of 4.44 percent in May.
Seance on Wall Street
There is a long history of mediums who claim to communicate with the dead. They sell their services to people anxious to talk to relatives or great figures of the past. Such exercises can be dismissed as harmless entertainment -- people spend a few dollars to be treated to tall tales. There is a Wall Street equivalent to these seances. People who claim to be knowledgeable about financial markets tell policy makers and reporters what the financial markets are thinking about current policy. These Wall Street seers claim to interpret events in financial markets for those of use who are less familiar with the mysteries of market movements.
In recent weeks, the Wall Street seers have been spinning stories about how the financial markets are very worried over the U.S. budget deficit. They have told us that the markets are concerned about the government's ability to repay its debt. The seers tell us that the markets may soon demand much higher interest rates, if the government does not get its deficit under control. The seers tell us that the government must take steps to rein in the budget deficits projected for the future by cutting back Medicare and Social Security. They also warn us about the risks of adding to the deficit with health care reform. And the seers tell us that we certainly should not try to tackle the problem of 25 million unemployed or underemployed workers with another big round of stimulus. That would make the financial markets very angry.
Those of us who were not born with the gift of being able to communicate with financial markets cannot directly evaluate the information that the financial markets are passing on to the Wall Street seers. However, we can easily determine the risk that investors assign to holding long-term U.S. government debt. This requires looking at interest rates. Interest rates appear to be directly contradicting the seers' assertions about financial markets. The interest rate on 10-year Treasury bonds is currently near 3.5 percent. The interest rate is not determined by people rattling off their visions about future debt defaults. It is determined by investors putting their money on the line.
These investors are willing to hold hundreds of billions of dollars in long-term government debt at a return of just 3.5 percent. By contrast, they demanded a return of more than 5% in 2000, back when the U.S. government was running a large budget surplus. If there is widespread fear in financial markets of a default on government debt, it is difficult to understand why investors would be willing to hold it at such a low rate of return. Usually investors demand high returns for holding risky assets.
In addition to interest rates, we could evaluate the seers' assessment by trying to carry through other implications of the bad news debt default scenario. Presumably, the stock market would be headed downwards with the financial sector stocks leading the way. After all, a default on U.S. government debt would be cataclysmic for the U.S. economy and especially for the banks who hold trillions of dollars in government debt or government-backed debt. Here also the news doesn't seem to fit the seers' vision. The markets have been rallying lately, and many financial stocks are doing quite well.
One piece of evidence that these seers have occasionally used to support their case is the fact that the price of credit default swaps on U.S. debt has risen. Credit default swaps (CDS) are in effect insurance against default. If the price of this insurance rises, then presumably the markets judge default to be a more likely event. That is the reason that people in their 60s pay more for life insurance than people in their 20s.
There is one problem with this story.
The payoff of a CDS depends not only on the default but also, as those who did business with AIG know, on the ability of the counter-party to pay. What is the likelihood that JP Morgan, Goldman Sachs or anyone else will be left standing in a world where the US government has defaulted on its debt? It's not clear what the price of CDS issued on US government bonds means, but it is not a straightforward assessment of the probability of default on the government's debt.
It should not be surprising that the vision of the Wall Street seers seem to be far from reality. After all, their crystal balls could not see the $8 trillion housing bubble, the collapse of which has wrecked the economy.
In fact, the self-proclaimed seers are using their visions to try to discourage the public from supporting policies that the seers don't like. These people want to see cutbacks in Social Security, Medicare and other social programs. They are more concerned that higher deficits could mean higher taxes on the wealthy at some point in the future than they are about the tens of millions of unemployed or under-employed today.
In short, those who want fantastic stories about the unknowable would be much better off visiting the people who promise to communicate with the dead than listening to the Wall Street spokespeople. They will learn more and be associating with people of greater integrity.
Money struggles to pass through banking pipe
Central banks have pumped a vast amount of money into the financial system this year – but so far there is little evidence that this liquidity has found its way into the broader economy. What is happening could be likened to the pattern that develops when a household drain is partly blocked as the central banks frantically pour money into the financial system, with the commercial banks supposedly acting as a pipe, in an effort to stabilise the economies.
But many commercial banks are reluctant to pass this liquidity on to their customers, in the form of loans, because they are scrambling to repair their own balance sheets and are afraid to lend because of fears of potential losses. The banking pipe is, thus, partly blocked. So where is this money, or liquidity, ending up? At the moment, a large amount is being parked at the central banks themselves.In Europe, commercial bank overnight deposits at the European Central Bank have soared since the ECB pumped €442bn in one-year loans into the system on June 24. Although the amount of money deposited overnight is very volatile, it rarely went above €50bn before the ECB injection. On Monday night, it stood at €188bn, and it has surged above €300bn on some days this month. Jean-Claude Trichet, the ECB president, has warned that “it may take some time ... for the extra liquidity to be transformed into credit” – without specifying how long. He has also acknowledged that much of the €442bn financial injection is being parked at the ECB’s overnight deposit facility.
“Banks will have to gain experience in using the longer-term credit that they obtain from their central banks to expand their longer-term assets rather than increase the availability of short-term liquidity,” Mr Trichet says. In the nearest the French ECB president comes to a headmasterly telling off, he adds: “We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes.” Deposits have also risen sharply at the US Federal Reserve and the Bank of England.
As well as depositing money at the central banks, the commercial banks are also buying government bonds, high-quality corporate bonds and, of late, equities – in effect recycling the liquidity around the financial system. While this “backflow” of liquidity is not dangerous yet, some economists fear it could end up distorting the markets in the coming months – undermining the rationale behind the extreme monetary measures. Some hints of this “backflow” emerged when Deutsche Postbank received €9.2bn of offers for its debut public sector covered bond on July 3 in the space of just 10 minutes. In the end, it sold €1bn to investors, of which about €300m was sold to banks.
This buying of bank bonds by the banks themselves appears to fly in the face of what the monetary authorities are trying to achieve, although investors say using spare cash to buy financial debt is safer than making loans since the banks are tacitly guaranteed by the government. Mike Amey, head of UK bond portfolios at Pimco, says: “It makes sense for investors to buy senior bonds issued by the major UK banks because they are relatively safe, with high levels of government support, and offer significant extra yield over government bonds. For example, you can buy five-year RBS bonds for a yield of 5.7 per cent compared with 2.9 per cent on a five-year gilt.”This blockage in the banking pipe – or “broken transmission mechanism” to use the monetary jargon – is not unique to Europe. It was a crucial issue that bedevilled the Japanese in the late 1990s and early part of this decade when the Bank of Japan engaged in quantitative easing at the time. In particular, when the BoJ flooded the markets with liquidity, the banks tended to hang on to that cash, rather than turn it into loans, even when the government pleaded with them to pass the monetary aid on. That, in turn, distorted the Japanese money markets and left some Japanese officials quietly concluding that QE had not been very successful.
In the UK, the Bank of England has tried to circumvent that problem – and learn from Japan – by purchasing gilts, rather than giving money directly to banks. The theory is that asset managers might use the cash they receive to purchase corporate bonds, driving down their yields. In essence, the British are using a tactic akin to trying to shove liquidity through multiple pipes, in the hope that some of it gets to the economy – even if one or two pipes are blocked. The key question is whether the extraordinary central bank policies are working.
In the case of the eurozone, bank lending to non-financial corporations – one of the most important barometers to the success of the ECB’s actions – has slowed dramatically this year to an annual growth rate of 4.4 per cent in May from a rate of 9 per cent in January. Eurozone lending for house purchases contracted by 0.5 per cent in May. No wonder central bankers are watching the situation closely. As long as some of the liquidity is still passing through the system, irrespective of the blockages, then the extra liquidity can have a stabilising effect. However, the risk of “backflow” is prompting unease and may be one reason why central banks end their current policies sooner than some expect.
US Treasury Criticized Sharply Over Watchdog Report
The U.S. Treasury Department is running the government's rescue of the financial system like disgraced investor Bernard Madoff, lawmakers and a watchdog suggested Tuesday, with little transparency and not enough limits to prevent conflicts of interest. "The taxpayers now have a $700 billion spending program that's being run under the philosophy of 'Don't Ask, Don't Tell,'" Rep. Edolphus Towns, D-N.Y. said.
Rep. Darrell Issa, R-Calif., said the Treasury is "actively obstructing" the ability of lawmakers and taxpayers to understand the value of the various investments that have been made as part of the Troubled Asset Relief Program. Such a refusal to provide regular, detailed information hearkens to the reassurances Madoff provided investors in his Ponzi scheme, Issa said. "Both Bernie Madoff and Treasury are saying just trust me without showing us the books," Issa said.
The comments came as TARP Special Inspector General Neil Barofsky appeared before the House Committee on Oversight and Government Reform on Tuesday. Barofsky, who is one of the key independent watchdogs over the $700 billion TARP program, said the Treasury has not been forthcoming with information to his office and has not taken steps to prevent certain large financial firms selected by the department from profiting on inside information. "TARP has become a program in which taxpayers are not being told what most of the TARP recipients are doing with the money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested," Barofsky said.
While Barofsky said the Treasury has generally been cooperative, one issue could be communication between Barofsky and Treasury Secretary Timothy Geithner. Asked Tuesday when he last spoke to Geithner, Barofsky acknowledged that their last conversation occurred in January, just a "couple of minutes before a larger meeting." Barofsky's office estimates the U.S. government's potential exposure to programs aimed at dealing with the financial crisis at $23.7 trillion. To get that figure, Barofsky combined direct spending with all the government guarantees and programs and assumes the "gross exposure" the government could face if all the programs were tapped to their fullest potential.
The Treasury, responding to that estimate Monday, called the numbers "inflated." Barofsky, however, said the figures are based on publicly available government information. "We take offense with that," he said of the Treasury's comments. "If the numbers are inflated it's the government itself that inflated them." Barofsky raised specific concerns about the Treasury not instituting restrictions to prevent government-selected firms from taking advantage of market sensitive information to generate sizable profits in their other businesses. Despite such restrictions on other government programs where private firms have been selected to manage government assets, the Treasury has resisted instituting any barriers for firms in the program to deal with toxic assets.
"Failure to impose a wall... will leave Treasury vulnerable to an accusation that has already been leveled against it - that Treasury is using TARP to pick winners and losers," Barofsky said. One reason for establishing such restrictions is to avoid the reputational risk to the Treasury and the firms involved in the event there is some wrongdoing, Barofsky said. His office had 35 ongoing criminal and civil investigations as of June 30, covering a range of topics including accounting and securities fraud, insider trading, and public corruption. The office has received an additional 3,200-plus in tips on its telephone hotline.
Alan Grayson: "Which Foreigners Got the Fed's $500,000,000,000?" Bernanke: "I Don't Know."
US fears new crunch as CIT secures $3 billion financing deal
The American lender CIT Group was in tense talks with bondholders last night as it struggled to stave off bankruptcy before Wall Street opens today. The US government has refused to come to the rescue a second time, having bailed out CIT in December, leaving the century-old lender scrambling to find an estimated $3bn (£1.8bn) in immediate funding. With over $75bn of assets, CIT would be the biggest US bank failure since regulators took over Washington Mutual last year.
Advisers led by Morgan Stanley and JP Morgan are searching for options, including a complex "debt-in-possession" formula that allows the bank to continue operating under creditor protection. The Obama administration has taken a calculated gamble that the collapse of CIT would not have systemic effects on the US economy. However, the bank has over 1m customers and is a leader in lending to small businesses, a sector that is needed for job growth and one that is already bearing the brunt of recession.
Failure would risk serious knock-on effects for many of CIT's 300,000 shops and small firms dependent on short-term finance, known as factoring. The bank has 70pc of the US market for this niche business. Experts warn that many companies would face a cash crunch as they hunted for a alternative credit lines. The US National Retail Federation has given warning of a "chain reaction" causing disruption across the country as the Autumn season approaches.
CIT has lost $3bn over the last two years. Like so many banks, it strayed from its core business into sub-prime lending and student loans. Like Northern Rock it relies heavily on the wholesale market to raise funds, and to roll over debt. Its deliquency rate on commercial loans has reached 5.4pc. It was still described until recently as "well capitalised" by the US Federal Reserve. It is understood that creditors have agreed to provide $3bn in fresh loans as part of an orderly bankruptcy, if that improves the chances of recovering their money in the end.
CIT Expects Loss of $1.5 Billion, Bankruptcy If Debt Swap Fails
CIT Group Inc., the 101-year old commercial lender seeking to avoid collapse, said it expects to report a loss of more than $1.5 billion for the second quarter and may need to file for bankruptcy if it’s unable to tender for notes maturing next month. CIT’s “existing liquidity” isn’t enough to repay the $1 billion of floating-rate notes maturing on Aug. 17, the New York-based lender said today in a regulatory filing. CIT, which announced a $3 billion rescue financing from its bondholders yesterday, has asked holders of the August notes to swap their claims for 82.5 cents on the dollar.
“Late in the second quarter of 2009, our available liquidity dropped below the level necessary to operate our business,” the company said in the filing. “Even if the offer is consummated successfully, we will require significant additional funding during the remainder of 2009 and beyond to operate our business.” As part of the terms of its loan from bondholders, CIT has to get the creditors to approve a restructuring plan by Oct. 1, the company said in the filing. Bondholders providing the financing include Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silver Point Capital LP, people familiar with the deal said yesterday.
CIT declined 27 cents, or 21 percent, to 98 cents as of 10:15 a.m. in composite trading on the New York Stock Exchange. Credit-default swaps protecting against a CIT default for five years climbed 4.5 percentage points to a mid-price of 45 percent upfront, according to broker Phoenix Partners Group. The cost implies that traders have priced in a more than 90 percent chance that the lender will default within the next five years, according to a standard pricing model.
CIT Rescue Deal May Not Be Enough To Ward Off Chapter 11
CIT Group Inc.'s $3 billion rescue package from bondholders may not be enough to protect the lender from seeking bankruptcy protection, the company said in a filing Tuesday with the Securities and Exchange Commission. The cash injection should help the company deal with $1 billion of debt maturing in August, and also provide some fresh funding for making new loans. CIT is seeking to reduce its debt burden in a tender offer for $1 billion of its bonds. CIT said in the filing if it doesn't get enough of its outstanding floating-rate senior notes due Aug. 17 tendered, it may need to file for bankruptcy protection, absent additional financing.
CIT also said the government judged the company needs about $4 billion in additional regulatory capital, including an extra $2.6 billion in tier-one capital, following a stress test. Shares of CIT fell after the filing and were down 26.44% in recent trading at 92 cents a share. The 101-year-old commercial lender is facing a worsening liquidity crisis as its customers are drawing down credit lines amid fears it may disappear. Last week, the government turned down the company's request for a second bailout, following $2.3 billion in funds from the Troubled Asset Relief Program it previously received. While the government hasn't judged CIT to pose a systemic risk should it tumble, it could damage efforts to revive employment because it lends to around 1 million small and medium businesses.
Analysts at CreditSights previously have said the company may need about $6 billion to avoid bankruptcy protection. On Monday, CIT struck an agreement with a group of creditors that will provide it with $3 billion in 2.5-year loans, a development that gives it a little breathing room to restructure its finances. In CIT's tender offer for the floating-rate notes, it is asking investors to swap those securities for 82.5 cents on the dollar before July 31. Those who tender after that date will only get 80 cents. Some of the same CIT bondholders that came up with the new loan already have agreed to support the tender offer.
But CIT said it may have to declare bankruptcy if it doesn't get at least 90% of the notes tendered. It said bankruptcy might entail seeking court approval for the sale of most or all of its assets, or reorganizing. It said that if enough notes aren't tendered, it likely won't be able to pay off the notes next month. CIT said in the filing that its status as a bank holding company could be affected if it fails to meet the minimum capital requirements. It could be forced to divest itself of its CIT Bank subsidiary, or risk having CIT Bank seized by the Federal Deposit Insurance Corp. if its capital levels are too low, the company said. The company also said it expected to report losses of more than $1.5 billion in the second quarter.
People involved in the rescue process say bondholders' longer-term vision for CIT depends on some forbearance from the Federal Reserve and FDIC officials. Without it, bondholders will be hard-pressed to continue to provide support for the lender, these people said. Indeed, $1.7 billion in debt payments is due by year's end, and CIT must pay off an additional $8 billion in 2010. The bondholders hope that by taking steps to stabilize its finances, CIT will be able to transfer more assets from a holding company to its bank in Utah. It can then raise customer deposits to fund those assets.
First, CIT needs an exemption from the Federal Reserve and a nod from the FDIC. Earlier this year, the regulators allowed a transfer of $5.7 billion in student loans by CIT, but more recently they have seemed reluctant to grant additional transfers. Bondholders hope, however, that with a private-sector deal in hand, the regulators will take a second look and allow more transfers. Even though CIT's long-term plans center around the regulatory waiver, no imminent action is expected on that front, according to a report from The Wall Street Journal.
CIT has to find a way to borrow funds cheaply, such that it can lend at a profit. At an initial interest rate of 13% - more than the 10.5% rate mentioned in initial news reports - the emergency loan is coming at a high cost to CIT, which makes loans to many of its customers at rates below 10%. One goal of the debt swap is to reduce credit concerns about CIT, potentially allowing it to borrow more cheaply. CIT lends to companies ranging from restaurants and private schools to clothing makers. It also leases railcars, aircraft and equipment, and it has a large business providing cash to manufacturers and collecting on their invoices. For years, CIT funded its activities largely by selling bonds, only to find itself in trouble when credit markets froze about a year ago.
State Street books $3.3 billion Q2 loss
State Street Corp. said declining revenue in virtually all of its business segments and a big one-time charge linked to its special conduit business contributed to a $3.3 billion net loss in the quarter ended June 30. Revenue at State Street totaled $2.1 billion, a 21 percent drop from the $2.6 billion posted a year ago. The company's reported revenue declines included:
- a 19 percent fall in servicing fees, which totaled $795 million, compared with $977 million a year earlier.
- a 31 percent decline in investment management fees within its State Street Global Advisors unit. Those fees totaled $193 million in the second quarter, versus $280 million in the year-earlier period.
- a 3 percent slip in trading services revenue, which fell to $310 million from $320 million.
- a 43 percent drop in securities finance revenue, which fell to $201 million from $352 million.
- a 78 percent decline in processing fees linked to its much-maligned structured products and conduits operations. Those fees totaled $17 million in the second quarter, compared with $77 million a year earlier.
State Street attributed the declines to reductions in its assets under custody and management, as well as a decision in May to consolidate much of its structured products operations. That move resulted in a $3.68 billion one-time charge, the company said. Assets under custody at Boston-based State Street declined nearly 17 percent year-over-year, falling to $16.4 trillion from $19.7 trillion, while assets under management within its investment operations fell 17.8 percent, dropping to $1.56 trillion from $1.9 trillion.
State Street reported $133 billion in assets on its balance sheet as of June 30, compared with $146 billion a year earlier. The most recent number excludes $20 billion in excess deposits held at the Federal Reserve, the company said. The company said it also had $4.75 billion in unrealized losses within its investment portfolio, a slight improvement from the end of the first and fourth quarters when it reported unrealized investment losses of $5.85 billion and $6.32 billion, respectively.
