Thursday, August 20, 2009

August 20 2009: Seemingly, contradictory, economy


National Photo Co. Swim into the future waves June 17, 1922
Iola Swinnerton and Anna Neibel, winners of a beauty contest at Washington's Tidal Bathing Beach


Ilargi: You’ll have to stick with me for a bit on this one, guys, I'm about to bombard you with stats. It seems the best, or even the only, way to share with you what I started thinking about when I read a whole bunch of seemingly contradictory articles earlier today. Here's a tale of three countries:



Britain
U.K. Has Largest July Deficit on Record as Tax Revenues Collapse
  • Britain had an £ 8 billion ($13.2 billion) budget deficit in July, the largest for the month since records began [..] The shortfall compared with a surplus of £ 5.2 billion a year earlier, the Office for National Statistics said in London today. The median of 16 forecasts in a Bloomberg survey was for a £600 million deficit.
  • The U.K. deficit this year will touch 11.6 percent of gross domestic product, second only to the U.S. gap of 13.5 percent, the IMF estimates. Next year, the deficit may total 13.3 percent of GDP, almost double the 7.7 percent peak in the 1993-94 fiscal year [..]
  • Government receipts dropped 15 percent in July from a year earlier, the steepest decline since records began in 1998. Cash receipts from corporate profits falling 38% and value- added tax declining 34%. Income tax payments dropped 15 percent [..] Spending rose 7.5 percent, with net spending on social benefits climbing 10 percent after unemployment climbed to a 14- year high.
  • For the first four months of the fiscal year that began in April, the deficit was £49.8 billion, compared with £15.9 billion a year earlier.
  • Including the liabilities of banks now controlled by the government, such as Bradford & Bingley Plc and Northern Rock Plc, Britain had £800.8 billion of debt in July, or 56.8 percent of GDP. That's the biggest debt burden since 1974-75. In 1976, the U.K. sought an emergency loan from the International Monetary Fund.
  • A cash method of accounting, known as the public sector net cash requirement, showed a deficit of £200 million, the first shortfall for a July since 1995. Economists had expected a £5.6 billion-pound surplus.




Germany
Budget Gaps Widen in U.K., Germany
  • The recession has left even deeper scares in Germany, where the government forecasts gross domestic product contracting by 6% in 2009.
  • During the first seven months of the year, German tax receipts were 5.2% lower than the year-earlier period, while federal government tax receipts were 2% lower during the same period.
  • One of the hardest-hit categories has been the intake from corporate taxes, tumbling 57.9% during the first seven months from a year earlier, while income-tax revenue was down 4.4% in the January-July period on a yearly basis. The government has forecast a widening budget gap, with the countrywide deficit seen coming in at 4% of GDP this year and at 6% of GDP in 2010 [..]




US
Mounting joblessness fuels US housing crisis
  • The percentage of loans that were in foreclosure or at least one payment past due rose to 13.16 per cent, the highest increase since the MBA began keeping records in 1972 and a jump of more than a percentage point since the first quarter.
  • ... signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis that may not be easily addressed by government loan modification programs[..]
  • ... many of the foreclosures involved homes that were vacant, borrowers who no longer had jobs, or loans where there was fraud involved. As a result, said Mr Brinkmann, "it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves."


US July jobless claims in surprise rise
  • There were 576,000 initial jobless claims filed in the week ended Aug. 15, up from a revised 561,000 the previous week [..]
  • The 4-week moving average of initial claims was 570,000, up 4,250 from the previous week [..]
  • 6,241,000 people filed continuing claims in the week ended August 8, the most recent data available. That's up 2,000 from the preceding week's revised 6,239,000 claims.


Number Of Poor In U.S. Likely Increased By 1.5 Million Last Year
  • The official poverty level is now $21,203 for a family of four, and $13,540 for a family of two[..]
  • The ranks of poor and uninsured Americans are likely increasing – with more than 38.8 million believed to be in poverty.
  • [..] a "statistically significant" increase in the poverty rate, to at least 12.7 percent. That would represent a jump of more than 1.5 million poor people compared with the previous year.
  • [..] the census figures released next month could possibly understate the actual number of poor people, since the poverty rate is a lagging indicator that tends to accelerate over time.
  • [..] [Blank] estimated earlier this year that poverty could eventually hit 14.8 percent or more if unemployment reaches 10 percent as some analysts predict – or nearly one out of every seven Americans.




Ilargi: Pretty bad, right? Suits jumping from windows and all that, pretty teenage girls having sex for stale old bread, and 3 year-olds eating shoesoles. That's what I thought, too, until the next series of articles on the same three countries set me straight. What was I thinking?




Britain
City taken by surprise as Bank of England’s figures herald end of recession
  • Britain has emerged from the worst recession since the Second World War, new Bank of England figures suggested yesterday. Detailed forecasts published by the Bank showed that gross domestic product (GDP) will rise by 0.2 per cent between July and September, marking the first economic expansion since the first three months of last year. The Bank expects the economy to continue to expand in the fourth quarter, by 0.4 per cent, and sustain the recovery throughout next year.
  • The Bank expects the economy to grow by 2.2 per cent next year [..]
  • The economy has been shrinking for the past 15 months and is believed to have contracted by as much as 5.6 per cent over that time.
  • Separately, there was upbeat news from Britain’s beleaguered manufacturing sector yesterday. A survey showed that optimism at factories rose to its highest level in more than a year. The gauge of those expecting a rise in output rose to -5 in August, up from -14 in July [..]




Germany
Germany Is Bound for Recovery, Bundesbank Says
  • The news should cheer the German government, which is coping with rising fiscal strains as it struggles to limit damages of the global economic downturn. To date, the government has projected a 6% drop in GDP this year. The government also has forecast a widening budget gap, with the countrywide deficit seen coming in at 4% of GDP this year and at 6% of GDP in 2010 [..]




US
U.S. Leading Economic Indicators Index Rose 0.6 Percent in July
  • The biggest lift came from a positive spread between long- and short-term interest rates, followed by drops in jobless claims, a longer factory workweek, rising industrial supplier deliveries, stock prices and orders for capital goods.
  • The factory workweek rose to 39.8 hours in July, the highest since January, from 39.5 in June [..]
  • The S&P 500 has soared 48% since March 9 [..]
  • The Conference Board’s index of coincident indicators, a gauge of current economic activity, was unchanged after falling 0.4 percent the prior month. The National Bureau of Economic Research, the arbiter of when recessions begin and end, follows this index to help it time downturns. The index tracks payrolls, incomes, sales and production. The gauge of lagging indicators fell 0.3 percent following a 0.7 percent decrease in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

    Economists surveyed by Bloomberg this month said the economy will grow at an average 2.1 percent pace in the second half of this year after contracting over the previous 12 months. The anticipated expansion won’t be enough to prevent the unemployment rate from reaching 10 percent for the first time since 1983,

White House to Cut Deficit Estimate for 2009 to $1.58 Trillion
  • President Barack Obama’s budget office will announce the government’s deficit for 2009 will total $1.58 trillion, about $262 billion less than forecast in May, according to an administration official. The White House’s biannual budget review set for release next week will show the outlook for the fiscal year ending Sept. 30 improved primarily because of reduced costs associated with the stabilizing economy. That has allowed the administration to scrap a $250 billion contingency plan to aid the financial industry, the official said. The reduced deficit is also attributable to fewer bank failures than anticipated, which meant spending at the Federal Deposit Insurance Corp. will be $78 billion less than forecast [..]
  • The Obama administration had previously pegged this year’s shortfall at $1.84 trillion and next year’s deficit at $1.26 trillion. Tax revenue this year will total $2.074 trillion, the official said, which would be down 18 percent from last year, a reflection of the slow economy. Spending will grow to $3.653 trillion, which would be up almost 23 percent from 2008.