Venture Investment Drops 51% as Startup Funding Hits 1994 Lows
Venture capital investment fell 51 percent in the second quarter as firms coped with the recession and a drought in initial public offerings, bringing funding for startups to the lowest level in 15 years. Venture capital firms invested $3.67 billion in 612 financing deals during the quarter, down from $7.56 billion a year earlier, according to PricewaterhouseCoopers and the National Venture Capital Association. Only 141 startups had a first round of venture funding, the smallest number since 1994.
The lack of IPOs is preventing venture capitalists from earning returns on their current investments. It also forces firms to divert more money to older companies, said John Taylor, a vice president at the NVCA. That’s keeping new companies from getting started as easily, he said. “Typically, the venture industry takes on 1,000 new companies a year, and in 2005 to 2007, it was 1,300,” Taylor said. “This is far off that pace, and far off what we want to see.” Startups will probably raise about $15 billion in capital this year, the report said. That’s similar to 1996 or 1997 levels. They raised $30.6 billion in 2007, the NVCA said.
The industry isn’t confident that the economy and IPO market will rebound soon, said Ray Rothrock, a venture capitalist at Venrock in Palo Alto, California. Until it gets easier to take companies public, capital for startups may stay scarce, he said. Clean-technology financing fell 70 percent to $274.4 million, while Internet deals dropped 68 percent to $523.9 million. The bright spot was biotechnology financing, said Tracy Lefteroff, managing partner of PricewaterhouseCoopers’s venture capital arm. Those deals increased 54 percent from the first quarter, spurred by optimism that big drug companies will buy startups to get access to patents, Lefteroff said. A wave of existing drug patents is due to expire by 2011.
“Life sciences is one of the few sectors that still have a fairly steady stream,” Lefteroff said. The slumping IPO market is hurting mergers as well. Knowing that acquisition targets can’t go public, companies are offering fire-sale prices, Rothrock said. “An IPO market keeps the merger market honest,” he said.
Only six U.S. startups have gone public this year, and only 10 U.S. companies have pre-IPO paperwork on file with regulators, NVCA President Mark Heesen said last month. That represents the worst slump in almost 40 years, the NVCA said. “We desperately need an IPO market to come back at some point, but I don’t think we are there yet,” said David Jones, chairman of Louisville, Kentucky-based Chrysalis Ventures.
The Case Against Larry Summers
by Elizabeth MacDonald
Federal Reserve chairman Ben Bernanke presents the Fed’s semi-annual monetary-policy report on Capitol Hill today, the start of two-day hearings. On tap will be the Fed’s massive quantitative easing programs and the exit strategy out of them, a dicey proposition that analysts say ranks right up with the US’s exit strategy out of Iraq. But although Bernanke is winning kudos and praise for making brilliant moves to save the US economy, chatter on the cocktail party circuit in Washington, DC is that Bernanke may not get asked back as the world’s most powerful central banker when his term expires in January 2010, due to a variety of reasons (see below).
Reasons that have caused 60% of House members to co-sponsor a new bill that would give the Government Accountability Office the right for the first time to inspect the central bank’s books, its monetary policymaking, its lending and its connections with foreign central banks, all now off-limits to Congressional interference. Word is that instead President Barack Obama may tap Lawrence Summers, director of the National Economic Council and former Treasury Secretary, as the next Federal Reserve chairman. Besides Summers, other potential options include San Francisco Fed president Janet Yellen, and former Fed vice chairmen Roger Ferguson and Alan Blinder.
But would Summers be the best choice to replace Bernanke as chairman of the US Federal Reserve? Dig deeper into Summers’ background, and you’ll not only see that Summers is potentially so radioactive that the White House may not decide to put him up as a replacement for Bernanke, but why it did not even deign to choose him to be US Treasury secretary, picking Timothy Geithner instead, as Summers may not have survived a Congressional confirmation hearing.
Summers is widely praised as a top notch economist nonpareil, with innovative contributions to economic research in public finance, labor and macroeconomics. For one, Summers was a key backer of a cut in the capital gains tax rate, arguing such taxes were inefficient. However, at minimum the criticisms about Summers–his prior positions on bank regulatory policies, notably derivatives, his conflicts of interest with Wall Street, his incendiary remarks–would make for volatile confirmation hearings.
And the case against Summers as Fed chairman is separate from a sense in Washington that Summers is simply too blunt and domineering, that he would condescend to Einstein if he could, as one analyst said, or that he is a self-made man who worships his own creator. Below is a tip sheet on what to watch out for in this growing debate about Summers as the new Fed chair. You’ll find also key issues that affect your investment portfolio, the stock market, and the economy. The tip sheet was compiled with the assistance of Fox News analyst James Farrell, a sharp financial analyst.
The question lawmakers are struggling with is this: are the following Fed actions done on Bernanke’s watch enough to replace him? That under Bernanke the Fed has blown out its balance sheet to more than $2 tn to bail out Wall Street and the banks; that the Fed is now more entangled in fiscal policy and subject to political pressures than ever before, threatening its cherished independence; that it used taxpayer money to make 100% whole the recklessly disastrous bets made by Wall Street firms in the AIG bailout, including Goldman Sachs; that the Fed gave $20 bn in taxpayer money without conditions to Bank of America to buy Merrill Lynch, after chief exec Ken Lewis threatened to ditch the deal; and that Bernanke’s own actions have raised questions over whether the Fed can be the systemic risk regulator when as Fed governor, for example, he agreed with Greenspan in keeping rates drastically low during the bubble years, inflating the bubble even more, or that he said subprime loans were not a problem before the credit crisis blew up in the summer of 2007.
Summers Soft on Derivatives Regulation
Derivatives have created a worldwide financial meltdown, a daisy chain of toxic paper that has zapped investment portfolios worldwide. These ticking time bonds have created havoc in governments from here to Europe to Russia to Asia. What’s gone unnoticed is that in the late ’90s Summers did nothing to stop former Fed chair Alan Greenspan from pressuring US accounting rule makers to water down a proposed new derivatives accounting rule that may have helped stop the current crisis. Many business leaders had strongly opposed the new rule. In fact, in 1998, Summers testified in Congress against regulating the derivatives market.
Derivatives, such as mortgage-backed bonds, are financial contracts whose values are linked to, or derived from, those of underlying assets such as bonds, stocks or commodities. Ten years before the worst meltdown since the Great Depression, in the summer of 1997, Greenspan demanded that the Financial Accounting Standards Board weaken the new rule, which would have forced companies to book changes in the market value of their derivatives contracts. The FASB sets the rules for how companies report their profits.
Greenspan wanted the FASB to eliminate the profit adjustment and instead force only large companies to merely disclose the fair market value of their derivatives in supplements to their financial statements. Greenspan said the new rule “may discourage prudent risk-management activities,” would create “volatility” in bank capital levels and give an inaccurate picture of banks’ financial conditions. Greenspan’s pressure came just three years after the business world had pressured the FASB to stop a new rule that would force companies to book for the first time the value of stock options as an expense. Thanks to pressure from Greenspan and business executives, it took the FASB years more to pass the new rule.
In 1998, Summers also defended derivatives in testimony before Congress. He said that Wall Street firms who make these trades “are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws.” Summers added that to “date there has been no clear evidence of a need for additional regulation of the institutional OTC [over the counter] derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need.”
(Summers might now very well conclude that the current financial mess has provided the “clear evidence” to support regulating derivatives, Farrell says).
Summers also threw down another obstacle to cracking down on the ticking time bonds that are derivatives when he said that any move to regulating derivatives by the Commodity Futures Trading Commission “ought to come with the legitimacy of a clear legislative mandate from Congress.”
Summers Supported Repeal of Glass-Steagall
Market analysts, watchdogs, and members of Congress now argue that the repeal of Glass-Steagall in November 1999 also helped create the current Chernobyl-level meltdown on Wall Street and the collapse in the US economy.
Glass-Steagall is the Depression-era act enacted in 1933 which put up a firewall between commercial and investment banking. With its repeal deposit-taking banks for the first time could wade into the dicey securities business, putting deposits at risk.
Specifically, the repeal let commercial lenders such as Citigroup, once the largest US bank by assets that is now on government life support, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities, says the Journal of Economic Perspectives, an economic journal published by the American Economic Association. Banks had lobbied for the repeal of Glass Steagall beginning in the ’80s out of fear over the rising economic might of Japan–never mind that Japanese banks were notorious for, ironically, having razor-thin capital cushions (as US banks subsequently did).
Japan’s banks soon led the country into its economic collapse. When President Bill Clinton signed the Financial Modernization bill in 1999, which effectively repealed Glass-Steagall, then-Secretary Summers stated: “This is the culmination of years of effort by many, many people, reflects the work of presidents, Treasury officials, members of Congress, those in the private sector, from both parties, and dedicated professionals, both inside and outside the government. With their help, I believe we have all found the right framework for America’s future financial system.”
Summers’ Wall Street Fees and Perks
Summers has met with withering fire for accepting lucrative fees and perks from Wall Street, which he has been and is now paid by the US taxpayer to regulate. Summers has come under criticism for accepting perks from Citigroup, including free rides on its corporate jet in the summer of 2008 during the presidential election. At the time an economic adviser to Democratic presidential candidate Obama, Summers reportedly got a free ride on a Citigroup jet in August 2008 while attending the Democratic National Convention in Denver. Summers also earned decent fees from Wall Street in the year before he joined the White House and began helping to oversee the financial industry.
Specifically, the New York Times reported in April 2009 that Summers was paid millions of dollars in 2008 by Wall Street firms over which he would eventually exert regulatory power. Summers earned $5.2 mn from the hedge fund D. E. Shaw, and collected $2.7 mn in speaking fees from Wall Street companies that received government bailout money The Times said that Summers reported in financial disclosure forms that he made “40 paid appearances, including a $135,000 speech to the investment firm Goldman Sachs, in addition to his earnings from the hedge fund, a sector the administration is trying to regulate.” The report says he also “appeared before large Wall Street companies like Citigroup ($45,000), JPMorgan Chase ($67,500) and the now defunct Lehman Brothers ($67,500), according to his disclosure report.”
Summers Pressured Congress to Stop Exec Pay Caps
According to the Wall Street Journal, Summers called Democratic Senator Chris Dodd, chair of the Senate Banking Committee, asking him to remove caps on executive pay at firms which have received bailout money, including Citigroup. Treasury secretary Geithner also called as well, the Journal says. The White House was worried that the Senate’s rules “would prompt a wave of banks to return the government’s money and forgo future assistance, undermining the aid program’s effectiveness.”
The legislation restricted bonuses more severely than the Obama administration’s pay limits, as it would have barred any company “receiving bailout funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.”
Summers’ Role in the California Energy Crisis
Did Summers do anything to stop high-level pressure on then California governor Gray Davis to relax regulation of the energy markets during the 2000 energy crisis. According to the book “Conspiracy of Fools: A True Story” by New York Times reporter Kurt Eichenwald (Random House, 2005), then Federal Reserve chairman Greenspan and Treasury Secretary Summers met with governor Davis on December 26, 2000 to discuss California’s power crisis.
While Gray opened the meeting by stating that “if [energy] deregulation fails in California, it will fail in the United States,” Greenspan and Summers disagreed.
“Truthfully, governor, California hasn’t deregulated,” the book quotes Greenspan as saying. “The state simply replaced one form of regulation with another. It’s become a system of central planning run amok.” The book says Summers silently agreed, and then joined in. “You have a fixed price set by the state for selling electricity to the public. But you have a variable, floating price when you buy electricity,” the book quotes Summers as saying.
“That’s not sustainable,” the book quotes Greenspan as saying. “The problem is your regulatory system. And there are a very limited number of solutions. But the first step is that prices for consumers are going to have to go up.”
Davis showed no emotion, the book says. “I really feel the problem is the energy producers,” he said. “They’re manipulating the markets and forcing up prices.” “They may be,” the book quotes Greenspan as saying. “But that’s beside the point. That’s not causing the problem; that’s making it worse. The real problem is a supply-and-demand imbalance.”
Summers Remarks About Aptitude of Women
Summers stepped down as president of Harvard University in 2006 after a no-confidence vote by the university’s faculty. Among other things, Summers created a furor in a 2005 speech he gave in which he said that women’s under-representation in the top levels of academia is due to a “different availability of aptitude at the high end.” In discussing why women may have been underrepresented “in tenured positions in science and engineering at top universities and research institutions,” because Summers said his “best guess” was that “there are issues of intrinsic aptitude, and particularly of the variability of aptitude.”
Summers said that this variation, combined with other factors, “probably explains a fair amount of this problem.” Although he later said his statements were an “attempt at provocation,” Summers eventually apologized for his remarks and later stepped down in 2006. “I was wrong to have spoken in a way that has resulted in an unintended signal of discouragement to talented girls and women,” Summers said, later adding: “Despite reports to the contrary, I did not say, and I do not believe, that girls are intellectually less able than boys, or that women lack the ability to succeed at the highest levels of science.”
Summers Opposed Infrastructure Spending?
Blogs on the Internet likely have this one wrong. This controversy started when Democrat Rep. Peter DeFazio stated on MSNBC’s The Rachel Maddow Show that “Larry Summers hates infrastructure and some of these other economists. They were very much part of creating the problem, and now, they are going to solve the problem. And they don’t like infrastructure. So, they want to have a consumer-driven recovery.” Not quite.
Summers publicly advocated for infrastructure spending as part of a stimulus effort in Congressional testimony on September 9, 2008: “There is a compelling case for significant new commitment to infrastructure spending. While infrastructure spending is often seen as operating only with significant lags, I have become convinced that properly designed infrastructure support can make a timely difference for the economy,” Summers testified before Congress.
Summers added: “Evidence from the Minneapolis bridge collapse suggests that it is possible to launch infrastructure programs where the vast majority of the money is spent within a year…Properly designed infrastructure projects have the virtue of being helpful as short run stimulus, especially for the employment of the workers most hard hit by the housing decline, while at the same time augmenting the economy’s productive potential in the long run.”
Summers Fired a Harvard Whistleblower?
Despite what the blogosphere says, the evidence is thin that Summers while president of Harvard University made a controversial decision to fire a whistleblower worried about derivatives investments in the school’s endowment.
In 2002, a new employee of the company that manages Harvard’s endowment (Harvard Management), Iris Mack, wrote to Summers to express concern about the endowment’s investments in derivatives. Mack had asked Summers to keep the communication confidential. Marne Levine, chief of staff for Summers, assured her that the communications would be kept confidential.
On July 1, 2002, Mack was called into a meeting by her boss, Jack Meyer, then the chief of Harvard Management. The next day Meyer fired her. Meyer told Mack that she was fired for making “baseless allegations against HMC to individuals outside of HMC.” When Mack threatened to sue for an unlawful firing, Harvard entered into a confidential settlement with her.
Could deflation be round the corner?
In our previous issue of threesixty we said "We believe that the stock market rally, that started 9th March, has now ended and, so far, what has followed is a deteriorating stalemate, prices heading sideways/downwards".
It might seem from the FTSE chart that the price has recovered from its most recent low. So is our technical signal following the break below 4,300 and subsequently 4,200 obviated as a result of this rally? The answer is no. The consolidation between 4,300 and 4,500 ended on 11th June when the intra-day price fell to 4,255. That was the determining factor.
Because the consolidation period had ended, our opinion is that the new downward direction of the stock market is determined. Any rally back to 4,300 or even 4,500 does not reverse that signal unless, the price closes above 4,500; in which case, we would deem our signal to have failed and the future direction of the market to be uncertain.
If there is to be a perfect technical outcome then the price for FTSE will, from about here, again reverse. If that takes the price below 4,100 the bear market will have delivered its next very strong signal about where it is going – south!
In the Wall Street Journal on Thursday 16th July, Andy Kessler, hedge fund manager and author of "How we got here", wrote about "The Bernanke Market". He dramatically illustrated that the US stock market this year has matched WSBASE (sum of currency in circulation). The effect of the blizzard of money creation and zero interest rates has been reflected in the performance of the stock market, meaning that the Fed's monetary policy has not got banks lending to households and companies, and stabilised the housing market without which the US economy won't grow. Instead, it has fuelled a bear market rally in equities.
The UK and US economies are made up of 70% consumer spending; so unless consumers are willing to abandon their new practice of saving and paying down debt rather than spending, where can the economy go but down? Consumers are the plankton of the financial food chain – if the plankton in the sea dies, the big fish that feed off smaller fish, that feed off the littler fish, that feed off the plankton, will all perish.
In the Daily Telegraph Business section, 16th July, under the headline "Idle factories risk deflation spiral says World Bank". Ambrose Evans-Pritchard said that the World Bank warns that the global economy could fall into a deflationary spiral risking further spasms of financial distress.
Of all the puzzles to be solved, inflation or deflation is the biggy. We have for a long time said, even when central banks and pundits were warning of inflation, even hyperinflation, that the big danger is deflation. As obvious as the inevitable inflationary outcome seems, prices are still falling not rising, unemployment is rising not falling, wages are declining not rising and global excess capacity is rife. Printing money is the only thing that's keeping us out of deflation. Imagine how deflationary the stock market, property market, jobs, the whole caboodle would be if money had not been printed and injected into the system.
We would recommend the article by Martin Wolf published in the FT on Wednesday 15th July, headlined "After the storm comes a hard climb". As always his words are insightful and he ticks virtually all the boxes. To quote from that article:
"Private sector prudence is likely to endure in a post-bubble world characterised by mountains of debt. In the last quarter of 2008 and the first quarter of 2009, US household borrowing was modestly negative. But at the end of the first quarter of 2009 the ratio of gross household debt to GDP was a mere 2% of GDP lower than at the end of 2007. De-leveraging is a painful process: it has barely begun.
"If, as is likely, the private sector remains prudent, the public sector will remain profligate. Moreover, so long as this period of retrenchment lasts, the risk will not be inflation but rather deflation. The lesson which is apparent is that fiscal profligacy and deflationary pressure can last longer than anybody imagines."
Economists Van R Hoisington and Dr Lacy Hunt, on the same subject from their quarterly review and outlook, second quarter 2009, headlined "Debt and deflation" concluded that:
"The combination of an extremely overleveraged economy, ineffectual monetary policy and misdirected fiscal policy initiatives suggests that the US economy faces a long difficult struggle. While depleted inventories and the buildup of pent-up demand may produce intermittent spurts of growth, these brief episodes are not likely to be sustained. In several years, real GDP may be no higher than its current levels. However, since the population will continue to grow, per capita GDP will decline; thus, the standard of living will diminish as unemployment rises. These conditions will produce a deflationary environment similar to the Japanese condition."
It is a well-known truth that in matters economic and financial "the majority are invariably wrong". From October 2007 to September 2008 only one member of the Bank of England's Monetary Policy Committee, Danny Blanchflower, repeatedly voted for lower interest rates. It was presumed, because he was in the minority that he was wrong and that the majority must be right. Instead, he was correct and the majority were unequivocally wrong - the MPC dramatically capitulated in October 2008. We suspect President Obama is faced with a similar problem, amongst his gang of advisors the only one giving the right advice is ignored because he is in the minority.
TD Ameritrade to Pay $456 Million, End Cuomo Probe
TD Ameritrade Inc. resolved federal and state claims it misrepresented auction-rate securities, agreeing to return to investors what New York Attorney General Andrew Cuomo said amounts to $456 million. The online brokerage sold auction-rate securities as safe, cash-like investments, as did many other firms. Banks managing auctions abandoned the $330 billion market in February 2008, stranding thousands of investors who could no longer unload the securities. The accord will let clients sell back securities they bought from TD Ameritrade before the market froze.