Ilargi: I'm sure by now you see at least part of what I was thinking this morning. That is, "The Economy", as it is reflected in GDP numbers, has nothing at all to do with what goes on in people's lives, or in the "Real Economy" for that matter.
  • Close to 40 million Americans live below the poverty line.
  • Close to 40 million Americans live in a home that's in a stage of foreclosure.
  • Foreclosures are busy leaving behind a country with so many empty spaces it looks like a smart bomb went through it.
  • Mortgage delinquencies and defaults are setting new records every time, can't miss, anyone cares to count. And the leading cause is no longer crap loans; it's lost jobs.
  • Jobless claims are rising in the midst of summer, not exactly a time to fire anyone, and unemployment numbers are by now severely skewed to begin with, for reasons hardly anybody cares to address. Continued claims are going up, even as an estimated 500,000 people per month fall off any and all extended benefit wagons so far invented.
  • Which takes us right back to the first point: the poverty line.

But none of that matters when we measure a recovery. Two things that do matter, apart from rate spreads, which are at least partly contested, and falling jobless claims, which are about wholly contested, are:
  1. A longer workweek. Yeah, sure, clunkers and stuff, a few more cars made and sold. It's turning more into Cash for Flunkers today, if you care to pay attention. But if you work longer, does that give anyone a job?
  2. The rise in the stock markets. No serious GDP or economy measure should ever be based on a yardstick that can drop 20%-30%-50% overnight. How could that ever be considered more important for an economy than what happens to the people living in, and dependent on, that economy? It's something that might work in "smoothly running" times, but certainly not now. Now, it's far too volatile an item to measure anything by.


And look through all those stats. Maybe it's just me, but I think all this is insane. If you get to measure things using whatever you think is best to come up with a positive outcome, how can you lose? If you're talking about confidence indices and the like, of course they'll go up at the first sign of life. Most people answering those surveys depend on positive news for their livelihood, their status, their self-esteem. Give them anything and they'll run with it.

But that's not the way to gauge how your economy, your community, and your country are doing. Still, they all do it, as you've seen. Britain dives so deep into debt they'll be lucky to ever climb out. But their central bank comes with great news. How, why? Well, you have to look at how GDP is calculated. And if you do, you will find that debt doesn't seem to affect GDP. That is, not negatively. It does influence GDP, but 180 degrees different from the way you would think it does. In fact, not only does increased government spending (i.e. more debt, larger deficit) not hurt GDP numbers, it actually boosts them, if and when the amount borrowed is spent into the economy.

Anyway, the idea is clear by now, I'm sure. We are all incessantly being subjected to number games that don’t add up, not even close. And that's how you get a recovery.

Which has relevance to your own personal life only if you're not being thrown out of your home, or being fired from your job, or losing your extended benefits, or applying for foodstamps, or have recently found out, or are about to, that someone in your family has a medical condition that you have no insurance for (yeah, right, what are the odds?), or have a kid you’d like to send to college, or have a mortgage that's about to reset, or, or, or.

Or any of another brazillion options you have for seriously screwing up your financial situation. It doesn't matter, GDP has a life of its own in a parallel universe. Hardly of the options above have any discernible negative influence whatsoever on the GDP, while a very comfortable majority of them provide a wonderfully positive boost.

To put it more blandly: the more miserable you are, the better off the rest of us. So say the numbers. And if you'd just keep listening instead of going back all the time to those dumpsters you've been hanging out in lately, you'd come to see you are better off too.









Mounting joblessness fuels US housing crisis
More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday. The percentage of loans that were in foreclosure or at least one payment past due rose to 13.16 per cent, the highest increase since the MBA began keeping records in 1972 and a jump of more than a percentage point since the first quarter.

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis that may not be easily addressed by government loan modification programmes. While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase. Prime fixed-rate loans accounted for one in three foreclosure starts at the end of the second quarter. A year ago they accounted for one in five.

"There has been a shift in the problem from one driven by the types of loans to one driven by macro problems in the economy and drops in house prices," said Mr Brinkmann. Florida continued to be the worst state in the union for mortgage performance, closely followed by Nevada. Florida has 12 per cent of its mortgages in some stage of foreclosure – the highest in the country – while 23 per cent of the Florida mortgage market is at least one payment overdue. This is almost twice the national average if Florida’s performance is excluded. The next highest states were Nevada at 21.3 per cent of loans at least one payment past due, Arizona at 16.3 per cent and Michigan at 15.3 per cent.

The new figures come as mortgage lenders and servicers, which collect home loan payments, begin implementing President Barack Obama’s housing market rescue plan. The second quarter saw 38 mortgage servicers modifying home loan terms under the programme, sending out more than 400,000 modification offers and beginning 230,000 trial modifications. While these programmes have had an impact on holding foreclosure rates below where they would otherwise be, Mr Brinkmann said many of the foreclosures involved homes that were vacant, borrowers who no longer had jobs, or loans where there was fraud involved. As a result, said Mr Brinkmann, "it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves." Mr Brinkmann expects the peak in foreclosures to lag the peak in unemployment by around 6 months.




US July jobless claims in surprise rise
The number of Americans filing for initial unemployment insurance rose last week, the government said Thursday, surprising economists. There were 576,000 initial jobless claims filed in the week ended Aug. 15, up from a revised 561,000 the previous week, the Labor Department said in a weekly report. A consensus estimate of economists surveyed by Briefing.com expected only 550,000 new claims. "It's not not all that surprising to see claims bounce back," said Mark Vitner, economist at Wells Fargo. "The labor market continues to face a lot of stress." The 4-week moving average of initial claims was 570,000, up 4,250 from the previous week's revised average of 565,750.

Continuing claims: The government said 6,241,000 people filed continuing claims in the week ended August 8, the most recent data available. That's up 2,000 from the preceding week's revised 6,239,000 claims. The 4-week moving average for ongoing claims fell to 6,266,000 from the preceding week's revised average of 6,268,500. The initial claims number identifies those filing for their first week of unemployment benefits. Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks. The figures do not include those who have moved to state or federal extensions, nor people whose benefits have expired.

State-by-state data: Two states reported initial claims fell by more than 1,000 in the week ended July 11, the most recent data available. Claims in California fell by 5,635, and Michigan's dipped by 1,490. Ten states reported claims increased by more than 1,000. Tennessee reported the most new claims, at 2,525, which the state said was due to layoffs in the transportation equipment, industrial machinery, rubber/plastics and service industries.

Outlook: Vitner said he expects initial claims will rise back up to 600,000 a week. "I don't know that we'll get back to the highs, but we'll start approaching them again," he said. As companies continue to feel the crunch of the recession, they will be slow to hire again, but the mass layoffs seen in January and February have eased, Vitner noted. "They'll simply not be replacing people people who are leaving jobs to retire, raise a family or go back to school," Vitner said. "They're holding off on every cost for as long as they can."




Number Of Poor In U.S. Likely Increased By 1.5 Million Last Year
The ranks of poor and uninsured Americans are likely increasing – with more than 38.8 million believed to be in poverty. Rebecca Blank, the Commerce Department's undersecretary of economic affairs, spoke to The Associated Press in advance of next month's closely watched release of 2008 census data. Noting the figures are not yet final, Blank said the numbers likely will show a "statistically significant" increase in the poverty rate, to at least 12.7 percent. That would represent a jump of more than 1.5 million poor people compared with the previous year. "There's no question that 2008 economically was a much worse year than 2007," she said Wednesday. "The question is how much and how bad."

The number of uninsured is also expected to increase notably due largely to rising unemployment and the erosion of private coverage paid for by employers and individuals, but Blank declined to say by how much. In 2007, the number of uninsured fell by more than 1 million mostly because government programs such as Medicaid for the poor picked up the slack. The census figures, set to be released Sept. 10, could have important ramifications as Congress returns from its August recess to debate health care reform, its cost and the ways to pay for it. Republicans also have traditionally pointed to the intractable poverty rate as a sign that government programs for the poor do not work, a claim likely to be repeated often in light of the federal stimulus package.

In a 30-minute interview, Blank said the census figures released next month could possibly understate the actual number of poor people, since the poverty rate is a lagging indicator that tends to accelerate over time. As a result, the 2008 data could prove to be the tip of the iceberg, with more significant declines reflected in 2009 figures that will be released next year. Blank, a former co-director of the National Poverty Center at the University of Michigan, estimated earlier this year that poverty could eventually hit 14.8 percent or more if unemployment reaches 10 percent as some analysts predict – or nearly one out of every seven Americans.

Based on 2007 figures, the poverty rate currently stands at 12.5 percent, or 37.3 million, largely unchanged from recent years. The official poverty level is now $21,203 for a family of four, and $13,540 for a family of two, based on a calculation that includes only cash income before deductions for taxes. It excludes capital gains and it does not take into account accumulated wealth or assets, such as a home. On Wednesday, Blank said she was working with the Census Bureau to provide better measures of poverty. Such alternative measures, which will be released sometime after Sept. 10, will seek to better incorporate added costs of health care, child care, housing and transportation, but also noncash income from the stimulus and other government programs, such as tax credits and food stamps.




U.K. Has Largest July Deficit on Record as Tax Revenues Collapse
Britain had an £ 8 billion ($13.2 billion) budget deficit in July, the largest for the month since records began in 1993, as the economic recession ravaged tax revenue and the cost of unemployment benefits surged. The shortfall compared with a surplus of £ 5.2 billion a year earlier, the Office for National Statistics said in London today. The median of 16 forecasts in a Bloomberg survey was for a £600 million deficit. Britain last had a deficit in July in 1996.

The U.K. will have the biggest deficit in the Group of 20 next year, when Prime Minister Gordon Brown faces reelection, according to the International Monetary Fund. Brown is urging G- 20 leaders to keep up a coordinated fiscal stimulus until a world economic recovery is more certain. The Conservative opposition says spending cuts and possible tax increases are needed to bring down debt. ``The next few years will be characterized by severe fiscal austerity,'' David Page, an economist at Investec Securities, said before the report.

The U.K. deficit this year will touch 11.6 percent of gross domestic product, second only to the U.S. gap of 13.5 percent, the IMF estimates. Next year, the deficit may total 13.3 percent of GDP, almost double the 7.7 percent peak in the 1993-94 fiscal year under Conservative Prime Minister John Major. July is the second of the four months in the fiscal year when the Treasury receives the biggest tax payments. This year, the recession weighed on corporation tax receipts while a surge in the jobless count increased Treasury spending.

Government receipts dropped 15 percent in July from a year earlier, the steepest decline since records began in 1998. Cash receipts from corporate profits falling 38 percent and value- added tax declining 34 percent. Income tax payments dropped 15 percent, reflecting slower wage growth and job cuts at banks including Citigroup Inc. and Royal Bank of Scotland Group Plc. Spending rose 7.5 percent, with net spending on social benefits climbing 10 percent after unemployment climbed to a 14- year high. Net investment rose 10 percent to £2.9 billion as the government brought forward projects to help the economy.

For the first four months of the fiscal year that began in April, the deficit was £49.8 billion, compared with £15.9 billion a year earlier. The Treasury in April forecast a deficit of £175 billion in the year, or 12.4 percent of gross domestic product. To cover the gap, the government said it expects to sell an unprecedented £220 billion of debt, prompting Standard & Poor's to warn that Britain may lose its AAA credit rating. Including the liabilities of banks now controlled by the government, such as Bradford & Bingley Plc and Northern Rock Plc, Britain had £800.8 billion of debt in July, or 56.8 percent of GDP. That's the biggest debt burden since 1974-75. In 1976, the U.K. sought an emergency loan from the International Monetary Fund.

A cash method of accounting, known as the public sector net cash requirement, showed a deficit of £200 million, the first shortfall for a July since 1995. Economists had expected a £5.6 billion-pound surplus. With Labour trailing behind the Conservatives 10 months before the general election deadline, Brown has sought to draw dividing lines between continued investment under his government and Conservative cuts. Economists say spending restraint and higher taxes are inevitable, whichever party wins. Britain has been hit hard by the loss of tax revenue from financial firms and the housing market, which together accounted for half of the increase in total government income from 2002 to 2008. The Treasury predicted in April that debt will double to £1.4 trillion by 2010, the current value of U.K. economic output.




Budget Gaps Widen in U.K., Germany
The German and U.K. governments on Thursday became the latest to reveal growing fiscal strains as they struggled to limit damages of the economic downturn. Rising social outlays and plunging tax receipts have widened budget gaps and driving up borrowing requirements, according to reports issued by both governments. The reports, in line with budget updates coming from elsewhere in Europe this summer, underscores the pressure on governments as most forecasts see a long and shallow recovery, dogged by high unemployment.

For Germany and other members of the 16-country euro zone, such forecasts threaten to prolong the period that their debt and deficit limits overshoot limits set down by the Maastricht treaty. In the U.K., which isn't a member of the euro zone, the public sector borrowed a net £8 billion ($13.23 billion) in July, the Office for National Statistics said Thursday, much more than the £200 million net borrowing estimated by economists. That borrowing requirement was the worst result for that month on record and is the first time there was net borrowing in July since 1996. July is usually a better month for the public finances with large tax payments coming in from companies.

Using the detailed data on tax revenues, the ONS said corporation tax receipts declined 38% in July from a year earlier with all sectors of the U.K. corporate world reporting big declines. There was a 34% drop in Value Added Tax receipts, while income tax was down 15%. Central government current spending was up 7.5% in July in annual terms, with net social benefits, including unemployment payments, up 10.4% on a yearly basis. The U.K.'s public finances have deteriorated sharply since last autumn with the country experiencing its deepest recession in decades. Output has contracted for five straight quarters and the numbers out of work have climbed steadily since mid-2008, putting an extra toll on the public coffers. In the U.K. financial year to date, which started in April, public sector net borrowing was a record £49.8 billion against £15.9 billion for the year-earlier period.

The recession has left even deeper scares in Germany, where the government forecasts gross domestic product contracting by 6% in 2009. "Even though economic data as a whole are pointing to a stabilization of the economy, the situation however is still fragile," Deputy Finance Minister Joerg Asmussen wrote in the ministry's August fiscal update. "The crisis and its consequences are far from overcome." Tax intake has shriveled. During the first seven months of the year, German tax receipts were 5.2% lower than the year-earlier period, while federal government tax receipts were 2% lower during the same period.

One of the hardest-hit categories has been the intake from corporate taxes, tumbling 57.9% during the first seven months from a year earlier, while income-tax revenue was down 4.4% in the January-July period on a yearly basis. The government has forecast a widening budget gap, with the countrywide deficit seen coming in at 4% of GDP this year and at 6% of GDP in 2010, exceeding by far the 3% limit for budget deficits required under the European Union's Maastricht Treaty. "These numbers make once and for all clear: formulating and implementing a successful consolidation strategy will be among the most pressing issues of the next government," said Mr. Asmussen. "Without an imminent return to a stable fiscal path, neither the Maastricht criteria nor Germany's borrowing cap rule ... can be met."




City taken by surprise as Bank of England’s figures herald end of recession
Britain has emerged from the worst recession since the Second World War, new Bank of England figures suggested yesterday. Detailed forecasts published by the Bank showed that gross domestic product (GDP) will rise by 0.2 per cent between July and September, marking the first economic expansion since the first three months of last year. The Bank expects the economy to continue to expand in the fourth quarter, by 0.4 per cent, and sustain the recovery throughout next year.