“TD Ameritrade is the latest in a series of landmark ARS settlements that bring unprecedented relief to tens of thousands of investors,” Robert Khuzami, director of the U.S. Securities and Exchange Commission Enforcement Division, said in a statement. TD Ameritrade joined a dozen firms in resolving allegations over auction-rate securities sold as liquid, short-term investments, Cuomo said. They include Citigroup Inc., Goldman Sachs Group Inc. and Fidelity Investments. Charles Schwab & Co. said today it will fight a settlement demand Cuomo issued along with a threat to sue.
Fred Tomczyk, president and chief executive officer of TD Ameritrade, said the firm decided on the buyback given its financial strength and the illiquidity in the auction-rate securities market. “While our role in the market for these securities was significantly different from that of other financial institutions that have previously announced similar programs, we believe this is the best way for us to help clients,” Tomczyk said in a statement. No fine was imposed, the company said. The 11 banks that settled agreed to pay $572.5 million in penalties under terms reached with Cuomo and state securities regulators who joined the investigation. The attorney general accused them of describing the securities as cash equivalents and not telling investors about the risk of being left holding the bonds if interest-rate setting auctions failed.
Fidelity, the world’s largest mutual fund manager, in September became the first retail broker to settle with New York and Massachusetts, agreeing to buy back $300 million in auction- rate securities. TD Ameritrade agreed to the buybacks from retail investors who bought them before Feb. 13, 2008, within 75 days for account holders with $250,000 or less, and by March 2010 for all other eligible customers. The company agreed to compensate eligible customers who sold their securities below par by paying the difference between par and the sale price plus interest. It also agreed to reimburse reasonable interest from affected customers who took out loans after Feb. 13, 2008.
Cuomo’s office said it sent a letter July 17 telling San Francisco-based Schwab the state is prepared to sue the online brokerage unless it provides investors with “the liquidity they were promised” when they bought the securities. Schwab said it will defend itself rather than settle. Schwab said in a statement today that Cuomo’s allegations were “without merit.” The company blamed “improper behavior by the large Wall Street firms that created” and then abandoned auction rate securities.
“When regulators hastily settled with many of these Wall Street firms, they let them off the hook by not requiring them to repurchase ARS that downstream investors bought,” Schwab said, vowing to contest the allegations and “vigorously defend” the company. Schwab added that its limited participation in the auction- rate securities market was “driven by client demand.” It said some 90 percent of purchases were unsolicited trades.
Americans Repaying Debt Most Since ‘52 Spurs Savings
For the first time since Harry S. Truman was in the White House, Americans are paying back their debts, a phenomenon that just might help keep interest rates low as the Treasury sells a record $2 trillion of bonds and rising unemployment increases U.S. savings. While the proportion of consumers without jobs rose to 9.5 percent last month, household borrowing fell to 128 percent of the average family’s after-tax income in the first quarter from a record 133 percent a year earlier, according to data compiled by Bloomberg. The total debt of individuals, nonfinancial companies and federal, state and local governments grew at a 4.3 percent pace at the start of the year, down from a peak of 9.9 percent in the fourth quarter of 2005, Goldman Sachs Group Inc. estimated.
“We’ve never seen a pullback like this,” Goldman’s chief U.S. economist, Jan Hatzius, said in an interview from his New York office. “We are seeing an adjustment, and it’s very painful and there’s a lot of collateral damage.”
The 0.7 percent contraction in debt among households and nonfinancial companies from January through March was the first since 1952, when Truman was president and the government began keeping the records, Hatzius said. Consumer credit fell at an annual 1.6 percent rate in May to $2.52 trillion, according to the Federal Reserve. Reduced spending may slow the recovery from the first global recession since World War II because U.S. households generate 17 percent of global gross domestic product, according to Sara Johnson, a managing director at IHS Global Insight in Lexington, Massachusetts.
At the same time, rising unemployment helped lift the U.S. savings rate to 6.9 percent in May, the highest since December 1993. That’s keeping Treasury yields in check because banks are pumping deposits into the bond market instead of making new loans. Bank holdings of Treasuries and debt of mortgage companies Fannie Mae of Washington and McLean, Virginia-based Freddie Mac totaled $1.33 trillion in the week ended July 8, up 16 percent from a year earlier, according to the Fed. Treasury benchmark 3.125 percent notes due in May 2019 yielded 3.61 percent July 20. That was just under the 3.72 percent weighted average year-end forecast of 63 analysts surveyed by Bloomberg and 2 percentage points below the 5.64 percent average rate of the past 20 years.
“The levels of cash on bank balance sheets will keep government-bond yields lower,” Robert McAdie, global co-head of credit strategy Barclays Capital in London, said on a conference call with investors July 16. The U.S. will sell $1.1 trillion of Treasuries by the end of the year, on top of the first half’s $963 billion, Barclays Plc estimates. While the Treasury steps up borrowing, corporations are rushing to lower indebtedness. About 190 U.S. companies, including Dearborn, Michigan- based automaker Ford Motor Co. and Las Vegas casino owner MGM Mirage, raised a record $91 billion in secondary share sales from April through June, according to Bloomberg data. As of mid- June, proceeds from about three-quarters of these sales were used to pay back bonds and loans, the data show.
Of the record $774 billion in corporate-bond offerings this year, about 75 percent were used to refinance existing borrowings, according to Bloomberg data and John Lonski, chief economist at Moody’s Capital Markets Group. Palo Alto, California-based Hewlett-Packard Co., the world’s largest personal-computer maker, and Memphis, Tennessee-based International Paper Co., the biggest manufacturer of office paper and cardboard shipping boxes, both issued bonds in May to repay debt.
“Corporate America is going through debt rehab,” said Lonski, who’s based in New York. “The focus right now is on improving financial health and that probably will be at the expense of capital spending and hiring activity. Nothing will discourage capital spending or encourage cutbacks in staff more than much lower-than-expected sales.” The job reductions are pushing unemployment near 10 percent, a level not seen in 26 years, according to the Labor Department.
“You are not going to buy a new pair of jeans if you don’t have a job yet,” Blake Jorgensen, chief financial officer of Levi Strauss & Co., said in a phone interview from San Francisco. The jeans maker reported a second-quarter loss of $4.13 million on July 14, compared with a year-earlier profit of $701,000. Retrenchment by consumers puts the U.S. economy on pace to grow at an annual average of “closer to 2 as opposed to 3 1/2 percent” for a generation or more, Bill Gross, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, said in his July commentary posted on the firm’s Web site.
“There has been a big change in the private sector, and that’s fine,” Fed Chairman Ben S. Bernanke said today in semi- annual testimony before the House Financial Services Committee “It creates problems in the macro economy, because without consumer spending, the economy doesn’t grow as fast.” People “need to get their balance sheets in order and their budgets in order,” Bernanke said. While U.S. savings rise, companies are enduring increasing levels of pain.
Consumers “understand what they are spending more than ever,” Mike Duke, chief executive officer of Wal-Mart Stores Inc., told employees and suppliers July 16 in Bentonville, Arkansas, where the world’s largest retailer is based. “This has brought on a new normal of how consumers view consuming, shopping.” Frugal motorcycle shoppers are avoiding taking on debt to purchase bikes such as the Road King touring model, which costs as much as $40,000 when customized, from Harley-Davidson Inc. The biggest U.S. motorcycle maker’s finance arm said July 16 that loans fell 33 percent in the second quarter to $700 million.
“Sales of Harley-Davidson motorcycles at retail in the U.S. declined significantly in the second quarter, with the backdrop of unemployment at 25-year highs and consumer confidence at near-record lows,” the Milwaukee-based company’s CEO, Keith Wandell, who rides a Road King, said on a conference call. As Americans save more and borrow less, the U.S. will have to rely on “international growth to drive our growth,” Citigroup Inc. CEO Vikram Pandit said in prepared remarks for a June 15 speech in Detroit. “There is a clear tradeoff between saving more and stimulating the economy in the short term to achieve stability,” Pandit said.
“The world needs different drivers of growth away from the U.S. consumer and credit markets.” The longest recession since the 1930s should move President Barack Obama to increase spending on top of the $787 billion stimulus package enacted by Congress, said Laura Tyson, an outside adviser to the president. A second stimulus package focusing on infrastructure projects should be considered because the first one was “a bit too small,” Tyson said this month. It’s “too early” to tell whether the current plan is working and the country should be open to more spending, House Majority Leader Steny Hoyer, a Maryland Democrat, said July 7.
Obama administration officials say it’s premature to discuss a second stimulus, since most of the initial measure’s effects won’t kick in until late this year and in 2010. “He hasn’t ruled anything in; he hasn’t ruled anything out,” White House press secretary Robert Gibbs said July 16. “If there are things that can be done to help spur the economy back to recovery faster, they’ll certainly be considered by them and the whole team.” The U.S. lost a greater-than-expected 467,000 jobs last month, and Vice President Joe Biden said July 5 the administration “misread the economy” when it predicted unemployment would peak at 8 percent once the stimulus package was passed. On July 14, Obama said the jobless rate will “tick up” over the next several months.
“If you look at various measures of debt in the system, they suggest what we’re doing is getting started on this adjustment; we still have several years to go,” Goldman’s Hatzius said. “We’re going to be at saving levels that are much, much higher than they were in 2006 and, in many cases, permanently.’ Slower U.S. growth may benefit the world economy by reducing trade imbalances and strengthening America’s financial position, said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. The U.S. current-account deficit, which reached a record 6.3 percent of GDP in the third quarter of 2006, has shrunk to 4.5 percent as savings climbed.
‘‘It’s a good thing to raise our savings rate here in the U.S.,” Bryson said. “The large current account deficits in the U.S. are an accident waiting to happen. If we start to rebalance the world economy, the probability of future train wrecks starts to come down as well.” The de-leveraging of the U.S. economy comes at “an inopportune time,” said Martin Fridson, who joined with BNP Paribas Investment Partners to found Fridson Investment Advisors in New York last year. “It’s a change that’s got to occur, but it absolutely slows down the potential for recovery,” said Fridson.
Consumers’ debt pullback is only now getting under way, said Simon Johnson, a professor at the Massachusetts Institute of Technology in Cambridge and former chief economist at the Washington-based IMF. The rise in savings so far is largely a product of mortgages being extinguished by home foreclosures, government tax cuts and transfer payments under the stimulus package, he said. “As there’s an adjustment to higher savings, then there is a potential paradox of thrift,” Johnson said, referring to economist John Maynard Keynes’s theory that increased saving is good for individuals but bad for society as a whole because it reduces demand. “To some extent, the government can offset that” with fiscal stimulus, he said. “At some point you have to worry about the budget deficit.”
The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion as of June 30, the first time the gap for this period surpassed $1 trillion, Treasury figures show. After suffering a collapse in wealth of at least $15 trillion since early 2007, American consumers are leading the U.S. economy into a “new normal” of higher savings rates and lower consumption, according to Pimco’s Gross, who manages the world’s biggest bond fund. “‘Non Appetit,’ not Bon Appetit, will become the apt description for the American consumer and significant parts of the global economy, including the U.S.,” Gross wrote in the July commentary.
Consumers are drinking more tap water, hurting demand for vegetable juices made by Camden, New Jersey-based Campbell Soup Co.,Sean Connolly, president of the U.S. division, told analysts July 15 at a soup factory in Maxton, North Carolina. “Unfortunately our vegetable-juice business has slowed this year along with the rest of the shelf-stable juice category due to the economic downturn,” he said. “We definitely have a paradox of thrift going on,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “If everyone rushes for the exit at the same time, it’s hard to get out. If everyone is de- leveraging at the same time, it’s hard to get the economy going.”
China to deploy forex reserves
Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday. “We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday. Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.
The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China. Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.” China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.
Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency. “This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.” State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.
China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller. In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies. “Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”
The US-China Ponzi scheme
By unwittingly tying together their fortunes as they pursued their own interests, the 2 nations have put themselves on an economic path of mutually assured destruction.
Imagine becoming so successful at your job that you stack up $2 trillion in income, which you conservatively place in short-term U.S. Treasury bonds for safekeeping. Now imagine that when you try to cash in those bonds to buy a few things for your kids, the clerk at the bank abruptly shuts her window and tells you to go away. That is essentially the situation faced by China these days as it wonders whether its plan to manufacture goods for U.S. consumers over the past two decades in exchange for a pile of credit slips was really such a hot idea.
The answer is coming up as a big, fat "uh-oh" as the U.S. deficit and debt obligations balloon to levels never before contemplated, and Beijing is denied requests to buy U.S. and Australian mines and oil properties. And as Beijing leaders talk openly, if obliquely, about their angst, they are unsettling world credit, currency and stock markets, which don't know what to make of the idea that the world's largest Ponzi scheme might be coming to an abrupt end. This is a good time to assess the chilling possibilities, as the resolution of this pending crisis will afflict investors, workers and business owners alike.
What's so Ponzi about the Chinese-U.S. relationship? Basically everything. Look at it this way: After a currency debacle in 1998 left its economy in tatters, Beijing decided to radically restructure its financial relationship with the West. Policymakers pegged the value of China's currency to the dollar, which had the effect of keeping it artificially low. The cheap renminbi made it irresistibly inexpensive for U.S. companies to manufacture goods in China, even after shipping costs. As more companies shifted their operations to China, the U.S. manufacturing base was hollowed out in the name of globalization and profitability. Americans who once enjoyed high-paying factory jobs moved on to lower-paying service jobs.
China didn't need much of anything made in America, so instead of buying cars from Detroit and furniture from North Carolina with its factory profits, it bought Treasury bills. The purchase of all those bills drove down U.S. interest rates. So as middle-class and blue-collar Americans saw their wages stagnate or decline, they discovered they could still keep their old lifestyles by borrowing. Over the past decade, Americans were able to outspend their incomes by easily rolling their debts forward through serial home refinancing. The situation was never ideal, but it worked as long as the value of their collateral -- their homes -- kept rising.
As long as China kept buying Fannie Mae, Freddie Mac and Treasury credits, the scheme worked in a strange and beautiful way: Our driveways filled up with cars and boats, shopping malls spread out across the suburban landscape, and the retailer with the closest ties to China, Wal-Mart, became the United States' largest company. Was that so bad? Well, now think about this in the context of a Ponzi scheme such as the one perpetrated by disgraced financier Bernie Madoff.
Madoff's clients for years thought they were rich because he sent them brokerage statements that said so. But that scheme worked only as long as new money kept coming in. When international money flows seized up last year and too many people wanted to redeem their accounts at once, Madoff's $50 billion game fell apart. Then his victims suddenly discovered that their brokerage statements were worthless pieces of paper. Madoff clients' households crashed, and now one-time millionaires are broke. The reality is that they were always broke; they just didn't know it yet.
The credit that has kept American families afloat for the past 10 years is similar to those Madoff-produced brokerage statements. The credit is good only so long as China keeps recycling funds through the Ponzi scheme. But if Beijing leaders ever decide that it's just too risky to own U.S. dollars and debt, then the system is going to come crashing down. Of course, it is not really in China's interest to stop the scheme, even if it wanted to, because its own economy would likewise blow up. Satyajit Das, a credit derivatives expert in Australia, likens this to stepping on one of those land mines that are activated by the weight of a victim's body. As soon as the weight is lifted, the mine explodes, and the person's leg is blown off.
China is thus frozen in place, damned if it does and damned if it doesn't. It's a classic Catch-22. China's cache of U.S. bonds isn't worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value. "People need to realize that China doesn't actually have any real U.S. money," Das says. "Unless they can turn in their bonds and exchange them for something else, they're only paper assets. Yet if they try to exit the position, they'll destabilize the dollar, and the value of the rest of their assets will plunge. And that's not even their biggest problem. It's that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible."
In short, Das says, Beijing thought it had discovered the perfect scheme for establishing independence from the West, yet it has instead made its dependence worse than ever. And he observes that one unspoken reason that China has gone whole-hog on its massive, $650 billion fiscal stimulus program -- creating more factory capacity in a country that is already reeling from overcapacity -- is that the effort gives it cover to stockpile copper, oil, iron ore and other hard assets that it considers to be better stores of value than dollars.
Now here's why this affects all of us: China and the U.S. together built the most monstrous liquidity bubble in world history as each pursued what it believed to be logical self-interest without any regulator, such as a stern global central banker, telling them that they were on a path of mutually assured destruction. Now it's reached the point where global capital markets will impose their own discipline. Because most money generated over the past decade was spent on consumption rather than investment -- it's as if Madoff's clients blew their fake money on chartering jets rather than buying real property as a store of wealth -- there are few new buyers of goods. This has killed U.S. retail sales, crushed employment, lifted the foreclosure rate, stymied homebuilders and undercut loan demand.
There are no good solutions. The Chinese need to open their markets and let their currency float on the open market, but they won't for political reasons. And the U.S. needs to either halt its runaway deficit spending so that the world is not even more flooded with our debt, or swallow its pride and issue Treasurys denominated in Chinese currency. That probably won't happen either. Which means there is only one solution left: a long, slow, boring, lonely, soul-crushing process of digging out from under the piles of debt that got us into this mess. You might even say that the bursting of the credit Ponzi scheme has left us all in jail now with Madoff. Let's hope that our sentence is shorter than his.
Deceptions, Deceit and Distrust
With the former Investment Banks being granted Commercial Banking status due to the unfolding financial crisis in late 2008, it was widely reported in the mainstream financial press that this "change" would mean that these banks would be subject to more oversight and hence, more transparency would result regarding their derivatives activities.
Ladies and gentlemen, nothing could be further from the truth. View the Q1/09 Quarterly derivatives report here.
If we take a look at the latest Quarterly Derivatives Report published by the U.S. Office of the Comptroller of the Currency, in table 1, we see a detailed breakdown of the derivatives activity of the 25 largest Commercial Banks in the U.S. Take special note of the aggregate total derivatives being reported by the top 4 names on the list:(Click on images to enlarge)
Now let's contrast table 1 with table 2, which shows the outstanding derivatives notionals held by the top 25 Bank Holding Companies, a completely different picture [or lack of, perhaps?] emerges. The total amounts of derivatives held by the same names are, for the most part, MUCH LARGER:
The OCC Quarterly Derivatives Report provides a great deal of analysis and charts examining further breakdown of total derivatives reported by Commercial Banks; by product [precious metal, foreign exchange, interest rate], by contract type, by concentration, by credit exposure, by profitability, by revenue and by product type and maturity.
For derivatives held by many of these same U.S. institutions at the Bank Holding Company level, the OCC gets summary data only. The detailed data under the purview of the Federal Reserve and no detailed analysis is made public through the OCC or any other regulator.
For instance, while the chart appended below DOES include/measure precious metals futures holdings of Goldman Sachs at the Commercial Bank Level, as goose-eggs across the board - it says nothing about Goldman's holding of precious metals futures at the Holding Co. level. The same can be said for Morgan Stanley, who do not even appear on the list appended below:
The above chart published by the Office of the Comptroller of the Currency would mistakenly lead us to believe that Goldman Sachs does not participate in the gold market, ditto with Morgan Stanley.