These growth figures have been extrapolated by economists from data published by the Bank in the wake of last week’s Inflation Report. The Bank expects the economy to grow by 2.2 per cent next year, its central forecast shows. That is greater than the Treasury’s forecast of 1.75 per cent, which is seen as extremely optimistic by City analysts, who expect the economy to grow by only 0.8 per cent. Even taking into account the downside risks to growth, the Bank still expects Britain to grow by 1.3 per cent next year. The economy has been shrinking for the past 15 months and is believed to have contracted by as much as 5.6 per cent over that time.

The upbeat forecasts take into account last week’s surprise £50 billion boost to the economy announced by the Bank’s rate-setting Monetary Policy Committee (MPC). It emerged yesterday that Mervyn King, the Governor, and two other members of the committee favoured injecting a further £75 billion. They were outvoted by a majority of six, the victors wanting £50 billion extra, taking the total to £175 billion. The split surprised markets, raising expectations that further quantitative easing (QE) could be on the cards. Sterling fell by nearly a cent against the dollar to hit a low for the day of $1.6375, but later rallied.

The MPC minutes show that the Governor, Professor Tim Besley and Professor David Miles were keen to risk boosting quantitative easing much more, arguing that the committee could increase interest rates if inflation started to rise. They said that doing too little could dent the public’s confidence in the committee. "Insufficiently stimulatory monetary policy could cause inflation to remain below target, depressing inflation expectations," the minutes said, adding: "Confidence in the efficacy of monetary policy might also be damaged, limiting policymakers’ ability to stimulate the economy in the future."

But most members of the committee said that the expansion of quantitative easing should be "moderate", given that some of the downside risks to the economy had receded. Economists have raised concerns about how the Bank intends to "unwind" quantitative easing by selling the gilts it has bought. Michael Saunders, economist at Citigroup, said: "The MPC appear unconcerned ... that their approach could produce a messy exit strategy later on." Vicky Redwood, UK economist at Capital Economics, said: "If, as we expect, [the inflataion data] turns out to have been a blip and the economic recovery is weaker than the MPC expects, there is a good chance that the MPC will extend the QE programme again in November."

Separately, there was upbeat news from Britain’s beleaguered manufacturing sector yesterday. A survey showed that optimism at factories rose to its highest level in more than a year. The gauge of those expecting a rise in output rose to -5 in August, up from -14 in July, the figures from the CBI revealed.




Germany Is Bound for Recovery, Bundesbank Says
The German economy has touched bottom and could see a "clear recovery" in the third quarter, as rising orders from abroad boost output and business confidence, Germany's central bank said Thursday. "In Germany, leading indicators suggest a palpable recovery in economic output from a low level is possible," the Bundesbank said in its latest monthly bulletin. "With the improvement of foreign demand ... an important precondition for a further gain in corporate confidence" has been met," it said.

The Bundesbank again warned that its forecasts contain a high degree of uncertainty, the possibility a new credit crunch and high unemployment. But the central bank observed that the current combination of low capacity utilization and increasing orders "is a constellation typical of an economic turning point." Germany's economy broke four quarters of economic contraction in the second quarter, when gross domestic product grew 0.3% from the previous three months. The rebound was driven mainly by government stimulus programs and a recovery in May and June in demand for German exports.

The news should cheer the German government, which is coping with rising fiscal strains as it struggles to limit damages of the global economic downturn. To date, the government has projected a 6% drop in GDP this year. The government also has forecast a widening budget gap, with the countrywide deficit seen coming in at 4% of GDP this year and at 6% of GDP in 2010, exceeding by far the 3% limit for budget deficits required under the European Union's Maastricht Treaty. In a separate report issued Thursday, the German finance ministry said its recession-related outlays have soared as tax intake has shriveled since the beginning of the year.

"Even though economic data as a whole are pointing to a stabilization of the economy, the situation however is still fragile," Deputy Finance Minister Joerg Asmussen wrote in the ministry's August fiscal update. "The crisis and its consequences are far from overcome." During the first seven months of the year, overall German tax receipts were 5.2% lower than the year-earlier period. Corporate tax receipts tumbled 57.9% during the first seven months of the year from the year-earlier period. "These numbers make once and for all clear: formulating and implementing a successful consolidation strategy will be among the most pressing issues of the next government," said Mr. Asmussen.




U.S. Leading Economic Indicators Index Rose 0.6 Percent in July
The index of U.S. leading economic indicators rose in July for a fourth consecutive month, another sign the worst recession in seven decades is almost over. The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.6 percent, less than forecast, after a revised 0.8 percent increase in June, the New York-based group said today. The July gain marks the longest series of increases since 2004. Fewer job losses, rising stock prices and a renewal of factory output all indicate government efforts to stem the financial crisis and revive the economy are paying off. Even so, a jobless rate forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.

"The recession has bottomed," Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. "The focus is no longer are we going to get out but what the recovery is going to look like." The index was forecast to rise 0.7 percent, according to the median of 52 economists in a Bloomberg News survey, after an originally reported increase of 0.7 percent in June. Estimates ranged from gains of 0.1 percent to 1 percent. Six of the 10 indicators in today’s report added to the index, three subtracted and one was neutral.

The biggest lift came from a positive spread between long- and short-term interest rates, followed by drops in jobless claims, a longer factory workweek, rising industrial supplier deliveries, stock prices and orders for capital goods. Weaker consumer expectations, declining money supply and falling building permits pulled it down. A gauge of new orders for consumer goods and materials held steady. New applications for unemployment benefits fell to an average of 559,000 in July from 616,000 in June. Figures from the Labor Department today showed that claims unexpectedly rose to 576,000 last week from 561,000 the week before, indicating companies are trying to cut costs further.

The factory workweek rose to 39.8 hours in July, the highest since January, from 39.5 in June, the Labor Department said Aug. 7. Automotive plants are boosting output in response to signs that demand is recovering as they benefit from government incentives of up to $4,500 for consumers who trade in gas guzzlers for fuel-efficient vehicles. General Motors Co. this week called back 1,350 union workers, its biggest one-time gain in jobs since 2006, as it boosts second-half production, partly in response to demand from the Obama administration’s "cash for clunkers" program. Ford Motor Co. last week said it is boosting factory output by 26 percent in the second half of the year to meet rising demand created by the trade-in program.

A 1 percent gain in the average level of the Standard & Poor’s 500 Index in July from the prior month contributed to the leading index. The S&P 500 has soared 48% since March 9, when it reached its lowest level in more than 12 years, as data signaled the economy may be turning around. Meanwhile, consumer expectations for the next six months fell in July and continued falling this month, according to the Reuters/University of Michigan survey of sentiment released last week. Seven of the 10 indicators for the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times. The Conference Board estimates new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, was unchanged after falling 0.4 percent the prior month. The National Bureau of Economic Research, the arbiter of when recessions begin and end, follows this index to help it time downturns. The index tracks payrolls, incomes, sales and production. The gauge of lagging indicators fell 0.3 percent following a 0.7 percent decrease in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Economists surveyed by Bloomberg this month said the economy will grow at an average 2.1 percent pace in the second half of this year after contracting over the previous 12 months. The anticipated expansion won’t be enough to prevent the unemployment rate from reaching 10 percent for the first time since 1983, the survey also showed. The recession may already be over, according to Edward McKelvey, a senior economist at Goldman Sachs Group Inc. in New York. A July gain in industrial production, the first in nine months, and the likelihood that output will keep growing because of depleted inventories is "the best" sign the contraction is over, McKelvey wrote in an e-mail to clients on Aug. 18. Nonetheless, he said, "a lot has to happen before we can state this conclusion with conviction."




Labour market lags US recovery
The number of US workers filing new claims for unemployment climbed unexpectedly last week, adding to fears that a recovery in the labour market will lag behind the rest of the economy that has been showing signs of life. The Conference Board reported on Thursday that its index of leading economic indicators rose for the fourth month running and a strong report on manufacturing from the Philadelphia Federal Reserve Bank added to evidence that the US economy is starting to emerge from the grips of the downturn.

However, new jobless claims rose by 15,000 to 576,000, official figures showed, while continuing claims increased by 2,000 to 6.24m. The less volatile four-week average of first-time unemployment claims also rose, increasing by 4,250 to 570,000. The results disappointed Wall Street analysts who were expecting jobless claims to fall. "Unemployment claims remain below levels seen in the first half of 2009, but are not signalling a further slowing in the pace of layoffs from that seen in July," noted John Ryding and Conrad DeQuadros, economists at RDQ Economics.

Earlier this month the labour department reported that the US unemployment rate eased from 9.5 to 9.4 per cent with a lower-than-expected 247,000 increase in the number of unemployed. States suffering from more lay-offs included Tennessee, North Carolina and Wisconsin, as the manufacturing, construction and transportation industries continue to struggle. California and Michigan welcomed fewer lay-offs, as job cuts eased in the car industry.

While unemployment continues to be a problem for the US economy, other indicators are offering hope. The Conference Board’s leading economic index rose by 0.6 per cent in July and has jumped by 3 per cent in the last six months. Narrowing interest rate spreads, a dip in July jobless claims and extended working hours lifted the results and offset declines in building permits and consumer sentiment. The Conference Board said that the trend reveals that the "recession is bottoming out and that economic activity will likely begin to recover soon".

Meanwhile, the latest survey by the Philadelphia Federal Reserve Bank buttressed that view, with figures showing that manufacturing activity in the mid-Atlantic region improved to levels last seen in November 2007. While unemployment continued to decline (?!), manufacturing executives said they expected business activity to increase in the next six months and hiring to pick up. "A combination of aggressive inventory liquidation in the first half of the year and stabilising orders suggests that manufacturing output will be better supported in coming months," said Joshua Shapiro, chief US economist at MFR. "From a longer term perspective, once the effect of inventory adjustments wears off from the manufacturing data, it will be up to final demand to carry the baton."




White House to Cut Deficit Estimate for 2009 to $1.58 Trillion
President Barack Obama’s budget office will announce the government’s deficit for 2009 will total $1.58 trillion, about $262 billion less than forecast in May, according to an administration official. The White House’s biannual budget review set for release next week will show the outlook for the fiscal year ending Sept. 30 improved primarily because of reduced costs associated with the stabilizing economy. That has allowed the administration to scrap a $250 billion contingency plan to aid the financial industry, the official said.

The reduced deficit is also attributable to fewer bank failures than anticipated, which meant spending at the Federal Deposit Insurance Corp. will be $78 billion less than forecast, said the official, who requested anonymity because the figures haven’t been publicly released. The deficit figure, as revised, would amount to 11.2 percent of the nation’s economy, the official said. That would be the biggest share since 1945. "It’s better than we expected but it’s still a huge deficit," said Stan Collender, a former congressional budget aide who is a partner at Qorvis Communications in Washington. He said the administration deserves "some credit here for managing the financial bailout situation so that they didn’t need another one," adding that Obama and his aides faced "a very unstable situation when they walked in."

The administration’s mid-session review, slated for release on Aug. 25, will update the White House’s economic and budget forecasts with revised estimates of GDP growth, unemployment and future deficits. The administration official declined to discuss any other details in the report. The nonpartisan Congressional Budget Office, which in June estimated this year’s deficit would reach $1.825 trillion, is also scheduled to release a revised estimate on Aug. 25.



The Obama administration had previously pegged this year’s shortfall at $1.84 trillion and next year’s deficit at $1.26 trillion. Tax revenue this year will total $2.074 trillion, the official said, which would be down 18 percent from last year, a reflection of the slow economy. Spending will grow to $3.653 trillion, which would be up almost 23 percent from 2008. Federal spending has been driven up in part by the $787 billion economic stimulus package enacted in February, a $700 billion bailout of the financial industry, takeovers of mortgage financiers Fannie Mae and Freddie Mac and the increased costs of running safety-net programs such as unemployment insurance.




Fed's Hoenig Stirs Debate on Bank Failures
The host for central bankers attending the Federal Reserve conference this weekend to discuss the financial crisis is a regional Fed chief who’s making waves with his proposal for letting big U.S. banks fail. Thomas Hoenig, the Kansas City Fed president, will welcome Fed Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and dozens of other central bankers to the annual symposium in Jackson Hole, Wyoming, starting today. Hoenig said he hopes the gathering will serve as a model for handling crises in the future.

Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it. "Tom is leading the mainstream on this," said former Fed Governor Lyle Gramley, now senior economic adviser with New York-based Soleil Securities Corp. "He’s ahead of the curve." Hoenig, 62, took office in 1991 and is soon to be the longest-serving Fed policy maker. Out of the 12 regional Fed presidents, he is one of two to have served as a head of bank supervision. Hoenig is tougher than his colleagues on inflation, having dissented from interest-rate votes four times since 1995, always for tighter policy.

Companies with weak capital or investor confidence shouldn’t be bailed out, Hoenig said in a private talk in Omaha, Nebraska, in March. He said the government instead should declare them insolvent, replace managers, remove the bad assets and require shareholders to take losses. Hoenig broke from his usual practice of speaking from notes on index cards for non- economic comments and released written text entitled "Too Big Has Failed." Senator Sam Brownback of Kansas asked for a copy of the speech after reading a newspaper article about it. He invited Hoenig to testify at an April hearing of the Joint Economic Committee, where Brownback is the ranking Senate Republican. Brownback said he had received "huge numbers of calls" from constituents angry about bank bailouts.

"Tom putting it out there, said, ‘You’re frustrated and you’re mad and there’s a way to address it,’" Brownback said in an interview. "It gave it, I think, a realistic, regulator approach from a respected individual." He said he would like Hoenig to address lawmakers again this year. The debate has been fueled by multibillion dollar government rescues of financial companies including Citigroup Inc. and American International Group Inc. Lawmakers in line with Hoenig include Alabama Senator Richard Shelby, the top Republican on the Banking Committee. "Our regulatory reform effort must place the risk back where it belongs, on the risk takers and not on the taxpayers," Shelby said in a statement.

Bernanke echoed Hoenig’s views in recent congressional testimony. In July 24 remarks to the House Financial Services Committee, the Fed chief indicated support for the Treasury’s resolution plan while adding that Congress might want to add some constraints such as requiring shareholders to bear losses. "People are starting to sit up and take notice of his remarks," said Camden Fine, president of Independent Community Bankers of America, a Washington-based trade group. "It’s influencing the debate." Not everybody agrees with Hoenig’s recommendation of setting strict guidelines to handle financial failures.

"You have to trust the authorities with some ability to change the rules when they need to," said William Isaac, former head of the Federal Deposit Insurance Corp. and now chairman of the global financial services unit of LECG Corp., an economic and financial consulting company based in Emeryville, California. While Hoenig’s plan may not be covered in the formal discussions at Jackson Hole, his fingerprints extend past the brief remarks he delivers: Hoenig approves topics and speakers, with an eye to fostering debate.

"It has to be vigorous," Hoenig said during an interview in a conference room next to his 14th-floor office at the bank’s new limestone-and-glass headquarters building in Kansas City. "I don’t think we’ll get better if we don’t listen to our critics as well as to those who praise us." Scheduled speakers include Bernanke tomorrow, along with Trichet, Bank of Japan Governor Masaaki Shirakawa, and less- well-known professors such as Carl Walsh of the University of California at Santa Cruz and Ricardo Caballero, chairman of the Massachusetts Institute of Technology’s economics department. "I’m hoping that this becomes, in a sense, a lessons- learned and a beginning of a blueprint," Hoenig said.