I suggest this is done intentionally to misdirect in much the same way that a group of conspirators assembled at Jekyll Island, Georgia almost 100 years ago today to frame up plans for a Private Central Bank. Knowing there was no appetite in the U.S. for a Private Central Bank, the proposed legislation was dubbed the Federal Reserve Act to give the intended Private Central Bank an air of being 'Federal', or, 'of the people' and being in possession of reserves - when in fact it was neither FEDERAL nor did it possess ANY reserves.
Deceptions like this have more recently come to be known as the HALLMARKS of American banking and finance. Why is anyone surprised? American corporations did learn from the deceptive best, didn't they? This is a significant contributing factor as to why the international financial community has grown so displeased and distrustful of American finance.
You see folks, the truth about Goldman Sachs and Morgan Stanley is that BOTH of these institutions are MAJOR players in the precious metals futures markets - but apparently only at the Holding Company Level where we are not permitted to see the size of their holdings and the influence they exert on the market. That information remains another one of the Federal Reserve's dirty little secrets.
This is why the New York Commodities Exchange [COMEX] has already taken provisions - CHANGING THE RULES - to allow for the delivery of 'paper' exchange-traded-funds in lieu of delivering physical bullion. The commodities exchanges are "supposed to be" mechanisms engaged in the price discovery of physical bullion - not paper alternatives.
The Federal Reserve has ALWAYS known the true state of the unfolding derivatives debacle. They fostered and protected its growth; Alan Greenspan used to claim that derivatives innovations gave the U.S. financial system "flexibility".
When the false economies brought on by artificial derivatives pricing finally sunk the American financial house, an accounting change was mandated to make insolvent banks appear, for accounting purposes - they are rolling in dough. Rest assured, American banks are rolling in something - but it's not dough.
More disingenuous clap trap - get the picture?
The Bank for International Settlements [BIS] informed me the Federal Reserve has been gathering data on the derivatives market for years:1) OTC derivatives: The data is collected by the FED-NY from a population of more than 3,000 reporting dealers located worldwide and whose head office in the US. Reporting dealers are mainly commercial and investment banks and securities houses, including their branches and subsidiaries and other entities which are active dealers. Please be informed that due to the confidentiality policy agreed with the reporting central banks we are not allowed to disclose the list of dealers participating in the survey. Having said this, please be also informed that the FED-NY publishes in their website the documentation related to this survey, i.e. reporting forms and methodology; I believe that this documentation includes the list of reporting institutions (only head offices):
See here
Now, only with the former investment banks now reporting a mere "glimpse" of their interest rate swap derivatives positions [listed under "OTC Swaps" in table 2] it reinforces and validates earlier work reported in The Elephant In the Room [pdf] - chronicling how the Fed has taken complete control of the entire interest rate curve [bond market] utilizing interest rate swaps books of their proxy institutions.
With new legislation currently being tabled to grant the Federal Reserve an expanded mandate and even more POWER, it is essential that the Obama Administration - that campaigned on transparency and change - DEMAND this illegitimate institution first be FULLY audited by an independent third party.
Pay of Top Earners Erodes Social Security
The nation's wealth gap is widening amid an uproar about lofty pay packages in the financial world. Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data -- without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries. Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don't include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.The pay of employees who receive more than the Social Security wage base -- now $106,800 -- increased by 78%, or nearly $1 trillion, over the past decade, exceeding the 61% increase for other workers, according to the analysis. In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002. The growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund. In May, the government said the Social Security fund would be exhausted in 2037, four years earlier than was predicted in 2008.
The data suggest that the payroll tax ceiling hasn't kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn't subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year. The magnitude of executive pay has been difficult to measure, even as policy makers grapple with ways to rein in compensation at companies receiving taxpayer bailouts. Companies aggregate the salaries of all employees in their filings to the Internal Revenue Service and to the Securities and Exchange Commission, and disclose details only for top officers.
But payroll taxes provide an indirect way to calculate amounts executives receive. Only earnings up to a certain ceiling are subject to a U.S. payroll tax of 12.4%, split between employer and employee, which finances Social Security retirement benefits. The ceiling, which is indexed to the average growth in wages, is $106,800 in 2009, up from $102,000 in 2008 and $97,500 in 2007. (Employers and employees also each pay 1.45% on an individual's total income, with no salary ceiling, to fund Medicare.) Social Security data show that 6% of wage earners have pay that exceeds the taxable earnings base, and that their "covered earnings" above the taxable maximum totaled $1.1 trillion in 2007. Adding the portion of their pay below the taxable wage base, $991 billion, totals $2.1 trillion.
The $2.1 trillion figure understates executive pay, however, because it includes just salary and vested deferred compensation, including bonuses. It doesn't include unvested employer contributions and unvested interest credited to deferred-pay accounts. Nor does it include unexercised stock options (options aren't subject to payroll tax until exercised), and unvested restricted stock (which isn't subject to payroll tax until vested; the subsequent appreciation is taxed as a capital gain).
Also not included in the total compensation figures is executive pay never subject to payroll tax. This category includes incentive stock options (which are generally taxed as capital gains), "carried interest" income received by hedge-fund and private-equity fund partners (also taxed as capital gains), and compensation characterized as a benefit (benefits generally aren't subject to any taxes). Benefits, a category that includes employer-provided health care and contributions employers make to rank-and-file pension plans, totaled nearly $1 trillion in 2007; it isn't possible to tell what portion represents benefits for executives, such as life insurance.
The ability to delay paying payroll taxes on compensation, something that generally is available only to highly paid employees, is in itself an economic benefit that ultimately boosts paychecks. Lawmakers over the years have introduced bills to raise the taxable wage ceiling, or eliminate it, as was done for the Medicare portion in 1993. During the presidential campaign, Barack Obama proposed extending payroll taxes on households with incomes above $250,000, but the administration isn't pursuing any change as it focuses on proposals for tax increases on wealthy households to help finance a health-care program.
Lifting the earnings ceiling could result in higher Social Security benefits payments to higher-income individuals, since benefits are based on a worker's highest 35 years of earnings. But the additional tax revenue would have decades to earn a return, thus offsetting the cost of the additional payments. Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund's deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings. Employers oppose changes that would increase their share of payroll tax. In addition, eliminating the ceiling would prevent employers from using a controversial but common technique, based on payroll taxes, to award additional benefits to executives who participate in rank-and-file pension and 401(k) plans.
For example, health insurer Humana Inc. contributes 4% of pay to employees' retirement accounts on salary up to the taxable-earnings wage base -- and 8% above it. Thanks to the richer contribution, Humana Chief Executive Michael B. McCallister received a total contribution of $22,370 under the plan in 2008. (He also received $314,790 in company contributions to his supplemental executive retirement and savings plan.) Typically, employers can't discriminate in favor of high-paid employees who participate in taxpayer-subsidized retirement plans. But a "permitted disparity" exception enables them to provide additional benefits on the portion of pay that isn't subject to payroll taxes, ostensibly to replace the Social Security benefits executives won't receive on the portion of their pay that is exempt from payroll taxes.
UK debt hits a record of £799 billion
Total outstanding government debt in the UK has risen to a record £799bn, or 56.6% of UK GDP - the highest since records began in 1974. New borrowing in June was £13bn, almost twice as much as a year ago, the Office for National Statistics said, after the downturn shrank tax receipts. The figures also reflect the cost of bank bail-outs and higher spending on social security benefits. One economist described the state of the public finances as "dire".
"The figures are modestly better than expected. It doesn't take away from the fact that the state of public finances is dire and that a considerable degree of fiscal tightening will be required," said Philip Shaw, chief economist at Investec. "The figures are volatile on a month-on-month basis. The size of the shortfall and volatility mean there is little to celebrate." Analysts had forecast borrowing of £15.5bn in June.
The UK is on track to meet Chancellor Alistair Darling's forecast of £175bn of borrowing this financial year. Public borrowing for May was revised down to £18.6bn from an initial estimate of £19.9bn. Business groups warned that, although it appears that public borrowing is in line with the chancellor's forecast, the government must not sit back.
"It would be wrong to tighten policy while the recession continues, but maintaining Britain's international credibility requires a robust plan for restoring our public finances over the medium-term," said David Kern, chief economist at the British Chambers of Commerce. "This must focus on curtailing public spending across the board, while avoiding damaging measures that would harm wealth-creating businesses." Meanwhile, a National Audit Office (NAO) report said that tax receipts fell by 10% in the past year - the biggest fall since 1923.
UK budget deficit hits record high in June
Total government spending in June hit £49bn, up from £44.2bn a year earlier
The UK's budget deficit rose to its highest level for any June on record last month, as tax receipts plunged in the wake of the financial crisis. The Office for National Statistics (ONS) said that the public sector posted a net cash requirement of £18.98bn last month, slightly lower than the £20bn expected by analysts but still a record high for the month. Public sector net borrowing, the government's preferred measure of the deficit, was £13bn – lower than analysts' expectations of £15.5bn, but also a record for the month of June.
The ONS said that the corporation tax take from the UK's distressed business sector plunged 14.1% from the same month last year, while VAT receipts fell 15.9% and income tax dropped 3.9%. Government spending rose to £49bn as it battled the recession, up from £44.2bn a year earlier, and payment of benefits – including unemployment pay – rose 9.7% to £13.3bn. Total receipts fell by 5.7% to £35.5bn.
Vicky Redwood, UK economist at consultants Capital Economics, said: "June's UK public finances figures are a touch better than expected, but do absolutely nothing to alter the big picture that they are in a dreadful state. The monthly PSNB total of £13bn was a little lower than the consensus forecast of £15.5bn, while there were downward revisions to borrowing in April and May. "This left a cumulative borrowing total in the first three months of the fiscal year of some £41.2bn. So at the current rate of increase, borrowing is on course broadly to match the Chancellor's full-year forecast of £175bn." However, she said she was expecting a deficit of up to £200bn, as recession continues to bite.
UK federal tax revenues drop by £32 billion
Tax receipts flowing into the Treasury fell by £32 billion last year as the recession hit Government finances, official figures showed yesterday. The perilous state of the national finances was made public as it was disclosed that the National Audit Office (NAO) has refused to sign off part of the Treasury’s accounts. The decline in Government revenue for the 2008/9 financial year – the steepest since the 1920s – included a £6.4 billion drop in VAT income following Chancellor Alistair Darling’s decision to cut the rate to 15 per cent last November, according to the HM Revenue and Customs annual report.
The Treasury was shown to have overspent by £24 billion on last autumn’s banking rescue. Its accounts were rejected by the official auditor because the insurance the Government granted to the troubled banks Lloyds and Royal Bank of Scotland was not approved by Parliament. The Treasury was among five government departments which had their accounts “qualified” by the National Audit Office for 2008-09. This means the auditors refused to sign off part of their accounts for the past year. The others are HM Revenue and Customs, the Department for Work and Pensions, the Ministry of Defence and the Home Office.
In total, the Treasury spent £45 billion on what was termed the Asset Protection Scheme under which the Government agreed to protect banks against future losses on bad loans in return for the public taking a stake in the business. Ministers had originally set the cost of the guarantees at £21 billion. Lloyds and RBS had loans guaranteed under the scheme earlier this year as Gordon Brown and Mr Darling sought to stave off a banking collapse. It is thought to be only the second time in the Treasury’s history that its accounts have been qualified.
The last time was in 1999-2000 when the department switched to a different accounting method. HMRC wrote off £1.3 billion in overpaid tax credits, with another £4.4 billion still to collect, of which £2.3 billion is unlikely to be recovered. Accounts filed for the Department for Work and Pensions were qualified for the 20th consecutive year. They showed that £2.7 billion of public money was lost to fraud and error in the benefits system last year. Of this, £900 million was lost to fraud, £900 million to “customer” error and £900 million to mistakes by officials.
Edward Leigh, the chairman of the public accounts select committee, said the accounts from the Treasury and HMRC “highlight different but equally disturbing aspects of the serious state of the UK economy”. A Treasury spokesman said: “The NAO has acknowledged that the need to act by introducing the Asset Protection Scheme did not allow time to seek Parliamentary approval for the accounting consequences of the scheme, which resulted in a technical qualification of the accounts.”
Financial protectionism: the silent disaster already hitting the UK
Protectionism takes on many forms. We’re familiar with the types that involve tariffs on goods foreign companies are trying to export (like those which the US adopted around the time of the Smoot-Hawley act in the 1930s) or alternatively subsidies for domestic companies (like the Common Agricultural Policy in the EU, or cotton subsidies for US farmers).Both make it uneconomical for foreign producers to pump their goods into other countries and, according to broadly accepted economic theory, undermine the global economy by subverting the law of comparative advantage and preventing money from flowing to those who produce goods most efficiently. More fundamentally, protectionism also goes hand-in-hand with nationalism and international political aggression, by giving an economic grounding to perhaps instinctual human fear of otherness.
As we all know, protectionism was one of the real disasters of the 1930s, and the big fear this time around has been that the financial crisis would give rise to protectionist tendencies. It would be nice to assume that this will not be the case this time around but I’m not so sure. Protectionism is already on the rise, however, this time around it is taking a quite different form to that of the Great Depression – a more invisible one.
Rather than tariffs and subsidies, this modern protectionism is financial. It involves banks from every major economy stopping lending to overseas businesses. Worse, it is something that is being not just endorsed but ordered by politicians, even as they spout their warnings about not giving in to the temptations to erect trade barriers.
According to the Bank for International Settlements, which is the best monitor for these issues, the amount of cross-border lending, which had been rising each quarter at a rate of well over $100bn, plunged by $205bn in the final quarter of 2008. Its recent annual report, which is required reading, sets out the quandary in plain terms:
Global banks have operations in dozens of countries – on its website, Citigroup lists locations in exactly 100. The existence of global intermediaries enhances the efficiency of the financial system. By reducing the need to have lenders located physically near borrowers, international banks facilitate trade in goods and services as well as the cross-border movement of capital.But after seeing foreign-owned banks pare back activity during the crisis, host country governments may become less sanguine about allowing outsiders to operate on their soil. The result could very well be a greater role for host country supervisors in protecting their financial systems from the possibility of hasty exits by foreign banks. And, by reducing the ease with which capital moves across borders, financial protectionism would shrink trade in goods and services and thus moderate growth and development.
The point is a tricky one. Of course we all abhor protectionism, but by the same token, many banks around the world simply would not exist – would have crumbled or been eaten up by others – were it not for the support of their taxpayers. It would seem perverse, would it not, if that money were used to prop up businesses in other countries, far away, that had no connection with that country’s taxpayers (aside from making a bit of profits for their banks)? So in many senses it is rational that Gordon Brown and Alistair Darling have ordered their part and fully-nationalised banks to concentrate on lending to UK companies and individuals and slowly to pull out of other jurisdictions.
But rational or not, this is protectionism. Pulling a loan to a company in the US, Argentina or wherever represents a breakdown in globalisation, as the flows of money around the world stagnate.
The problem is not merely an academic one. For all the talk of green shoots, Britain is still embroiled in a credit crunch. Businesses and individuals are struggling to borrow – in large part because the money simply isn’t there for them to do so. This morning the Bank released its Trends in Lending report, which you can find here. The most interesting chart, as far as I’m concerned, is this one, which shows what has contributed to the sudden drop in company lending.
As you can see, before the crisis the lion’s share of cash flowing into UK companies’ accounts – cash that was then used to buy things, invest in machinery and products and pay staff – came not from UK banks but from foreign-owned banks (with a small contribution from “other lenders”, which means fringe non-bank institutions, many of whom have come a cropper post-crisis as you can also see from their shrinkage after early 2008). After the crisis, this foreign contribution to UK business funding has gone into reverse, and in the past few months it has been foreign-owned banks and lenders which have most quickly reduced their lending in the UK, by not renewing deals and pulling some existing loans.
This is extremely serious for the UK for a simple reason: British companies have traditionally tended to be more reliant than their American or European counterparts on borrowing directly from banks, rather than tapping the equity or bond markets. You can see this in graphic form on this chart, also from the Bank’s report. As you can see, it is loans rather than bond or equity issues which had been the mainstay of company funding. Like the rest of us, when businesses needed extra money, they visited the bank.
This gets to the heart of why Britain is more vulnerable than most to the second- and third-round effects of the financial crisis – something the International Monetary Fund pointed out last week. It so happens, due to the shape of our economy, the dominance of financial services and this peculiar reliance on bank lending rather than the bond markets, that we stand to lose rather a lot from the experience. Though companies can and will adapt by finding cash on the equity and bond markets, it won’t be easy . One can find plenty of people to chide for the fact that we’ve come to this pretty pass, of all political hues, so let’s leave aside the blame game.
But let’s be aware, when the Government orders its banks to pull their lending back from overseas that financial protectionism will hit the UK harder than almost any others. And this is before one even gets into the rather more terrifying consequences for global economic harmony.
Why the British banking system won't be emerging from intensive care anytime soon
As the second anniversary of the credit crunch approaches and with another round of calamitous banking write-downs looming, it seems appropriate to revisit the question of what progress, if any, has been made in repairing Britain's profoundly damaged banking system. Can banks be weaned off publicly provided life support any time soon? There are some grounds for optimism, with interbank lending rates returning to more normal levels, a limited revival in risk appetite, and some kind of an uplift in mortgage and business lending, albeit from exceptionally depressed levels. Yet the broader prognosis is still not at all encouraging.
By general agreement, a sustained economic recovery cannot take hold until private credit starts flowing again, so these questions are of rather greater importance than the distracting and largely irrelevant political debate over which institution – Bank of England or Financial Services Authority – should take charge of banking supervision. The credit crunch was sparked by a sudden loss of confidence in the integrity of bank balance sheets brought on by the sub-prime mortgage losses in the US. Widespread use of complex derivative securities meant that nobody could be sure what individual bank exposures were. Wholesale markets, depositors and investors withdrew their support en masse, and once-plentiful liquidity dried up. What began as a problem in funding fast became one of solvency, as rising impairment charges destroyed capital buffers, leaving assets short of liabilities.
The two problems – funding and solvency – are inextricable linked. If there are doubts about a bank's solvency, the markets will withdraw funding support. Problems in funding led to a credit squeeze, which helped tip the world economy into recession. As the downturn intensified, a more conventional bad debt experience took hold, further exacerbating the solvency problem. Credit creation, the lifeblood of any modern economy, stalled. What made Britain particularly vulnerable, as the International Monetary Fund observed in its latest assessment of the UK economy, is the substantial size of our financial sector relative to national output, together with heavy reliance on cross-border funding. Traditionally a strength of the British economy, these characteristics have become a profound weakness.
Foreign banks, which in recent years have been substantial lenders to the UK economy, have withdrawn so as to fight their own battles back home. UK banks have meanwhile struggled to maintain their domestic lending at previous levels. With markets and depositors demanding their money back, banks have had little option but to liquidate lending positions and rein in credit wherever possible. An extreme shortfall, or "funding gap", has opened up which taxpayers have had to fill. These actions have prevented a full-scale collapse, but the system of private credit creation remains badly injured with no obvious way of repairing the damage.