Thomas Michael Hoenig grew up in Fort Madison, Iowa, the second of seven children of a plumber and homemaker. After being drafted into the Army and serving in Vietnam, he completed graduate studies in economics at Iowa State University in Ames. Unlike most students, Hoenig was ready with his dissertation topic, bank competition. "He decided what he wanted to write his dissertation on and came in and told me," recalled Dudley Luckett, a retired professor who was Hoenig’s adviser. Hoenig joined the Kansas City Fed as an economist in 1973. He played basketball there with another young economist, Donald Kohn, who’s now the central bank’s vice chairman.

One of Hoenig’s defining experiences occurred in 1982, when he was on the front lines during the failure of Oklahoma City’s Penn Square Bank, which triggered a national banking crisis and helped precipitate the 1984 government takeover of Continental Illinois National Bank & Trust Co. "We learned lessons about concentrations of credit," Hoenig said. That and subsequent events helped shape his view that setting hard rules for banks was better than the so-called principles-based approach, which favors wide-ranging edicts such as treating customers fairly. The U.K.’s financial regulator held itself out as a principles-based regulator until this year. "There’s nothing in this crisis that I haven’t seen before," Hoenig said.

Warning about dangers posed by big banks isn’t new for Hoenig. In a 1999 speech, Hoenig said the rise of "mega financial institutions" created a risk of a "less stable and a less efficient financial system" because the government would be reluctant to close troubled companies, creating implicit guarantees for some depositors and creditors. Hoenig will become the longest-serving Fed policy maker this year when Minneapolis Fed President Gary Stern, who has also made a name studying too-big-to-fail, retires. "I don’t ever recall him being so vocal on a subject like this," said Douglas Lee, who runs Economics from Washington, a consulting firm in Potomac, Maryland. "He will certainly be a voice that will be listened to."




Citigroup’s Asset Guarantees to Be Audited by TARP Inspector
Citigroup Inc.’s $301 billion of federal asset guarantees, extended by the U.S. last year to help save the bank from collapse, will be audited to calculate losses and determine whether taxpayers got a fair deal.
Neil Barofsky, inspector general of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, agreed in an Aug. 3 letter to audit the program after a request by U.S. Representative Alan Grayson. Barofsky will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses.

The Treasury, Federal Deposit Insurance Corp. and Federal Reserve provided the guarantees last November, when a plunge in Citigroup’s stock below $5 sparked concern that a run on the bank might rock global markets and impede an economic recovery. New York-based Citigroup paid the government $7.3 billion in preferred stock in return for the guarantees. "What kind of toxic assets did the Federal Reserve guarantee, and what off-balance-sheet liabilities have been pinned on us?" Grayson, a Florida Democrat who sits on the House Financial Services Committee, wrote yesterday in an e- mailed response to questions on the audit. "How much money have the taxpayers already lost? We need to know."

Citigroup’s guarantees are among $23.7 trillion of total potential government support stemming from programs set up since 2007 to ease the financial crisis, according to a report last month by Barofsky’s office. The "total downside risk" from Citigroup’s asset guarantees is about $230 billion to the Federal Reserve alone, Grayson said in a June 24 letter to Barofsky requesting the audit. Citigroup’s guarantees came on top of $45 billion of bailout funds obtained last year through the TARP program. Bank of America Corp., which also got $45 billion of TARP funds, initially agreed to take guarantees on $118 billion and later decided not to sign the accord.

The pool of Citigroup assets included $154.1 billion of mortgages, $16.2 billion of auto loans, $21.3 billion of "other consumer loans," $12.4 billion of commercial-real-estate loans and $13.4 billion of corporate loans, Citigroup Chief Executive Officer Vikram Pandit said in a Jan. 27 presentation. The assets also included $31.9 billion of distressed securities and $51.5 billion of off-balance-sheet lending commitments. Under the terms of the guarantees, Citigroup must absorb the first $39.5 billion of losses on the assets, plus 10 percent of the remaining losses. Through June 30, losses on the pool totaled $5.3 billion, Citigroup said in its second-quarter earnings report.

"We are working closely with the government on the implementation of the loss-sharing agreement, and of course, we will cooperate with the special inspector general for TARP in any review," Citigroup spokesman Stephen Cohen said. The bank’s share price fell 1 cent to $4.13 as of 4 p.m. in New York Stock Exchange composite trading. At that price, the shares are almost 10 percent above the $3.77 level they reached last November, when the guarantees were announced. One question is whether Citigroup’s loans and securities were adequately written down before being put into the covered pool, Joseph Stiglitz, a Columbia University economist who won the Nobel Prize in 2001, said in an interview today. "If they picked a high price, the losses could be a major exposure for the taxpayer," Stiglitz said.

In his letter, Barofsky said he "will begin to assemble a team to audit the Citigroup guarantees." "We anticipate finalizing the audit plan and issuing a formal audit announcement shortly," he wrote. The audit will address "the basis on which the decision was made" as well as the "process for selecting loans to be guaranteed," according to Barofsky’s letter. The inspector general also will assess "the risk-management and internal controls and related oversight processes and procedures to mitigate risks to the government." The audit will take several months and a deadline hasn’t been set, said Kris Belisle, a spokeswoman for Barofsky.

The Treasury, FDIC and Fed said in a joint statement on Nov. 23 that they agreed to the plan to support "financial market stability, which is a prerequisite to restoring vigorous economic growth." They promised to "exercise prudent stewardship of taxpayer resources." The following month, the Federal Reserve Bank of New York hired New York-based money manager BlackRock Inc. under a $12 million contract to spend two months providing an independent valuation of Citigroup’s guaranteed assets. The New York Fed paid another $5 million to $10 million to PricewaterhouseCoopers LLP to assess Citigroup’s own methods of valuing the assets, according to a copy of the contract posted on the Federal Reserve Bank’s Web site.




US to study impact of new off-balance-sheet rules
U.S. regulators plan to gauge how severe of a hit banks will take from an accounting change that will force them to bring more than $1 trillion of assets back on their books. Next week regulators expect to propose a rule that seeks input on whether banks need more time to build capital cushions against the assets that were once held by off-balance-sheet trusts. Banks will still have to move the assets back on to their books on Jan. 1, 2010, but regulators want feedback on the impact of the accounting change and whether it might be prudent to phase in the risk-weighted capital that must be held against the assets.

The Federal Deposit Insurance Corp posted an agenda on its website on Wednesday indicating that regulators will propose on Aug. 26 the rule that seeks input. Sheila Bair, chairman of the FDIC, acknowledged earlier this month that the change would be a tough hit for some banks and could derail the recovery of the securitization market, which helps lenders extend credit. "We support the general direction of bringing all this back on balance sheet. But the timing ... still gives me some heartburn," Bair told the Senate Banking Committee.

Banks have traditionally used off-balance-sheet vehicles to avoid reporting requirements or to reduce the amount of capital they needed to hold to satisfy regulatory requirements. As the financial storm gathered, uncertainty about some of those vehicles helped undermine confidence in banks and accelerated the financial crisis. The Financial Accounting Standards Board finalized rules earlier this year to force banks to move these obligations onto their books, and provide more disclosure than the footnotes that currently provide scant information to investors.

The impact of the change could be huge. The Federal Reserve, during a recent "stress test" of the largest 19 U.S. banks, said the change could mean about $900 billion of assets being brought onto the books of those institutions. Citigroup said in a recent regulatory filing the rule could force it to bring $159.3 billion of assets back on its books, including $85.5 billion of credit card-related assets and $14.2 billion of student loans. JPMorgan Chase said it would likely have to add $130 billion of assets to its balance sheet, and said the change would decrease its Tier 1 capital ratio.

During the stress-test process, the Federal Reserve ensured that these largest institutions had large enough capital cushions to weather the change, but it could still affect their leverage ratios, and slightly smaller banks' capital levels could more dramatically change. "From an economic standpoint, we're very concerned, especially for credit card companies," said Mike Gullette, vice president of accounting for the American Bankers Association. "We are very anxious to see also just what kind of capital requirements that the regulators are going to settle on."