As the FSA's director of banking, Tom Huertas, has pointed out, the totality of this public support is already close to £1.3 trillion, or virtually as big as Britain's entire annual GDP. A bewildering alphabet soup of schemes has been put in place to counter the contraction in private provision of credit. Yet mind-boggling though these numbers already look, they still understate the true magnitude of the problem. In promising that nobody will lose a penny as a result of the banking crisis, the Chancellor has in effect underwritten the liabilities of the entire UK banking system, amounting to a multiple of several times the size of GDP.
The balance sheet of Royal Bank of Scotland alone is worth around 1.5 times GDP. Even the combined might of the British taxpayers would be incapable of honouring this promise, which therefore amounts to no more than a confidence trick. It's a bluff which the Government had better hope the markets never call. In theory, there is a timetable for withdrawing much of the public support so far given. Both the "special liquidity scheme" and the "asset purchase scheme" are due to come to an end in two to three years' time. In its latest Financial Stability Report, the Bank of England warns the City that a funding gap of approximately £500bn (one third of GDP) will have to be filled at that point.
The options are limited. One solution is that banks might shrink their balance sheets to fit by selling or liquidating assets. That would turn the present scarcity in credit into an outright famine. Or they could find alternative sources of funding. Yet assuming the money was available at all, the markets would charge the banks an arm and a leg for it. The cost of credit would rise precipitously. The Government may be willing to roll its support over, but this risks permanent damage to sovereign credit-worthiness at a time of already extreme concern in the capital markets over the public finances.
Alternatively, banks could raise even more equity. This wouldn't necessarily solve the problem either, even if investors were prepared to provide it. Ever greater quantities of equity are no panacea, as the British journalist Walter Bagehot, whose writings more than 100 years ago established the ground rules for dealing with banking crises, once remarked. To paraphrase, a well-run bank needs no capital, but no amount of capital will save a badly-run bank. Some combination of all these things may be part of the answer, but until we can be certain of where the bottom in the economy lies, and therefore the eventual size of bad debts, there's going to be no politically acceptable, market-based solution to the funding problem.
All is not lost. Deprived of bank credit, business is finding other ways of obtaining the capital it needs to trade. Corporate bond markets have reopened and there has been a massive amount of new equity raised to replace the debt bankers can no longer provide. Yet the funding gap is going to remain a heavy drag on the UK economy for years to come. All the various proposals for reform of financial regulation we've seen to date, from Turner to the White Paper, from George Osborne yesterday to the Geithner proposals in the US, and even Europe's De Larosiere report, look reasonable enough as far as they go, but they also seem to miss the main point. What they fail to address is the fact that many banks are simply too big. They are too big to manage – nobody can hope to understand the totality of the risks they are running – and they are too big to properly look after the customers they serve.
But most of all they are too big for the countries they are rooted in, with liabilities which, as in the case of RBS, dwarf the size of national economies. Governments have no option but to support banks which are central to their payments system even though the growth in their trading positions and international lending puts them beyond the ability of taxpayers to underwrite them. That's why the British banking system has such a massive funding crisis. Regrettably, this is going to be injurious to the UK economy for years to come. Let's please learn the lessons and break up these goliaths, rather than fiddling around with capital controls and reform to banking supervision. Bankers will always find a way around those constraints.
German property giant Hypo Real Estate may need £8.6 billion rescue
The German property giant Hypo Real Estate may need at least €10bn (£8.6bn) in fresh capital from the German state to stay afloat, according to the chairman of the oversight board. The admission is the latest evidence that mounting losses in Europe's banking system have yet to be tackled. "The bank clearly has a solvency problem," said Michael Endres, head of the board in an interview with Welt am Sonntag. "It wouldn't surprise me if a capital injection of €10bn proved insufficient."
Meanwhile, the extent of credit damage in Spain is becoming clearer after America's GMAC revealed that it had been selling Spanish mortgage assets at 14.5 cents on the dollar as it withdraws from global ventures to focus on the US home market. Until now, it has been hard to measure the extent of the "haircuts" being suffered on Spanish mortgage securities since there is no obvious gauge such as the ABX Index used to track sales prices on US subprime and Alt-A debt.
The GMAC sales suggest that Spain's property crash will inflict large losses on foreign creditors, mostly from Germany and France. The Spanish government has long insisted that higher credit standards in Spain have spared the country the sort of debacle seen in the US. Hypo Real's Mr Endres said earlier management had expanded at breakneck speed in foreign markets that they never understood, wading cluelessly into US housing through its Dublin operations. "The property market is like farming: you don't buy a field until you have walked around it a few times," he said.
Hypo Real was saved last October in a €50bn joint rescue by the Bundesbank and private lenders. The government's stabilisation SoFFin has since taken over 90pc of the Munich bank, though fresh capital has so far been limited to €3bn. A leaked memo by the German regulator BaFin said Hypo Real had "problematic assets" of €268bn. The agency said German banks need to take advantage of green shoots optimism and help from the state's "bad bank" scheme while they can, or face trouble in coming months.
The state-owned Landesbank HSH Nordbank is also in difficulties as the crisis in the shipping industry grinds on. It received €3bn of fresh capital in May from the City of Hamburg and the state of Schleswig-Holstein, which have had to eat into their normal budgets to meet the cost. Many regional governments are themselves facing a deficit crunch – much like US states, although Germany's crisis is not yet as acute. The Länder face a combined deficit of €30bn this year (1.5pc of GDP). The International Monetary Fund said in its Stability Report that Germany and other European states are still far behind the US in taking steps to clean up the banking system. It has called for a transparent `stress test' of lenders but German finance minister Peer Steinbrück insists that this is unnecessary.
Ilargi: The Financial Times has a large special on Nigeria, Africa's -by far- most populous country. Go here for the entire series.
Nigeria: Still trapped on the threshold of prosperity
Spend a few days in Nigeria, and the contradictions seem extreme: a world-class oil exporter hit by fuel shortages; a country with massive gas reserves in darkness; fertile land empty of farmers. Peer a little closer, and these failings start to look less like a chaotic anomaly, and more like the result of a highly-organised – if shadowy – set of commercial arrangements that benefit the few at the expense of the many. Billionaire oligarchs, politically-favoured businessmen and officials in state-owned companies have built empires large and small by exploiting the bottlenecks strangling growth: moribund refineries, clogged ports and dysfunctional power grids.
For Nigeria to weather the impact of the global slowdown and stand a chance of delivering prosperity to its poor majority, these bottlenecks will have to be removed. President Umaru Yar’Adua has drafted laws and set up committees to oversee reforms that – if implemented – would further liberalise the economy and short-circuit some of the more blatant scams. Yet more than two years after his inauguration, the elites that profit from the status quo seem as entrenched as ever.
Certain private sector initiatives – to boost internet bandwidth and fertiliser provision, for example – will help tackle some of the distortions. Yet unless the government can reform the fuel, power and agriculture sectors, Nigeria may find itself forever trapped on the threshold of broad-based prosperity. Take petrol. Nigeria confronts – because of a legacy of mismanagement and sabotage at its four state-owned refineries – the perverse necessity of having to import 85 per cent of its refined products in spite of being an important oil producer.
To ensure petrol prices for consumers remain affordable, the government spends about N640bn ($4bn) a year on subsidies for importers. The system has delivered huge profits to big marketing companies such as Zenon and African Petroleum while discouraging investment in refineries. Odein Ajumogobia, the petroleum minister, says the government spent close to N700bn on fuel subsidies in 2008 and less than N500bn on capital projects. “The inefficiencies and the corruption ... [are] what deregulation, by one action, deals with,” he says. “If we have these funds that we save from the subsidy, they can be used to build infrastructure, improve our transport systems. We can improve the quality of life for the average citizen.”
The deregulation plan has yet to yield results. Marketers suspended imports after the government failed to pay hundreds of millions of dollars in subsidy arrears this year, leading to a weeks-long fuel crisis. Summoning reporters to a rare news conference, Mr Yar’Adua fumed at a “cartel” responsible for introducing “colossal corruption” into the system – a reference to the importers. Wale Tinubu, the head of Oando, one of the biggest fuel importers, says he wants to see a credible deregulation programme to make it commercially viable for him to build refineries. He warns, however, that the government is afraid of labour unrest that could accompany a lifting of the current price cap of N65 per litre of petrol. “The government wants the benefit of deregulation but it’s scared of the political burden,” he says.
Comparable bottlenecks hold back agriculture. The sector has grown steadily in recent years and accounts for about 40 per cent of gross domestic product, but limited progress has been made to create the kind of processing industries that would lift farming beyond subsistence level. Mr Yar’Adua has yet to deliver on pledges to amend land laws that stunt investment. Remi Babalola, the minister of state for finance, says the government is also working to repair crumbling roads with 55 projects in progress and N500bn earmarked for investment between now and 2011. The government also plans to make N200bn of loans available to farmers and invest a further N200bn in silos, irrigation and other projects. “There’s a lot of things that have happened,” Mr Babalola says. “It’s not just about promises.”
The private sector is working to improve provision of fertilisers, where scams revolving around state subsidies have long benefited officials at the expense of farmers. Nigerian growers use only 8kg to 10kg of fertiliser per hectare, compared with the 200kg recommended by the Food and Agriculture Organisation, according to one industry expert. Notore Chemical Industries, owned by Nigerian and international investors, has revived a plant outside Port Harcourt to become Nigeria’s sole manufacturer of fertiliser. Jite Okoloko, Notore’s chief executive, says he is working with the government to pilot a voucher system in Taraba and Kano states to improve the existing subsidy regime. “That’s the way to get a green revolution – by having the actual subsidies placed directly in the hands of the farmer,” Mr Okoloko says.
Private investors are also removing one of the biggest bottlenecks in the telecoms sector: a lack of internet bandwidth. A planned $245m undersea fibre-optic cable known as Main One is due to start delivering 1.92Tbps of bandwidth in June, 2010 – 10 times the capacity of the existing cable serving Africa’s west coast. “We expect a surge in access to the internet,” says Funke Opeke, chief executive of the Main One Cable Company. “Availability should increase and costs should be drastically reduced.” Such a prospect is more distant in the power sector. A chronic state of crisis has proved lucrative for companies that import diesel and generators and for officials who charge bribes for diverting what little power there is to clients who are willing to pay. Until Mr Yar’Adua can get the lights to work, many Nigerians will consider his administration to be one of the biggest bottlenecks of all.
Talk the talk – or walk the walk
For an oil-dependent country such as Nigeria, it was much easier to talk the talk of fiscal discipline when a barrel of crude was trading at close to $150 a barrel a year ago, than it is to walk the walk now the price is almost two-thirds lower. The administration has faced mounting political pressure from state governors to allow them to spend a greater share of the revenues in an oil savings account set up by the last government. Projections from Standard Bank suggest this administration is saving less than its predecessor, which ran an average federal budget surplus equivalent to 7.1 per cent of GDP in the three years to 2006. Since the new government took office in 2007, the federal government has run an average deficit equivalent to 0.3 per cent of GDP, even though the average oil price has been 50 per cent higher.
114 comments:
Scepticus is not a troll by my definition of the word. His net effect has been to keep some of the best minds in the comment section quite active. For some of the second tier minds, such as mine, he has created a bit of "pain between the ears," but this is the grey cell equivalent of P90X pain. As one economist put it, "By their fruits they shall be known." As to riding beams of light, Albert got a lot of mileage out of that fantasy.
This is not meant to imply that I endorse his positions or theories. But we have had so many asshole trolls here lately, that calling Scepticus one is very counterproductive to the blog.
@ El G
How long have you been sailing? You're quite the one man show! Plumber, physicist, teacher, Mac man, residential investment advisor and handyman etc!
What next? A spot on dancing with the vultures!
@ Ilargi
Is the UK a federation?! Does that make the EU a federation?
Re: The Japan situation
Japan at the time of it's downturn had an 18-20% savings rate so it had cash for a rainy day while the US has virtually no savings as a nation. Plus as a previous Anon poster stated in the last thread, the global economy was pretty strong and not in the midst of a credit bubble burst.
Re: Chinese Electricity use
Though China's electricity use went up in June for the first time in 8 months due to temperatures being over 40 degrees celcius. During the first half of the year, YOY, electricity use declined 2.02-2.43% depending on which paper you read online. This shows to me an economy that is contracting.
What say all ye here?
Had my first serious conversation with family members tonight and really need to vent (sorry to hijack the blog). Lots of conversation about things, but they think I'm completely insane....they want me to "go see someone" and/or get on some medication. They see "trouble" with the economy, but when I told them I want to sell the house and get some land the country, they thought I was completely loony.
I tried to talk about pooling capital/resources, but they would have none of that. They say I know nothing about farming, but I said no one knows anything at birth and that it must be learned, but they say I'm not a farmer and to just stay put and get a job and everything will be allright.
The real kicker is that they were completely peak oil unaware, and were of the opinion that we can have all the oil we want if "they" would let us drill, or that we will find other sources of energy as they become necessary (completely ignoring lead times and EREOI). The thought of a collapse within a decade was completely unfathomable. They would have no conversation of declining oil in the forseeable future. I mentioned Oil Drum and told them to do their own research, but I'm afraid it fell on deaf ears.
I now realize I'm on my own (or at least finding non-family community) - I'm a bit shaken but not surprised - at least now I know and can hopefully move forward unimpaired. Also, I tried to being up pooling labor, capital and resources, but that went over like a lead balloon.
Sorry if a bit OT, but I've just been in a bit of a funk, and hopefully this is the motivation to get me going. BTW, I'm ok the Eastern Shore of Maryland....anyone out there ready to form some kind of alliance to get thru the coming times :)
VK,
Ha! No, I think they call it a unitary state. Same difference. EU not so much.
Pondering California, my current home:
The center plunders the periphery. I listened to NPR this evening on my way home from work, and the San Mateo county commissioner was venting his anger with Sacramento over stolen local money. A sour social mood is developing. Even if the heartland thinks we're the land of fruit and nuts, they've all been raised by the television, and I bet they can't suppress their California dreaming - even if they won't admit it. When the home of the Beach Boys and endless summer lovin turns rancid, the rest of the nation can't be far behind.
Re: Cali. pension funds -- Mrs. Bukko had worked for the University of California system for many years before we emigrated. She had a large swack of money built up in retirement accounts ("superannuation funds" is the Aussie term, FWIW.) Even after our Elvis selves had left the building, we let the money ride in the U.S. because it promised such a sweet, sweet payout in U.S. dollar terms for the future.
However, in the spring of 2008, after too much time spent reading econoblogs like Mish's, we cashed it in instead of waiting for that promised monthly return (based on stock market valuation) that would roll in for the rest of her life. We took a big tax hit, (six figure worth!) but we reckoned the potential value loss would be even bigger, based on our reading of the econoblog tea leaves. (Moved it to a friendly European country known for its chocolate, watches and gnomes.) It was a gamble, but isn't everything in life, even if you're just crossing the street and gambling that the car coming toward you is going to see you and stop?
Thank you, Ilargi, for alerting me to this news item that reinforces that we made the right bet. Sad thing is, our grim calculation was right, and which means the future is going to ne wrong for the rest of those poor schmoes (including many of our friends) with ties to California. I hate being right like that.
Moral of the story? Pay attention to the hard numbers in the blogs, trust your judgment and act accordingly.
Side note about cuts to the Cali. prison system -- we've got a friend who's doing 20 to life for murder in it. (Sad story -- he was a smart computer guy, but started doing too much cocaine mixed with Prozac in the late 80s when SSRIs were a new thing, had a bad reaction and killed the part-time prostitute he was living with. He did the crime, and he's doing the time.)
The guy has been a good prisoner, has almost earned a master's degree in programming while behind bars, and we thought he'd be a good candidate for parole based on that. But the budget cuts mean that the state-paid monitors who oversee his work and make sure that no one cheats on tests, are being eliminated. That makes it LESS likely that he'll get sprung by the parole board.
It is what it is. Lou DID kill someone, and he's suffering for it. Deserved. But elimination of prison teaching staff is one of those consequences of the massive budget fail.
Jim,
I'd be surprised if your experience hasn't been shared by pretty much everyone on this blog at some point. There is only so much you can do. As conditions deteriorate this fall, they'll be calling for advice - sadly too late to help in many instances.
That's my experience from last year. My family thought I was nuts last summer when I started ranting about financial collapse. After the crash of October 08, they still thought I was crazy, but they started to ask for updates on what my "blogger friends" were saying.
Hello Ilargi,
Notice the contradictions from the Nigeria article, now rinse and repeat for Africa.
Yet more than two years after his inauguration, the elites that profit from the status quo seem as entrenched as ever.
yet,
He warns, however, that the government is afraid of labour unrest that could accompany a lifting of the current price cap of N65 per litre of petrol. “The government wants the benefit of deregulation but it’s scared of the political burden,” he says.
So the Government is not worried about unrest caused by all the crony capitalism that goes on but more about the silly subsidy! These stupid policies are all over Africa, sounds so familiar, Government's unwilling to take substantial action.
Then this, happening to us as well, though the drought is playing it's part as well, as water levels at our main dams are really low.
A chronic state of crisis has proved lucrative for companies that import diesel and generators and for officials who charge bribes for diverting what little power there is to clients who are willing to pay.
There's a water shortage here but somehow there's a booming private water supply sector that manages to find water and charge a nice premium on it - Shock Doctrine anyone ;)
Even this is strangely familiar,
“We expect a surge in access to the internet,”
East Africa finally got connected to the global fibre optic network, I hope to get a much faster and cheaper connection soon.
You may be surprised to learn that I consider the press here to be one of the freest in the world! I regularly read op-ed pieces in the main daily newspaper calling for revolution and detailing every little and major scam in glorious detail, but the main problem in Africa is Tribalism. We are a number of tribes living under the illusion of a nation state.
There's very little trust between tribes and people elect politicians along tribal lines and the tribe with the largest population wins and then goes on a 'looting spree' so as to benefit their tribe.
There's huge potential in Africa, absolutely huge! But alas, I fear we will never get out of the doldrums. (Though in some paradoxical way it might be good that we never made it out in the first place as the majority are used to hardship.)
ps - This was stunning to learn though, "Nigerian growers use only 8kg to 10kg of fertiliser per hectare, compared with the 200kg recommended by the Food and Agriculture Organisation" I always thought it was 1/6th and not 1/20th!
Jim,
Some other suggestions are -
1. learn to start to grow things now, you don't have to move. If you are in an apartment, you can start by growing things in containers. If you have a plot of land, get some seeds and start learning how to grow things now. I have only just begun learning and have started off small. Or, if you are interested in learning to farm, there are oftentimes internships available at farms.
2. rather than lecture things to people - try to start by changing your own behavior. Do little things such as doing unexpected favors for friends, family, and neighbors like helping shovel snow or giving then food you grow from your own garden. This will help you build and/or improve your relationship with others. Additionally, by taking small actions and discussing the benefits of the small changes to your finances, health, and mental well being it might encourage others to change their behavior without needing an extended and contentious conversation.
3. remember it takes time to get people to change their minds and oftentimes it requires saying the same thing in different ways over the course of multiple conversations.
4. remember that the main person you can control and change is yourself.
Hope that helps. Good luck.
Linda S.
Limits To Growth
The first run was how the model would behave with the known reserves of 1970 and there is no change in the evolution laws. (Pessimistic scenario)
Result: Perpetuation of Growth leads to a collapse in living conditions (food output and industrial output per capita).
Trigger: Exhaustion of non renewable resources
The second run was based on non-renewable resources being almost infinite and being nearly perfectly recyclable and that energy availability is not a problem anymore.
Result: Decrease in agricultural output that leads to starvation and population collapse.
Trigger: Explosion of pollution leads to collapse rather then a shortage of resources.
Third run was based on human intelligence being able to limit pollution to about a quarter that of the 2nd run while optimistic hypothesis on resources was kept.
Result: Collapse pushed ahead by a few decades even with 'illimited' natural resources, pollution control and lotsa oil!
Trigger: Extreme Population Growth leads to soil degradation causing a decrease in agricultural output per capita - starvation.
The fourth run was about increasing agricultural productivity vastly along with near unlimited resources and pollution control.
Result: Vast land degradation followed by a collapse in population.
Trigger: Rising industrial production as there are no limits causing it to explode inspite of pollution control.
Fifth run was about incorporating perfect birth control to avoid an explosion of population which led to massive global industrial production and thus land degradation in the last run.
Result: Population collapse deferred by a few decades.
Trigger: Burst of pollution (even with pollution control) caused by increase in industrial output per capita that leads to land degradation that leads to starvation (even with increased agricultural productivity)
Conclusion: Even under super optimistic hypothesis, collapse by the end of the 21st century is inevitable.
Only way out: End of the economic growth paradigm (though the authors did not advocate/ suggest this) and a big reduction in industrial output.
On present course a global population collapse is less then 40 years away according to a CSIRO paper comparing limits to growth then and 30 years later. (I think it's less then 10 years, Starcade suggests 10 days??)
@ jim
To repeat ... ben there!
We at TAE are trying to establish/follow a “survival plan”.
No one plan fits all.
If you haven’t purchased and learned how to operate a farm, forget it. It takes 4-5 years of experience.
Hope that you will be able to be among the employed as the economy contracts.
Gardening, as expressed by others in this blog, is a good plan.
Good luck!
jal
Jim,
I agree with Linda’s suggestions, you can only start by changing yourself. The other people in your life will take time and it may be an event -- not you -- that convinces them. However it works out, you can best help those you love in the future by preparing yourself now.
Regarding gardening, your skill will improve over time. One thing that many beginners overlook is soil. Good soil is a living thing full of decaying organic matter, bugs, and worms. It takes a long time to build up. This is something that I have been forced to learn because the soil around my house offered little of value to plants. (My house was built in 1910 and there was almost nothing other than lawn around it when I started. Lawns and fertilizers deplete the soil over time, and my soil was largely depleted.) My suggestion is this: If you have a place to garden, start collecting grass cuttings, leaves, and small branches. Pile them up and compost with any food scraps you may have. Every time you plant something, mix in a good amount of decomposing material with the native soil. This will improve plant yield enormously.
Among other things, I grow sunflowers using seed from the previous year. In the native soil that used to be lawn, they only get about 1 or 2 feet tall. I also grow them in soil that is around 75% compost. This group of sunflowers averages 10 feet tall and sometimes I get them to 14 feet. This is an improvement of 500 to 1400 percent. Most vegetables see improvements of double or triple. Some edible ornamentals, especially nasturtiums, see even greater results.
Soil conditions are huge wherever you live. I compost everything. I even rake up my neighbors leaves for them in the fall.
Jal,
As farming becomes more labor intensive, it will be more necessary for people to learn how to farm. I agree that buying a farm as a novice is probably not a good idea for most people; however, if someone has the cash saved up, it could work out. An alternative might be to work on turning the place where you live into a farm (or orchard). I have a good number of fruit trees that I’ve started from cuttings of trees in my yard and my plan is to begin planting them in public and semi-public places throughout my city in the fall. Trees and berry bushes are a good thing to start with because their production increases over time with very little new effort.
Jim,
You can try to sell YOUR OWN house if there is a big debt attached to it, especially a Home equity loan.
If you are talking about your family of origin's house, and not your own personal debt, just let it go.
If things go down the way you expect, your family will eventually see the wisdom of taking in boarders -- you can talk about that in the future, not now.
A job is a good thing to have in transition.
Keep one foot in both worlds for now.
Farm where you are planted: Get to know a local farm thru a CSA. There's a list of Maryland CSA's on the internet somewhere. They exist on the Shore. They often offer produce in exchange for helping them raise it. You can learn from them initially instead of making mistakes at home and still get 'paid' with the produce you cannot raise on your own property yet.
You are not on your own. You HAVE family, they will need you and you will need them in the coming transition, they just don't know it yet. Can't convince MOST people until they see it with their own eyes. So wait for that and prepare yourself quietly first. Drop the peak oil talk since that turns them off. Meantime invite 'em hiking camping fishing hunting, be subtle. Bring 'em some CSA produce. Offer to BBQ. Offer to help with handyman stuff, errands. Don't tell them what you're up to, just make yourself socially indispensible to them. Accept that they'll come around to seeing it your way only when it is also
obvious to everyone.
It's what I had to do.
-Anne Arundel County Cassandra
VK re LTG
I am convinced by the general results of the various runs of LTG. However, the results are aggregated.
As we well know the use of resources is dominated by the developed countries on a per capita basis. And we have seen the demographic profiles change radically also.
That leads me to believe that the changes that will lead to the aggregate change in population numbers shrinking will not be symmetrical worldwide.
I treat the 'economy' somewhat as a proxy for the whole LTG world view. The developed world on average is seeing a proportionally greater meltdown than the lesser developed world. It seems that we are going to hit bottom sooner.
I see Japan as the poster child for our fate. Once their exports no longer shield them from lack of resources their shrinking population will continue to shrink due to constrained resources.
The US is not as constrained but is likely to follow a worse trajectory because our social contract has been worse than just about every other developed country.
Is your dire projection of world population starting the trip to Oldavai in 10 years based on resource wars killing off large numbers or just the results of the factors in LTG coming into play?
Vicky
Jim, you're off the deep end. Your family must be terrified.
You seriously need to stop reading apocalyptic websites, go out and date some nice woman.
Jim
Been there --- you can only do what you can do. Hard place to be when you can see what others won't entertain. Good luck instituting your own "shelter in place" learning curve many others have suggested.
OT for some other to answer: I'm surrounded by extended family thinking they should hold on to house because not able to get a good price or break even --- also others clinging to old values of what success would have been if world continued on as it was for another generation. Shouldn't person sell house now as only going to get less in the future?
and someone has mentioned that after this summer, likely to be too late to sell --- can someone expand on that info?
pdh1953
"Jim, you're off the deep end. Your family must be terrified.
You seriously need to stop reading apocalyptic websites, go out and date some nice woman."
Hillarious. Thanks for that one, I needed a good belly laugh. I'm assuming of course, seeing as how you post anon, that you're "some nice woman".
From the second last article, German property giant Hypo Real Estate may need £8.6 billion rescue:
"The agency said German banks need to take advantage of green shoots optimism and help from the state's "bad bank" scheme while they can, or face trouble in coming months."
Is Take the Suckers for All Their Worth not implicit in this statement, or am I the only one that reads that into it?
@Jim -- I've been there.
You will not need to be alone. I'm starting to turn my folks around and you will do it too.
This will help:
1. Get into Transition Towns, like now. (You know about them right?) Start one in your area or join the one that's there already.
2. Start showing your family what you're doing and the strength of the response out there -- there are hundreds of TTs.
3. Definitely begin growing your own food, reskilling and other preparations.
4. According to some, way out in the country isn't the place to be anyhow. Eg. John Michael Greer points out that in times of civilizational decline (which this is) they tend to be very lawless in rural areas. A decent-sized town may be better. Talk to Sharon Astyk and join her 'adapting in place' course this august (I think).
5. Your family will see this and they will start to get it, but here's what will help: Make some financial predictions for them. Ask them about their economic expectations and then tell them what you are expecting yourself. Then say: "If I'm right, you're going to have to take this more seriously."
It's a slow process, no point in panicking, but you will prepare and you will change some minds over the months ahead. Good luck!
VK,
I was based very briefly in Lagos (9 days) in 1980. At that time, the black market rate was 1 Naira = 1 US Dollar. Currently, it is around 200 Naira to one dollar. Luckily for me, the contract that my company had with the civil aviation authority was deemed not worth the paper it was written on and I quickly withdrew to the comforts of Amsterdam. Phew, that was a close one. I was very young, foolhardy and naive at the time.
I read the article in the FT. They showed a beautiful picture of Bar Beach on Victoria Island in Lagos. The best hotels are near there. The "bar" was in reference to the sand bars that it had when the British first colonized it - not to the wild drinking establishments that are to be found alongside it. Anyway, when I was there, I was told by a resident that until recently, under the military government, the beach had been used for publicly executing criminals. They would tie these unfortunates to a stake in the sand and a soldier would take pot shots at them to the wild cheering of the crowds. A bit like in 18th century London - in slow motion.
It is somewhat ironic that Africa may not have such a drastic downward lurch as lots of other places.
Bukko_in_Australia,
We are in the UK right now and have moved our departure date to Melbourne, Australia, from Early 2010 to this October. My better half, although she was in full agreement with me that the future of the UK was rather grim, was not in a hurry at that time. Luckily, she agreed to move it forward a while back and now she is very glad to have done so. I am sure Australia will have loads of problems but keeping warm in winter should not be one of them. Our local English town has an almost surreal number of closed shops. One electric shop expanded around a year ago and I forcast that they would go bust and now they have done so after having a 50% discount on their stock.
She is keen to buy a house and I have made it clear to her that getting some productive land is more of a priority - perhaps forestry. Since I have been correct with my forecasts - the TAE has always reinforced my personal viewpoint and given me the data to argue convincingly for which I shall be eternally grateful - I am sure that I will be able to persuade her as to the right course at the right time.
I understand how difficult it is for Jim to convey his sense of urgency to his family. I consider myself lucky. I guess we have some of experience with economic disaster, revolution and war. Everyone else around here is so smug that it makes me wonder as to whether they have any understanding of reality.
Hello Vicky,
Is your dire projection of world population starting the trip to Oldavai in 10 years based on resource wars killing off large numbers or just the results of the factors in LTG coming into play?
I'm just using 10 years but I fear the next 5 years a lot as well, the problem with the credit crunch is that it could well crash oil production from the current 84+ mn barrels to around 20mn barrels almost overnight!
The US, European, Australian, Canadian, Japanese, Indian, Chinese food production systems are heavily dependent on oil! The US requires 10.4 quads every year to produce 1.4 qauds of food. Imagine that being fossil fuel input being cut by 70-80% in the matter of a year or so and then think how that would drastically affect food production all over the world!
Stoneleigh has mentioned that within 5 years the Avg US citizen won't be able to afford oil based products. Now think of the fact that US food is basically like eating oil (10 calories of oil used for every calorie consumed and the average piece of food is transported 3000 miles) Now imagine that playing out all over the globe. Grim stuff :-(
I've said before that the effects of these two are the same
Peak Credit = Peak Oil
Just that we can recover from peak credit given time, we can't from peak oil.
Aloha Jim -
Iʻll echo many of the others here re: talking to your fams and other loved ones. Was called crazy myself.
But be calm, persistent, and rational.
Iʻve found Chris Martensonʻs Crash Course is approachable for most people to intro the concepts. Your younger family members can watch online, but you may want to get his DVD for older folks.
I showed my parents this article about Dr. Martenson (cover of the Boulder Weekly July 9-15)
http://www.boulderweekly.com/20090709/coverstory.html
and now they are willing to watch the DVD and, after much discussion with me (Stoneleighʻs crystal clear explanations really prepared me for these conversations) consider changing their retirement holdings to be completely out of equities and only hold cash and short term US Treasuries. (still trying to convince them to sell the condo in Ocean City, MD asap).
Iʻve also been walking the walk by making some significant lifestyle and financial changes in my own life as a single guy in his early 40s so they know I am serious: selling my house in Hawaii, moving back to be close to family in Maryland (weʻre near baltimore), working as much as possible for a permaculture education site, etc.
BTW, how old are you? Weʻre trying to start a partnership of various entities focused on providing quality permaculture / organic ag education, internships, apprenticeships etc. to college students / young adults in the Mid-Atlantic region.
Volunteering at a local organic farm/dairy on the Eastern Shore might be a decent way for you to spend some time learning new skills and expanding your network.
Best of luck, mate.
Ric in Northern Baltimore County
Jim doesn't say if he has a mate or if he is under 40. If he is single and not yet debilitated by age {farming without a lot of mechanization is grueling and with mechanization only very exhausting}
then he should just convert his assets to dirt in a non winter clime and get doing and skip any further attempts at family conversion or personal theorizing. If he has a mate, just work on converting the mate.
It really must be said that the agricultural life has its rewards but it isn't for the frail or sedentary. It isn't any kind idyll.
It's more like a serious and life threatening addiction. Especially if you are not well physically. I'm legally very disabled, 57 years old, and actually capable of earning my living in as many ways as El Galli, but I am made genuinely delirious by the plant realm and my main reason for existence is growing food trees. I have one helper and she is ten years older than I and she works in the nursery 20 hours a week. Her job description is to not let anything die. And BTW, Jim, should you end up in the market for a life partner, find a healthy, tough, heat resistant variety that loves plants maniacally. Hope you are paying attention and I wish you great ecstasy to offset the pains.
VK
From yesterday:
Being a person on a small, tropical island without a sailboat is like being a eunuch in a harem. You know a lot more at twenty-three than I know at sixty-three, and the little I do know is slowly dribbling out my ears :-(
apc, I don't know why are you laughing man?
I think having a nice girlfriend that at some point becomes a faithful and resourceful wife is a great survival advantage?
If Jim had a resourceful wife she could talk some reason into him so he doesn't run around the relatives with his arms flailing..."I read a website and we're all gonna die"
A good woman gives you a sense of perspective and the four horsmen actually come a-knockin' who else would you rather have next to you, your aunt or your loving wife?
Just sayin'
Jim,
You have gotten some really good advice here. I can't say that I have been exactly where you are. First, I have the impression that you are in your 20's, and I am in my 60's. Second, I am a battled scarred curmudgeon and fairly verbally articulate. Age and demeanor will garner a little respect from adults (as an ex-teacher, forget the kiddies).
An aside: I was a science teacher in an alternative public high school in a Denver suburb about 16 years ago. I taught a section called Quitters about how and why to stop smoking. (I had finally kicked a two pack habit about four years previously). One of the kids asked my, "Why the fcuk should I give up smoking? You don't get cancer until you are over 40 and we know that life's not worth a shit by then anyway). Ah, teaching was such a rewarding experience. It's better to handle sewage :-)
All I can say about your family is don't burn your bridges, but build your independence, particularly financial, until they see the handwriting on the wall. And the best way to get people to listen to you is to speak almost in a whisper.
As I mentioned before, my friends here were seriously sponsoring me for a Prozac prescription two years ago, and now I have become the chief financial advisor :-) Times change. I have saved friends and relatives who chose to listen to me early hundreds of thousands of dollars. I am sort of a Bhuddist, but with a wise-ass attitude and a surly temper. I believe in reincarnation. I also believe that being a meat puppet is comparable to being in a Marine training boot camp swamp with mosquitos allowing three meter visability. Any sane cognizant being would never volunteer do it. Everyone on this planet is ipso facto insane. But when people want to be extra stupid, I just mutter "karma" to myself.
Back to packing.
Our faithful CNN continues to serve the urgent needs of the financial community. This is a major story on their "Business" page, yesterday, and today:
"Where to find rich singles" (big black headline)
"Seeking a sugar daddy (or mama)? Follow the money to these affluent towns, where singles are abundant. "
For folks in Australia working on starting/acquiring productive land- dig up Larry Geno and his spouse, Dr. Barbara Geno. They'll be found through either the permaculture or organic communities.
20 years ago they started a "bush tucker" nursery, and illustrated the food producing potential of a great many obscure Australian trees.
I think they know more about it than anyone.
Larry has a PhD, but won't admit it. He's one of those highly intelligent people who gets cranky around idiots. Not sure what they're up to these days.
Jim,
Don't panic as there is a gigantic flywheel effect in motion with regard to our transition from this wasteful and extravagant society to a more frugal and efficient future.
I have been around quite a while and went from a simple life (my first few years were on a small farm with a wood stove and outdoor privy) to the typical nice home on a corner lot, (which is now planted with veggies, etc..)
Thanks for asking the questions you asked because I have appreciated all the answers that resulted (except the one anon) and take heart. This Rome won't fall overnight.
Oh, learn to use your hands and simple tools!
El Gall - Re: ""Why the fcuk should I give up smoking? You don't get cancer until you are over 40 and we know that life's not worth a shit by then anyway)."
That's one of the saddest phrases I have seen in a long while, and speaks volumes as a reflection of the failure of something in our social fabric.
Appreciate your astute comments, your humor, and you candor.
White House Chief of Staff Rahm Emanuel told The New York Times Obama intends to use the news conference as a "six-month report card," to talk about "how we rescued the economy from the worst recession" and the legislative agenda moving forward, including health care and energy legislation.
http://tinyurl.com/mecmqp
The American public is pretty financial illiterate so let's just test the water here and see how stupid they really are.
The Power4Home advertisement at the bottom of your post is a scam...as far as I can tell.
My family and friends know I read the blogs too. They still think I'm nutty. They did ask my what the bloggers had to say, about Michael Jackson!
"Andrew said...
The Power4Home advertisement at the bottom of your post is a scam...as far as I can tell."
The Google ads are -potentially- different for everyone, they target specific location and behavior.
Best to follow don't ask don't tell
You're not as cool as you think when you drink, er, read loopy blogs
Jim,
I empathize with your frustration when trying to explain collapse to others. Most of us have been there. Thanks for sharing your story, which has provoked a lot of reflections and great suggestions from TAE commenters.
I'd like to emphasize that learning to grow food organically will be a much needed skill in the coming years. Read as much as you can on the topic and volunteer at a local organic farm, start a compost pile and grow your own veggies in containers or create a small veggie/herb garden.
I have always been able to connect with like-minded individuals via natural food stores, food coops and farmer's markets.
Oh, and remember that perseverance is a virtue! :)
What you have right now is trillions of dollars in bad bad investments and loans that have been added to the money supply over the past decades. If free market forces were allowed to occur these malinvestments would be liquidated and reduced to their realistic value, reducing the available money supply by the difference between the book value and the market value.
Currently the Fed is basically stop-gapping the difference for the banks by plugging a bunch of new money into the space between "book" value and REAL value. Also, mark-to-market has been eliminated (notice no major write-downs since that point - as if those instruments have been gaining value since then!!!) so for accounting purposes and money purposes that aspect of the money supply has not shrunk.
Add in the fact that most of the "deflation" occurring is in paper asset values (i.e. equity values in homes). If the equity was already used that money exists as cash within the system and the liability side of the balance sheet is held by the homeowner and ultimately the bank (when they default). To top it off the government has expanded its budget monumentally which is directly inflationary as governments spend and spend and spend injecting those new dollars directly into the economy to be passed around with all currently existing dollars.
There is small deflation right now but it's like a garden hose has been spraying at a fire hydrant for a while and the fireman are just turning the nut at the top so it can spray back.
Anonymous said, "Jim, you're off the deep end. Your family must be terrified.
You seriously need to stop reading apocalyptic websites, go out and date some nice woman."
That's funny coming from someone that doesn't even have the conviction to post under a pseudonym.