The FASB rule has the potential to immediately yank away some companies' well-capitalized status if regulators do not take a measured approach regarding what capital banks must hold against these assets, Gullette said.

Regulators hinted at the Senate Banking Committee hearing last week that they have some flexibility in how to bolster capital reserves against these assets. Comptroller of the Currency John Dugan said regulators are working on an interagency rule that could tweak how regulatory capital rules respond to the assets. "The bottom line is this stuff is going back on the balance sheet," Dugan told lawmakers. "Banks are going to have to hold capital against it. It's really a matter of timing and how it gets phased in." Dean DeBuck, a spokesman for the Office of the Comptroller of the Currency, said the guidance would deal with capital treatment but declined to elaborate.

Gullette said a risk-weighted approach to capital reserves would be appropriate because a bank should not be forced to hold a full cushion against an asset in which it's already sold off a 95 percent stake. "The risk in holding that security is not in the hands of the bank, it's in the hands of the ultimate investor," he said. Bair said the accounting change could punish lenders for retaining a bigger portion of the risk -- a key component of the financial reform effort under way in Congress. "I think it also could be very damaging to try and get the securitization market back because ... even if you just retain some portion of interest, the whole securitization might have to come back on-balance sheet," Bair said. "And that also goes at cross purposes with our efforts to try to keep people having some skin in the game."




CDS counterparty concentration has increased-Fitch
Large banks active in the $28 trillion credit default swap market have gained market share, which has concentrated counterparty risk in the contracts, according to a market survey released by Fitch Ratings on Thursday. Fitch surveyed 26 banks in 11 countries that are active in the CDS market and found that as a group, they had sold protection on around $13.8 trillion of debt as of the end of 2008 and bought protection on $13.9 trillion in debt. The top 10 counterparties in the survey accounted for 67 percent of total exposures in terms of the number of times they were cited as counterparties in the survey, up from 62 percent at the end of 2006, when Fitch last did the survey.

"This, when combined with the top five institutions providing 88 percent of the total notional amount bought and sold, is a reflection of the increasing concentration and counterparty risk within the (CDS) market," Fitch said. Counterparty risks in the market have also become more concentrated among fewer players since the collapse of Bear Stearns, Merrill Lynch and Lehman Brothers. The failure of these banks increased concerns over losses on the contracts if a counterparty fails.

JPMorgan leapfrogged Goldman Sachs as the largest CDS counterparty in 2009, with Goldman the second largest, Fitch said. They are followed by Barclays, Deutsche Bank and Morgan Stanley, respectively. Demands for collateral also increased, with 53 percent of banks surveyed saying that their counterparties had increased requirements for collateral used to back trades, with most of the increases being between 11 percent and 50 percent. Counterparties also demanded higher collateral to protect against counterparty risk, 74 percent of respondents said. Collateral is posted against trades to reduce the risk of losses if a counterparty defaults. It can increase with changes in the value of the contract or because of changing perceptions in a counterparty's creditworthiness.

"While collateral requirements were increased across the board for all institutions, it was hedge funds as a sector that needed to post higher collateral than others," Fitch said. "The majority of those surveyed did not feel that banks, security firms and traditional asset managers would be subject to an increase in collateral requirements and that the processes and controls in place to identify, measure and manage counterparty risk in relation to these entities were satisfactory," it added. The majority of the survey's respondents also expressed dissatisfaction with the use of value-at-risk (VaR) models to capture their potential losses, Fitch said. Around 60 percent of banks' surveyed said it was either very important or critical to recalibrate these models to account for stressed market conditions and data.

This combined with some proposed regulatory changes to include more variables in the models will increase the cost of trading CDS and may impact future market volumes, Fitch said. Liquidity was also cited as a key challenge by market participants, though volumes in single-name and index trades were strong during the crisis, Fitch said, adding these contracts represented 87.8 percent of the market at the end of 2008. "It was the lack of an active market for collateralized debt obligations and other complex products which made valuations difficult and the consequent drying up of liquidity a major issue," Fitch said.




China to trim US treasury holdings, diversify Forex reserves
China sold off 25.1 billion US dollars worth of U.S. treasury bills in June to bring its holdings to 776.4 billion dollars, according to data released by the U.S. treasury Department Monday. This has gratified people in China, whereas the United States keeps a close eye on the move. Judging from the perspective of its people, however, China is in an urgent need to alter its structure imbalance with its Forex reserves, so that the value of reserve assets could be preserved and increased.

U.S. treasury bonds seem to have the good safety and strong fluidity with a higher interest rate than that of same-term bank deposits, and it is exempt from interest tax. Against this rising mist, the devaluation trend of the US dollar will result in an intangible devaluation of its treasury bonds. Under such circumstances, China’s first large-scale reduction of US treasury debt is, beyond any doubt, within the bounds of reason. The reduction of US treasury bonds also shows that China "is seeking to diversity its Forex reserves." Such diversification is, nevertheless, poses a complex topic. To date, the main problem China has been facing has two aspects:

One aspect is to make a scientific value assessment of Forex structure, so as to maximize the return and minimize the risk and, the other aspect is to train the competent personnel well versed in the international game rules, who have rich managerial experience. Behind the reserve diversification, there is a diversification choice on excess value. First, China has to retain a certain proportion of US dollar reserves since the nation should have the basic means to ensure emergency or contingency international payments. Second, China must have a certain amount of gold reserves, a strategic national asset to serve as a strong prop or backing at the critical moment and, third, China must keep a certain proportion of other stable currencies, such as the euro, British pound and Swiss franc, to offer a useful hedge against dollar devaluation.

Besides, the use of Forex reserve should take the substantial form in kind. Since Forex reserves are not money of fiscal resource, the use of the reserves should be made mainly in external investment and international trade, or to purchase large-scale machinery and electrical equipment and sophisticated technologies and to make strategic asset investment or to join investment holding companies, focusing on high-growth investment opportunities where potential returns will exceed the cost of capital. Such an endeavor, however, has already been foiled repeatedly due to trade barriers and "fire walls" put up by a few Western countries.

Furthermore, granting loans to other countries, or directly buying real estates and housing and purchasing large-scale commodities. The issue on the table now is to acquire a correct appraisal of diversified channels for foreign exchange reserves and define the Forex mix in a scientific way. To diversify foreign exchange reserves and define their scientific, rational structure is the procedure China has to accomplish, and some new areas for investment need badly to be explored.

China has had "no ability to make other option" before but to shrink U.S. treasury holdings. Today, it must be recognized that China is still unfamiliar with the international game rules and the nation is only a pupil with regard to the performance of capital. People in China could be entirely unaware of "manipulation" by banking tycoons or financiers. So, China is in an urgent need of ace professionals in the banking sector good at strategic investment and management.

Forex reserves belong to the national wealth, and it is natural and inevitable that the general public pays high heed to their safety. Therefore, while explaining some suspicions to the public to win their trust, confidence and understanding, the relevant departments should also consider it an issue to pander how to conceal their strategic intention to the maximum.




State Pension Funds Down 59% On Private Equity Bets
U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans. The California Public Employees’ Retirement System, the Washington State Investment Board and the Oregon Public Employees’ Retirement Fund -- among the few pension managers to disclose details of their investments -- had recouped just $22.1 billion in cash by the end of 2008 from buyout funds started since 2000, according to data compiled by Bloomberg.

That amounts to a shortfall of 59 percent. In total, they haven’t reaped a paper gain from funds formed in the past seven years. The wisdom of those investment decisions hangs on the remaining value private-equity firms assign to companies they snapped up in 2006 and 2007, during the peak of the buyout boom. For the California, Oregon and Washington plans, that figure totaled $15.8 billion at the beginning of the year. While some investors say they’re confident the private- equity industry’s traditional practice of taking over companies will pay off, others have been shaken by a credit contraction that froze deal-making, eroded the value of the assets on private-equity firms’ books and prevented them from cashing out in public share sales.