But think about it for a moment, if we really went with the MSM mode of thinking, then all of the bear markets, market downturns and bubble crashes would've been impossible to predict.
You have to be some kind of loony to believe that there is never gonna be another bear market.
The nutcases living in a fantasy world have been blindsided by every downturn of the last ten years. Yet the fantasy blue sky nutcases continue to rag those that see the world for what it is, and keep getting it right.
Is sanity marked by living in a delusional fantasy, where you believe every day will be better than yesterday? If you can predict moves in the markets, then are you a nutcase?
I'll argue no. If you're getting it right most of the time, you're not a nutcase. The nutcases are the ones that keep telling us not to worry, that being blindsided with every downturn is desirable, because at least you're being optimistic while reality kicks in you in the teeth for being stupid.
@ Greenpa:
Our faithful CNN continues to serve the urgent needs of the financial community. This is a major story on their "Business" page, yesterday, and today:
"Where to find rich singles" (big black headline)
This has since been trumped by Erin Andrews' privacy violation.
Climate change? Soil depletion? Peak oil? Peak rare earths?
Trivial by comparison!
I'm also wondering if TPTB think China is stupid enough to sell the West the rare earths needed to outfit all 2,442 planned Joint Strike Fighters.
My magic 8-ball thinks, "Signs point to no."
anon 9:04 - "If Jim had a resourceful wife she could talk some reason into him so he doesn't run around the relatives with his arms flailing..."I read a website and we're all gonna die"
To which I must respond, if Jim had a resourceful wife she would be coherent enough to search out the truth from about all available sources and glean the truth.
Much of that gleaning would come from reading sites where folks were at least engaging in honest dialogue about things that matter vitally to us all.
Read the words in TAE, look at the charts, check out other sources, get your head into something constructive--it might save YOUR life.
"If Jim had a resourceful wife she could talk some reason into him so he doesn't run around the relatives with his arms flailing..."I read a website and we're all gonna die"
It's my experience that all you need to do is suggest that the economy might slow, and you're pegged as a crazy doomer.
Sane people believe that bad things never ever happen. And if they do, no one could ever predict them.
@ thethirdcoast
I'm also wondering if TPTB think China is stupid enough to sell the West the rare earths needed to outfit all 2,442 planned Joint Strike Fighters.
As El G wrote a few days after the beginning of the sucker's rally in late March - He never thought people could be that stupid, then he became a true believer in this magical power. So am I. Never underestimate the power of stupidity, especially when men are squabbling over money and women!
thethirdcoast
re rare earth metals
It all depends just how capitalistic China has become. Everyone knows that a true capitalist with sell the rope which will hang himself to the executioner if there is a profit to be made :-)
Jim,
I can sympathize with your situation. My wife and I have slowly been adapting our lives to what we see as "the new normal" for the past year or so. Our most difficult problem, beyond actually making lifestyle changes, has been discussing our thought processes with family members.
My father, who is financially secure and pretty healthy for a 71 year old, doesn't really get Peak Oil and therefore doesn't understand why I'm not in any hurry to replace my 2003 Corolla with something more expensive. Despite growing up in post-WWII former Yugoslavia (as the wrong ethnicity), I don't think he can imagine where Canada is headed in the next five years. My wife and I have started the conversation of how we are going to take care of him in the coming years, but given that her family is on the West Coast, it's an ongoing discussion without any easy answers.
Best of luck.
Scepticus (from a few days ago),
Apologies for the late reply. I have a lot of deadlines at work right now.
It is real interest rates that are the important factor.
Agreed. If the real rate is estimated by the fed at -5%, and that seems like a reasonable estimate, and yet offered rates for credit are say +6% for a typical 30 yr mortgage, then no wonder no-one wants credit. Now if offered rates for credit were -1%, the borrower has some work to do to make sure repayments are maintained, but its doable, as long as the money supply is growing, which it would be.
The money supply will not be growing. The contraction of credit vastly outweighs attempts to expand the money supply, and this would continue to be the case under a negative nominal rates scenario. Negative nominal rates will never go anywhere near low enough to mean low real interest rates.
Low real rates exist when nominal rates and inflation are rough correspondence, where inflation is high or low at the time. In recent years we have seen negative real rates, as nominal rates were low against the backdrop of a rapidly expanding money supply (credit hyperexpansion). Negative real rates helped to precipitate an enormous borrowing spree, for which we now reaping the consequences.
Negative nominal rates would not surprise me, but they will not stop a deflationary tsunami. The force of deflation is such that nominal rates would have to be hugely negative in order to deliver low real rates, and that is not going to happen. Real rates will remain stubbornly high, reflecting risk aversion, and the Fed will still be pushing on a string.
Scepticus (continued),
People would still hold cash and cash equivalents at -3% if they would lose more by holding anything else.
You're forgetting about attitudes. Rates of just -1% would be a huge huge boost and send equities, commodities and house purchases soaring, though not back to pre-2008 levels. Before too long rates would climb back into +ve territory as demand for credit increases.
Now eventually people will realise thats not as easy money as it first appeared, since underlying growth is still -ve long term and then we'll likely have another bout of deleveraging, but eventually, over a period of a decade or two and people have learned their lessons, rates would eventually settle at levels appropriate for real underlying -ve growth.
I never forget about attitudes. Human nature and psychological factors are central to my worldview. Equities and other assets are not going to soar. They are being continually repriced lower, often drastically lower. A slightly negative nominal interest rate is not going to change this, when real rates will still be high and people ability to service debt is falling very quickly thanks to unemployment, the coming cuts to benefits and entitlements, the loss of pensions etc.
These factors add up to a huge negative wealth effect. People do not spend when they feel poorer and when their incomes are not secure. Once this rally is over we will see the full effect of this new prudence. Spending is going to plummet, sending the velocity of money into the deep freeze. There's a reason we have compared deflation to Dante's Ninth Circle of Hell (a frozen lake). Nothing moves.
Deflation does not play out as a slow squeeze. It picks up momentum, gradually at first, and eventually sweeps all before it. That is the nature of destabilizing positive feedback.
Scepticus (continued),
The positive feedback loops that are activated as an era of excess ends are very powerful.
Negative nominal rates would heal that pain by transferring wealth from hoarders to spenders and borrowers. It would change society powerfully for the good over the long term and give a massive boost to money velocity.
Wealth will not be transferred from hoarders to spenders when real rates remain high. Cash will appreciate over relative to goods and services domestically. The incentive will be to hang on to cash as its purchasing power is increasing. Hanging on to it outside the banking system would be incented even more strongly as that would avoid the small penalty. In other words, you would be creating the conditions for a massive bank run.
Bank runs will eventually happen anyway, as there is nowhere near enough cash in the system to repay depositors. They will realize this at some point. The FDIC is putting off the day when they will have to deal the failure of a large institution. Even one such bankruptcy would finish the FDIC, and backstopping it with public funds would precipitate a seizure in the bond market. There is no way out of deflation once the bubble is blown.
Scepticus (continued),
The prudent actions of the individual in paying down debt...
A 300K 30 yr mortgage at 6% means you pay 647,514.00 for your house.
A 300K 30 yr mortgage at 1% means you pay 347,371.20
That debt is suddenly looking a whole lot more affordable!
No debt is going to look affordable very soon. $347,371.20 is going to look like an inconceivably large amount of money in the not too distant future. The very few people who still have any money will be able to buy the same property for an order of magnitude less than that.
Ordinary people are not going to have access to credit, as is already the case in much of the world. The only reason they had access to credit in recent years was that there was a great deal of money to be made in fees for those who made risky mortgages and then sold on the risk to Wall street through securitization. The securitization process is broken. Those who make mortgages in the future will be holding the risk themselves, and they will be extremely risk averse. They will not be lending to people who actually need the money.
Ilargi - "...California's two biggest pension plans lost about a quarter of their value, for a combined loss of almost $100 billion. In one year. That's about 4 times the budget cap..."
They're livin' it up...
Welcome to the Hotel California
Such a lovely place, such a lovely face
They're livin' it up at the Hotel California
What a nice surprise, bring your alibis
-- The Eagles, Hotel California
Nassim said...
We are in the UK right now and have moved our departure date to Melbourne, Australia, from Early 2010 to this October. My better half, although she was in full agreement with me that the future of the UK was rather grim, was not in a hurry at that time... I am sure Australia will have loads of problems but keeping warm in winter should not be one of them.
Good luck on the move, Nassim. I trust you've done your due diligence on what you'll need to get permission from the immigration authorities. In keeping with the "grow your own" theme of this thread, I'd point out that water and soil are two of the problems you allude to.
The Age newspaper in Melbourne has a little box on its front page every day showing how much water is in the dams, and also how much was in the reservoirs at the same time the year before. When I last looked on Tuesday, it was something like 29.6%, compared with 33% last year. And last year was down from he year before. People say "It's a 10-year drought," but I fear it's the new normal.
The soil here is also crap. Too sandy, too salty and too little organic material. It's been too many millions of years since Oz had volcanoes or glaciers -- the hot and cold ways to make good earth.
That said, in my walkabouts around various suburbs, I've seen some tremendous yard gardens put in by old Italian and new Vietnamese immigrants. They do raised-bed vegetable plots, trellises with grapes and figs, and fruit trees in impossibly small spaces. It takes intense soil prep and composting, as mentioned here. Just like it was done in their home countries, even if they don't need to with Safeway, Coles and the greengrocers on every shopping street.
Plus there's enough solidarity within the many ethnic groups (except us Americans, who are relatively rare here) that people have ready-made networks of the type Stoneleigh speaks of. And the Aussie government strikes me as one that's more devoted to the general well-being of its people than the corporate-owned U.S. .gov is. Should there be a big crash, "the Lucky Country" should indeed be that.
That said, I reckon America 2011will be more like Argentina 2001. Not Mad Max, just knocked back by the collapse of the money machine. Is anyone here besides Weaseldog a fan of "Ferfal," the Argentinian urban survivalist blogger? He's not a guns 'n' fortress type, but someone who describes what it's like to live in a society where all of a sudden, the currency was worthless. Ferfal makes for exciting reading, and he's written his own primers on what it was like to live through the crash.
Jim Wrote:
"they think I'm completely insane....they want me to "go see someone" and/or get on some medication."
Don't bother trying to convince them. Its not possible. No matter how strong your arguement is, you will fail. You have as much chance of sucess as teaching a dog to read and write. They simply cannot and will not comprehend your logic.
The only way you can achieve your goal is to go at it alone or find "like" minded people.
A not fun one; from Minnesota, where we have the cleanest government left on the planet-
Plainclothes cop kills unarmed man in bathing suit
crazy.
Stoneleigh,
I wonder if your conversation with Scepticus would make a good primer...
Also, your last comment/response points to a massive bank run triggered by the crash of a bank too big to backstop.
So, what are the conditions under which all regular TAE readers should drain their accounts to beat the run? How about for us Canadian readers?
Ferfal has also written his own book on "modern survival," as he calls it. Mostly centered on self-defense and living in a high-crime environment, he also outlines prudent food storage, wealth management, and general psychological preparedness tips. Self published and non-edited, a bit rough around the edges, but worth reading. Or you can cruise his blog for much of the material.
@Jim (and others interested in growing food): the best book I've ever read on growing vegetables is Steve Solomon's most recent book "Gardening When It Counts: Growing Food in Hard Times," New Society Publishers. Immensely practical book that will be a learning experience for someone at any skill level in gardening. Major insights on watering (or not, as he prefers); fertilizing; soil health; seeds and much more. Example: this book was the first time I saw vegetables classified according to how demanding they are to grow in terms of soil fertility, weed resistance, and water requirements.
Finally, I've been skimming through the scepticus/VK/Stoneleight discussions... his prescription for raising the reserve requirements rang a faint bell for me, and I finally realized where I had heard that before: the film "The Money Masters" (google Money Masters DVD, and you'll find chapters on-line) has a prescription for getting us out of the grip of private banking, and the heart of the monetary reform that the authors of the film propose is to take money creation away from the Fed (returning it to the Treasury), and then use Treasury-issued money to pay off the national debt while raising reserve requirements gradually from nominal 10% (really, zero now) to 100% (end of fractional reserve banking).
Of course, as someone has previously commented this is all angels dancing on a pin, as the political chances of that kind of reform are slim to none. Still, interesting to contemplate.
Jim,
sorry about the family discussion. But you are not alone. I have had the same reception from my family.
you cannot change someones mind. you can only present information and hope the look at it logically. Unfortunately for most people the information that one would present to them essentially discredits their world view, and very few people are willing to assimilate such information without being forced to do so by circumstances.
Anon @ 9:04
"A good woman gives you a sense of perspective and the four horsmen actually come a-knockin' who else would you rather have next to you, your aunt or your loving wife?
Just sayin'"
You don't know my wife...
Just sayin'...
;O)
IMO a lot of people are either retired from/working for the local/state/fedrl gov. Add in the people indirectly employed by these entities and I am sure it is well over 50%. Until retirement benefits are slashed and current employees suffer job/retirement reductions or loss not much is going to happen. People getting, or hoping to get, checks for nothing are not interested in change.
Therefore, the system is most likely doomed. By the time critical mass is reached it will be too late to establish the necessary infrastructure that is required to support a reduced footprint.
There are, of course, many other reasons why resistance towards a self-sustaining community structure is inevitable until AFTER the crash. As I&S have pointed out repeatedly the best time to prepare these communities is BEFORE things get serious. I see little to no evidence of any serious discussion/activity towards a sustainable future.
We are in the eye of the hurricane. Once the CRE/PrimeRE wall hits later this fall it is going to be like setting up a tent in 180mph winds.
This Rome HAS BEEN FALLING FOR AT LEAST 20 YEARS.
Stoneleigh said "The FDIC is putting off the day when they will have to deal the failure of a large institution. Even one such bankruptcy would finish the FDIC, and backstopping it with public funds would precipitate a seizure in the bond market."
Wouldn't that be 'The End'? There is going to be a LOT of angry people if they can't get their money out of the insured banks. The people would be demanding the government print them their dollars that are owed to them.
But if the government printed, then the dollars would be worthless and interest rates would go skyward indicating the bond market dislocation? Am I finally understanding why the government won't print?
Jim, good luck on your transition to growing your own. A couple of sources that might help you out.
The National Sustainable Agricultural Service. (ATTRA)
These folks can give you more information on sustainable agriculture than you could ever use. Check out their website at http://attra.ncat.org/
Another source are the extension services at the land grant universities. Being in MN, I am partial to the University of Minnesota. Their pages provide information on growing and preserving foods as well as many other topics. They can be found at http://www.extension.umn.edu/
Hope you find these sites helpful. If I can be of further assistance, give a shout.
Good Luck!
VK said on 7/17/09 " There's 6.4 trillion dollars in the form of 'Guaranteed deposits' the banking system while there's only 800 billion USD in physical cash.
"
If this is true, I see LOTs of future angry people if they are unable to get their money out of banks. Is there a way to verify these amounts with government charts?
Bluebird
The $800-900B of currency is common knowledge. Of that amount, the government or banks probably could only access 20%. The remainder is in the mattresses of TAE readers.
Angry depositors? USNORTHCOM was begun in 2002 to deal with angry depositors. Shots, hopefully across the bow, will calm them down. And half of southern CO is a KBR constructed Fed detention camp. The people's representatives have also been preparing. Americans are about to get a lesson in representative democracy. The only good news is that what passes for the brains of Rush dittoheads (who aren't in the military or police and thus occupied with shooting their friends and relatives) will probably explode from the cognitive dissonance.
Jim,
I know it’s hard to change someone’s mind when they have so much invested in the current system. I meet denial all the time on TAE subjects.
One of the best ways to change peoples’ minds is to succeed and be happy in your planned life changes. Success is one of the best ways to persuade. So with that I wish you luck.
-Punx
El G @ 3:48,
Well said!
Bluebird,
I copied the following (can't remember from where, probably from an article posted here) months ago and have it posted in the kitchen so everyone is constantly reminded not to use banks:
"Presently, there is roughly $6.84 trillion in bank deposits. $2.60 trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 trillion in bank deposits. Of the $6.84 trillion in bank deposits, the total cash on hand at banks is a mere $273.7 billion." (MISH'S GLOBAL ECONOMIC TREND ANALYSIS)
"There's 6.4 trillion dollars in the form of 'Guaranteed deposits' the banking system while there's only 800 billion USD in physical cash."
That still looks like a lot. In Britain, I remember a few years back the estimate was that just 3% of "money in circulation" was physical cash.
Bank runs will eventually happen anyway, as there is nowhere near enough cash in the system to repay depositors. They will realize this at some point. The FDIC is putting off the day when they will have to deal the failure of a large institution. Even one such bankruptcy would finish the FDIC, and backstopping it with public funds would precipitate a seizure in the bond market. There is no way out of deflation once the bubble is blown.
Ok, now I am not one to cast aspersions on folks that hold the PTB in less than holy stead.
But gimme a break. Fiat money is created at will. This is not the 1930's gold standard banking system we are dealing with. The dollars in circulation can be increased at the will of the pen.
So do, pray tell, and enlighten us as to how a bank must close its doors when the FDIC has a money printing quill in its pocket?
(That was rhetorical, btw).
"...what passes for the brains of Rush dittoheads ... will probably explode from the cognitive dissonance."
I doubt there is enough cranial content there for much of a bang!
(conitive dissonance)... let's see now... I think that's what I experience when I am tending my plants and then run by McDonalds (2 miles away) for an ice cream cone on the same day.
Or is that "keeping one foot in each world" as mentioned above in another post. ;-)
No debt is going to look affordable very soon. $347,371.20 is going to look like an inconceivably large amount of money in the not too distant future. The very few people who still have any money will be able to buy the same property for an order of magnitude less than that.
Right, now in what currency are we talking about?
You realize, of course, that the floating fiat system we have in play is only as valid as the consensus vote of all of the major participating central banks, yes?
So how do we end up with an en-masse devaluation without the buy-in of all major central banks?
Ok, I'll bite - not until at least the buy-*out* of all currency users in the world today? Not gonna happen.
So let's get real, shall we? Where will the herd flock itself? To a barter system? To some supra-national currency? To gold nuggets or dust? Not a chance. The fiat illusion will continue 'til the last bit of food that is available is put up for sale. (Meaning quite awhile yet methinks).
Do we really understand the dynamics in play here? I think strongly we do not...
I wonder how long it would take the Fed to physically print up the money and "give" it to the FDIC. There are logistics involved with special cotton fabrics, inks, etc, not to mention how much can they physically print per day. Someone wrote here that a trillion is a stack of $1000 bills 63 miles high. Since there is no such thing as a $1000 bill, this statement is somewhat suspect. But this would correspond to a stack of hundreds 630 miles high, not compensating for weight compression :-) That's a lot of printing even with the freedom of the press built into the first amendment.
But the bigger question would be - would the Fed print it? This is serious money going to the pissants. They may just tell us to go screw. In theory, it shouldn't cause any inflation, even if inflation were possible, since checking deposits are part of M1 or M2 ( I forget) while currency is definitely M1. So you are not increasing the money supply. But the police state really hates paper currency. Go figure.
Thank you all for the comments, suggestions and support. I guess I should have given a proper introduction before going into a rant - it's just that I needed to express myself where people understood where I was coming from. I knew most of you had probably "been there, done that" and would understand my frustration. As it was a rant, I don't intend to "cut anyone off" or anything stupid. (I'm kind of between fear and depression right now) Of course I didn't expect to change anyone's minds (it would be really strange if they did buy it lock, stock and barrel - that would be as bad as the flat out rejection - no critical thought involved).
I'm 44, have a wife of 14 years. We have 2 children, boy and girl, ages 5 and 8. My wife is actually very supportive, she supports a more minimalistic lifestyle and isn't caught up in consumerism. She understands the basic problems and wants a more simplistic lifestyle, but doesn't quite see the impending catastrophe like I do (she also doesn't read a lot of non-MSM media and blogs, etc. like I do). I know I should probably cut back on it, but it's so fascinating, like living history.
We have no debt except the house, and no real savings other than retirement. My idea is to sell the house while I can still have equity (I figure I have between 70-90K depending on how things shake out) and buy some land (3-5 acres ?!?) and put a trailer on it (I know, I'm crazy, but I really don't want any debt if I can at all help it). When I say "farming" - I mean gardening - or just enough to sustain the 4 of us to begin with (100' x 100' ?!?), but having more land to either support extended family and/or farm for profit. Who knows where this will go. The family is definitely into moving, but want a "farmhouse".
We have been gardening this year (a 4x12 and a 4x6 raised beds - tomatoes, peppers, squash, cucumbers, eggplant) and both our parents have gardened when we were kids, so we have some (little) experience. Also have a few herbs in containers. We started a compost pile too and that had been coming along well (didn't know it needed water until recently). Have been reading also - lots to learn - sometimes fun, sometimes overwhelming. Re: soil - I'm beginning to get it, but as with many things in life, there is so much more to know once you get beyond a basic understanding. Oh yeah, we have some sunflowers too.
We are also members of the CSA and I have been doing a little volunteer work, trying to gain familiarity and experience.
I'm trying to do the "walk the walk" thing. We installed a Geothermal ground loop heat/AC last fall and got off the oil. We're only electricity. I sold my car to offset most of the cost and am biking and loving it!! Sacrifice is no problem for me, in fact I thrive on it. My biggest fear (as you can tell) is food, because (a) I know that I have no idea how I could provide for myself and family if push came to shove, and (b) I can basically do without all the other stuff, even heat, if I *had* to. Also have barrels and jugs for about 180 gallons of water, but no appreciable food storage yet.
Re: transition towns - have heard of them and looked at a little, beed to revisit. Like so many others, I realize community is very important, but don't know where to start. I'm not much of a leader or even converser, I'm more of a "put your head down and work" kinda huy, but I'm trying to get my wife to lead in the department :)
Re: Crash course, I think that's a great idea and what I intend to do, but I haven't made it thru the whole thing yet and wanted to do that before I reommend it to others.
Again thanks all....
Jim
Jim you seem like a normal guy then, somehow you came accross as a single 30-year old in your first post.
In this light you should do what you have to do. If the situation starts getting worse many people will turn around and you will look like a genius.
On the other hand, and I am in this camp, I don't belive in apocalypse. And neither does 99.99% of the population. All this blog gives you is some kind of prediction of possible problems. But if you're gonna just blindly accept some 'vision of the future' from some internet blog, you're stepping into Jonestown territory.
You have a wife and a family, take care of them and stay vigilant. Don't let others do the thinking for you and at the same time don't think for other members of your family.
El G,
I'm wondering what makes you think a $1000 bill would need to be 10 times as long, wide or thick as a $100 bill.
A 4:54
"Do we really understand the dynamics in play here? I think strongly we do not..."
I would tend to (strongly) agree in your case.
Deflation and and devaluation are not the same thing.
"So do, pray tell, and enlighten us as to how a bank must close its doors when the FDIC has a money printing quill in its pocket?"
(1) The FDIC does not print, issue or will into existence any 'money'.
(2) The global demand for U.S. treasury bonds would collapse in a NY minute, like the WTC in fact, if any entity within the U.S. government started flooding the 'market place' with phoney phunny muny.
(3) No body really even knows how much of the government 'failout' TARP funds have been 'used' or even where they have been 'used' but general estimates are that maybe 10-20% of the $700 billion has even been shoveled out the federal door.
That means that even when the Federales committed to essentially pulling $700 billion out of their sorry ass and giving it away to corrupt banks, they couldn't even do that.
The $700 TARP funds are close enough to being considered "printed" because they are only really backed by the lame ass I-O-Me's of future tax receipts.
The I-O-Me's are as good as 3-ply super fluffy toilet paper, just like the dollar itself will be if you 'just print the money you need.'
The U.S. dollar will be judged by the global bond market, not by the slackalicious wet dreams of Duhmericans 'wishing upon a star' that they can just give people (they actually owe real debts to) Monopoly Money.
Get real dude.
Cousin Bumpy
Greatdogs, and Jim- "Being in MN, I am partial to the University of Minnesota. Their pages provide information on growing and preserving foods as well as many other topics. "
Um. As someone long familiar with the U of M- and others; let me say that I make my living doing things that they, and the U of M specifically still say are impossible. Not just one or two things; like 15 or 20.
So do keep some grains of salt handy.
Ilargi
"El G,
I'm wondering what makes you think a $1000 bill would need to be 10 times as long, wide or thick as a $100 bill."
Well, I don't. But I figure you would need ten times as many to make a trillion dollars.
News from 1930 Blog
Tuesday, July 22, 1930: Dow 229.29 -7.36 (3.1%)
Editorial: Federal expenditures have gone from about $300M to $4.8B in less than 50 years; state and local expenditures have likewise enormously increased since the war. Much of this is used for vital services including schools, water systems, roads, etc, but not all of it is justified on the basis of results. For example, $250M so far has been spent on the Farm Board, "and the result has been like pouring water through a sieve;" yet one senator wants to give it a billion. "Herein is the fault of legislative bodies in ordering public expenditures. They do not have to make the budget balance and care little about the responsibility on those who have that delightful task."
Pennsylvania oil producers agree to cut oil production 30%. "This makes strange reading for very old-timers recall that as far back as 50 years or more ago the majority believed the oil reserves of Western Pennsylvania would be exhausted in a few years."
Ilargi covers so much material that it's really hard to keep up sometimes but I just saw this today:
USPS May Be Unable to Make Payroll in October and Retiree Health Plan Costs, Unions Letter to White House Says
Apologies if it was posted in another TAE daily.
This train continues down the same track at ever increasing velocity. I'm now really worried about October, the "witching" month, on Wall Street.
Another interesting tid bit, they were trying to extract oil from shale in Nova Scotia:
Torbanite Products, Ltd. opens Nova Scotia plant to extract oil from oil shale. First Canadian plant to attempt this; to exploit huge deposits of oil shale throughout Nova Scotia. Oil shale rocks are heated to 800 deg. F. in airtight retort; hydrocarbon gases are then cooled and condensed to oil. Plant handles 50 tons/day; average yield is 1 to 1.5 barrels/ton.
1930 news blog
I guess this was before the banks started to go under in the 1930s.
Governor R.A. Young of Fed. Reserve Bd. warns banks to be careful about the increasing amount of loans against securities. About the crash last fall, says: “there is food for serious thought in the fact that, under our excellent banking system ... we nevertheless came to the brink of a collapse, had to resort to heroic action to prevent a panic, and were not able to avoid ... severe liquidation and what appears to be a business depression. Is this unavoidable? Is it necessary for this country to go through periods of reckless exuberance, accompanied by enormous credit expansion and fantastic levels of money rates that profoundly disturb the financial structure not only here but all over the world?” The cost of these episodes is paid in unemployment and worldwide depression. Reminds banks that security loans are safe only if a liquid market exists for the security; large scale sales can cause a drop in value, “and there is no telling when such a drop may terminate and what catastrophe may follow ...” Calls on banks not to assume Fed will always be able to help them, since its resources are “not inexhaustible.”
Says Ontario is heading in the same direction as California
http://www.sprott.com/Docs/InvestorsDigest/2009/07_24_2009.pdf
While there, read this too (I'm not sure if it was already posted, but it derides completely the green shoots theories)
http://www.sprott.com/Docs/MarketsataGlance/July_2009.pdf
@Ilargi
I would tend to (strongly) agree in your case.
Amlost took this to be a potential entre to an idea exchange. But experience decides in lieue of Ilargi's ego. It's a puerile perjorative, of course. Par for the course. The low road as always.
I hope Scepticus sticks around so we can raise the bar.
@Jim
CSA? You're not in Carlisle are your?
timekeeper... interesting...
"Oil shale rocks are heated to 800 deg. F. in airtight retort; hydrocarbon gases are then cooled and condensed to oil. Plant handles 50 tons/day; average yield is 1 to 1.5 barrels/ton."
Let's see, 1.25 x 50 = 63 bbs/day
That's the residual, after--heating 50 tons of shale rocks to 800 deg. in addition to cooling the hydrocarbons and condensing them to "oil" (kerogen I suspect).
Sounds like a poor EROEI process.
@ Bluebird
Here is the chart showing money supply uptil 2007, it's 14 trillion now and you can see the tiny green sliver being the physical money supply. About 800 billion dollars worth.
http://en.wikipedia.org/wiki/File:Components_of_the_United_States_money_supply2.svg
Vault Cash in the US is around 49-53 Bn at any given time. That means if even 0.8% of the money is withdrawn and people want more, the game is over - bank runs begin immediately.
Also I would assume atleast 25% of those physical dollars are found abroad so that leaves 600 bn in the US. That amounts to 2000 dollars per person in the US.
Greenpa,
As someone long familiar with the U of M- and others; let me say that I make my living doing things that they, and the U of M specifically still say are impossible. Not just one or two things; like 15 or 20.
I'd be interested to hear more :)
Devaluation is different than deflation. The rationality of a deflationary decline is not doubted by me. I read about how the Chinese may be doing this or that with a slow $ debt divestment strategy.
But emotions are another thing. What happens if the world dumps the $ sooner than later by accident? You would be talking devaluation and loss of reserve status and price increases at best.
Speaking of USD supplies let's not forget the 103 US dollars I have stashed in a coffee can up here in Canada. How much US cash is stashed( out of banking system) around the world?
Somehow I think quite a lot.Perhaps equal if not more that in the US vault?
Don't look now, but it appears as though racial conflict is brewing in Texas:
http://www.msnbc.msn.com/id/32043402/ns/us_news-race_and_ethnicity/
el g - we almost bought a sailboat this summer. It is part of my long-term survival plan to be able to escape to an island doomstead around here somewhere and to be able to access seafood. I also think we'll be relying on sail power a lot more in a future of oil scarcity. However, we have a bun in the oven at the moment, and I figure one project at a time so we'll wait till next year. Are you giving up the boat along with the truck? Does it have a diesel engine, too?
Ian
I've posted some Sprott things through time, he's interesting. Apparently, he's also a former classmate of Stoneleigh's.
Recommended reading, a 10,000 word essay on, "Peak Civilization": The Fall of the Roman Empire
http://europe.theoildrum.com/node/5528
Anonymous said...
@Ilargi
I would tend to (strongly) agree in your case.
Amlost took this to be a potential entre to an idea exchange. But experience decides in lieue of Ilargi's ego. It's a puerile perjorative, of course. Par for the course. The low road as always.
I suggest you scroll back to the tone of the original comment. Why expect to receive politeness if you don't give any? There's no-one in the entire world who I give the right to talk about Stoneleigh that way. It's not that hard.
Eric Sprott wasn't actually a classmate. We went to the same university, but not at the same time. He's quite a bit older than I am. The business school there is named after him since he gave them a huge donation during the tech wreck, when it certainly paid to be bearish.
Jim,
Oh, I know your pain. I'm about the same age as you – and kids the same age as you plus a 3 year old. Everyone I talk to knows only one thing about the economy. There is a peak, contraction, trough, and expansion. That’s it. The cycle never ends. Nothing more to know or understand.
I work for a bank that received TARP funds ... and I'm telling you NOTHING is moving. Nothing securitized, no syndicated loans for sale .. nothing.
I am a part of the FAS 157 team. Mark to market turned into mark to anything. The bank reminds me of the occasional story of some loser that freezes his grandma in a freezer in the basement in order to keep collecting income from social security.
Sorry going anonymous on this one. -Cleveland
Stoneleigh- "I'd be interested to hear more :)"
Hm! That would result in my unmasking! :-)
Which might eventually be possible, in another venue- two of my closest friends in the world are about to move from Minneapolis to Toronto; in which case I'll certainly be up to see them, and we might get together. That would be great.
One non hazardous example; the UofM information on growing Christmas trees commercially in Minnesota state that it's difficult/impossible, and not profitable in any case, to grow balsam fir in my corner of the state. Among the 8 species I've tried, it grows the fastest of any, with the least amount of work. By far. I found this out as I was leaving the business, of course.
Greenpa,
If you do get up to Toronto, by all means drop me a line. I'm down there sometimes for work, though home is in eastern Ontario. It would be great to meet you :)
Here is a link to another interesting text cited in the comments on the TOD article about the fall of Rome. It seemed highly appropriate for this site's purpose and its readership:
Secular Cycles
Many historical processes exhibit recurrent patterns of change. Century-long periods of population expansion come before long periods of stagnation and decline; the dynamics of prices mirror population oscillations; and states go through strong expansionist phases followed by periods of state failure, endemic sociopolitical instability, and territorial loss. Peter Turchin and Sergey Nefedov explore the dynamics and causal connections between such demographic, economic, and political variables in agrarian societies and offer detailed explanations for these long-term oscillations—what the authors call secular cycles.
Secular Cycles elaborates and expands upon the demographic-structural theory, first advanced by Jack Goldstone, which provides an explanation of long-term oscillations. This book tests that theory’s specific and quantitative predictions by tracing the dynamics of population numbers, prices and real wages, elite numbers and incomes, state finances, and sociopolitical instability. Turchin and Nefedov study societies in England, France, and Russia during the medieval and early modern periods, and look back at the Roman Republic and Empire. Incorporating theoretical and quantitative history, the authors examine a specific model of historical change, and more generally, investigate the utility of the dynamical systems approach in historical applications.
An indispensable and groundbreaking resource for a wide variety of social scientists, Secular Cycles will interest practitioners of economic history, historical sociology, complexity studies, and demography.
Jim's plans seem basically OK, but he needs to store much more water by at least a factor of ten.
Dr. J
I think the Lydia is a bit small for your needs. She is a Cape Dory Typhoon Weekender 19' sloop with a cuddy cabin and full keel with 950 pounds of cast iron ballast. She can only handle a maximum of four adults in the cockpit, and that is pushing it. Fossil fuel power is provided by a 3.5 hp Tohatsu which weighs all of 13 kg and has a one liter fuel tank Her hull speed is about 5.2 knots and the Tohatsu could do that on a windless day at about 2/3 throttle.
She was tentatively sold to a guy who summers in upstate NY but on the condition that I turn her over on a trailer for a short but mountainous trip to the east end. But I had the trailer parked near the mangroves and the rats stole all the tires, wheels, and 3 of the four spindle bearing hubs. Breaking free of the mooring was the last straw. I had two friends help me get her out. One was pulling backwards with a 15 hp dingy, the second was tipping the keel up by hanging on the main halyard, and I had my back under the bow pushing. It's still sore. After that escape attempt, I told Lydia that I wanted a divorce and sold her to my best friend here today for a dollar. She had become a distraction to my self-ejection. Talk about price deflation :-) (Sorry Ilargi)
As for a sailing doomship, you really must check out Orlov's essay on this. The New Age of Sail. He built one and lives on it full time in a MA slip.
http://docs.google.com/View?docid=dtxqwqr_23grsfpp
Here are three quotes from it:
"It's easy to be green!" says Kermit the frog in an SUV commercial; I would beg to differ, but then who am I to disagree with a hand-puppet?
It is to be expected that we will run out of fossil fuels before we run out of optimists, who are, along with fools and madmen, a renewable resource.
An inboard diesel is available as an option for those who enjoy unnecessary expense, water and oil in the bilge, dragging a propeller when under sail, and soot.
El Gal- cute comments from Orlov.
I disagree about fools being "renewable", however!
http://littlebloginthebigwoods.blogspot.com/2008/02/peak-patsies-is-here.html
el g - thanks for the Orlov piece - looks interesting. I had reached the conclusion awhile back that a sailboat was going to be part of my survival plan. I found a fairly new steel-hulled junk-rigged boat near here for a really reasonable price but we were in the middle of selling the house and we didn't have moorage at the time so I missed it. In the process, however, I figured that junk rigging might be the best for the long haul as it appears to work with far less reliance on high-performance fabrics. And a bullet-proof hull seems to be a good idea, too. Being a diesel afficionado, I am amused by Orlov's take on that.
anyone see this?
http://www.marketwatch.com/story/schultz-paints-bleak-picture-of-future?siteid=rss&rss=1
In its current issue, HSL reports rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
El Gallinazo,
While the US Gov no longer prints large demonination bills there was a time... (the large bills are worth a peek).
http://en.wikipedia.org/wiki/Large_denominations_of_United_States_currency
Brimstone
When you read the full article carefully, the prediction becomes less compelling.
EBrown
Nice touch that Woodrow Wilson, who sold out his fellow Americans in 1914 to the European Banking Cartel by signing the Federal Reserve Act, is pictured on the big one, $100,000, redeemable in gold. He should have a 30 pieces of silver certificate.
elgallinazo,
i didnt suggest the prediction was bullet proof, but is concerning to me given that i know a few currency traders who say they are seeing moves that would match this being made
And we should get the mint started on an Obama "Google" bill with his face on it.
Used by the government and granted without any noticable rhyme or reason. The receiving bank can declare itself saved forever more, and begin proselytizing to other financial institutions about the evils former life.
Brimstone
I think it is quite possible that it will happen in the time frame suggested. But after reading the full article, I just don't think I would want to tie my bungee cord to Harry Schutze before jumping off the bridge. But it will happen eventually. Time to keep stuffing our mattresses and deep sixing the plastic. Since we obviously are no longer on the gold standard as we were in 1935, I wonder if they will outlaw gold coins and bullion. Maybe I will try to rediscover the secret of the Sierra Madre.
EBrown
Not to be pedantic, but that would be an Obama googol Federal Reserve Note.
The final nail in the coffin for the UK:
http://business.timesonline.co.uk/tol/business/
industry_sectors/leisure/article6722488.ece
I have no problem with pedantry as I sometimes am susceptible to it. I note your correction and will not make that error ever again. It would help if I bothered to proof-read my post prior to hitting send since the last sentence is poorly constructed too, though the meaning probably shines through for anyone of moderate IQ.
Dr. J @ 9:24
A junk rig would be an excellent choice for a doomship. They can be made from inexpensive, easily available materials, such as plastic tarps. They are very easy to sail short handed, and they don't require heavily loaded, high strength components. I made a few of these sails out of plastic drop cloths, for a small boat, as a test and I was quite impressed. The disadvantage is that they don't point as well as a Marconi rig. This can be helped by cutting the sail with some draft forward.
Sometimes they get put on clunky hulls. You might talk to other owners of designs you consider.
Two indispensable resources if you plan to make your own:
The Chinese Sailing Rig by Derek Van Loan and Practical Junk Rig by H. G. Hasler and J. K McLeod.
New post up.
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