Now pension managers on both ends of the spectrum are looking skeptically at the so-called internal rate of return buyout firms calculate to gauge their results. "I work for over 400,000 employees, and they can’t eat IRRs," said Gary Bruebaker, the chief investment officer of the Washington State Investment Board. "At the end of the day, I care about how much do I give you, and how much money do I get back." Private-equity firms pool money from so-called limited partners -- pension funds, endowments, wealthy families and sovereign wealth funds -- and use that cash, along with money borrowed from banks, for corporate takeovers. The buyout managers aim to boost profits through cost cuts, acquisitions or added lines of business, then reap a return for themselves and their investors in a public stock offering or a sale to another buyer. The buyout firms also levy fees, typically 2 percent of the assets they oversee annually and 20 percent of profits from successful investments. That’s helped make the titans of the industry into billionaires.

Stephen Schwarzman, the 62-year-old co-founder and chairman of Blackstone Group LP, the biggest private-equity firm, ranked 261st on the 2009 Forbes list of the world’s richest people, with an estimated net worth of $2.5 billion. KKR & Co. LP co- founder Henry Kravis, 65, topped that with $3 billion, while Carlyle Group co-founder David Rubenstein, 60, weighed in at $1.4 billion. Buyout managers, and some pension funds, downplay their cash returns so far this decade and counsel patience, saying that investments often look worse in the years immediately after they’re made. Blackstone’s Schwarzman told backers on an Aug. 6 conference call he expected his New York-based firm to take some of its companies public in 2010. KKR, also in New York, sold shares in Avago Technologies Ltd. through an IPO earlier this month, raising $648 million.

Pension funds also say that over time, private-equity returns compare favorably to the Standard & Poor’s 500 Index, which declined 28 percent from the beginning of 2000 through the end of last year. Bruebaker says his Washington fund had an 8.2 percent average annual gain from its buyout investments in the past 10 years, compared with a 3.9 percent drop in the S&P. While investors can sell publicly traded stocks as needed, buyout funds keep money tied up for years, said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business. "With private equity, you’re taking on a liquidity risk, which people did miscalculate," said Kaplan, who has studied takeover returns.

University endowments and philanthropic foundations hurt by the worst economic crisis since the Great Depression have struggled to sell their stakes in private-equity funds to raise cash. Investors including Harvard University, in Cambridge, Massachusetts, planned to raise more than $100 billion through so-called secondary sales of limited partnership interests, some at discounts of at least 50 percent, people familiar with the effort said last year. Rubenstein, of Washington-based Carlyle, acknowledges that the buyout industry faces tough questions. "People have a lot of money in the ground and today it’s probably not worth what they had intended, but a turn-around in valuations is now beginning," Rubenstein said in an interview. "You’ll probably see general partners and limited partners focused more on multiples of equity rather than just IRRs."

Representatives of Washington, Calpers and Oregon all said they remain committed to private equity, and pointed to the long-term nature of the investments. "The market is in a trough," Oregon spokesman James Sinks said. "The picture would’ve looked different at the end of 2007." Calpers spokesman Clark McKinley noted that Calpers in June raised its target commitment to private equity to 14 percent of assets from 10 percent. "That’s an affirmation of our confidence in the asset class," he said. Schwarzman and Kravis declined to comment for this article. "We are hopefully toward the end of the absolute worst recession of our lifetimes," said Washington’s Bruebaker. "If you take a snapshot right now, things might not look good. These are 10- to 12-year investments and we believe they’ll be much better than what we see today."

Bruebaker’s fund and the Oregon Public Employees’ Retirement Fund warmed to buyouts during the 1980s, and Calpers joined in 1990. Today, among U.S. pension plans, Calpers is the largest investor in private-equity funds, while Washington and Oregon are the third- and fourth-biggest, respectively, according to San Francisco-based consulting firm Probitas Partners Inc. The three state funds, which serve more than 2 million people, collectively more than doubled their buyout commitments in 2005, to $8 billion from $3.1 billion. They ramped up even more the next year, when commitments climbed to $18.7 billion, the data show.

All told, private-equity firms raked in $1.2 trillion from 2000 through 2008, according to London-based researcher Preqin Ltd. The influx of money, coupled with cheap debt-funding from Wall Street banks eager to collect fees, fueled record-setting takeovers. Nine of the 10 biggest deals were announced from 2005 to mid-2007 as buyout firms acquired the likes of hotel operator Hilton Hotels Corp. and power producer TXU Corp. The buyouts ground to a halt after the subprime-mortgage market collapsed in late-2007, extinguishing investor demand for high-yield, high-risk debt. The dollar value of deals has dwindled to $42.2 billion so far this year from $212.2 billion in 2008, according to data compiled by Bloomberg.

Private-equity firms unable to cash out of investments have spent much of the credit crisis reworking the capital structures of their debt-laden companies. Chrysler LLC, the carmaker that Cerberus Capital Management LP bought in 2007 for $7.4 billion, and doormaker Masonite International Corp., which KKR purchased in 2005 for C$3 billion ($2.4 billion), filed for bankruptcy this year. At the same time, changes in accounting rules have cast a spotlight on the current value of private-equity investments. The Financial Accounting Standards Board’s so-called Statement No. 157, which went into effect at the end of 2007, requires investors, including private-equity managers, to gauge the fair value of holdings that aren’t traded. While most buyout firms typically carried their investments at cost, FAS 157 mandates quarterly assessments of current value.

Such marking-to-market means private-equity funds must tell investors how much their stakes are worth at that moment, even if the managers are planning to hang onto them for years. "Getting carried away by looking at mark-to-market in my personal view can lead you to an incorrect conclusion for the longer term," Blackstone’s Schwarzman said on the Aug. 6 conference call. Blackstone spokesman Peter Rose says it’s premature to judge recent investments, such as those made by the $21.7 billion fund the firm set up in 2007.

Schwarzman, who created Blackstone in 1985 with Peter G. Peterson, has said their unspent capital -- about $29 billion -- will enable them to buy companies at depressed prices and generate profits as the global economy recovers. Others see signs that the private-equity business is undergoing a transformation. Carlyle’s Rubenstein predicted that deals in the current environment will be smaller and less reliant on debt. Individual funds already being marketed to investors won’t top $10 billion, and subsequent efforts won’t exceed $5 billion to $6 billion, he said.

"These are major structural changes taking place," said Dayton Carr, founder of VCFA Group, a New York-based firm that buys interests in private-equity and venture-capital funds. "The basic economy has had huge issues. A lot of the funds will be smaller." The upheaval is reflected in the attitudes of pension-fund investors, who are watching and waiting for cash to come in the door. "When managers are forced to put a hard value on their holdings, we’re seeing some profound losses," said William Atwood, the executive director of the Illinois State Board of Investment, an $9 billion pension fund. "The rubber hits the road when cash is returned."




Pension funds back buy-out fight over bank deals
A coalition of large US state pension funds has backed the private equity industry’s opposition to new rules on takeovers of troubled lenders, saying the plan would have a "chilling effect" on attempts to revive the country’s banking system. The warning by funds from states including New York, New Jersey and Oregon, which manage billions of dollars on behalf of public workers and are big investors in private equity, will strengthen the buy-out industry’s lobbying against the proposed measures.

Under the planned rules, unveiled by regulators last month, private equity groups that buy a troubled bank would have to maintain its tier one capital ratio – a measure of financial strength referring to a bank’s equity capital and reserves – to 15 per cent of assets. This would be three times the level of other banks. Buy-out funds would also be banned from selling their lenders for three years. Executives argue that the rules would deter private equity from investing in failing lenders just as regulators are scrambling to find buyers for regional banks hit by the crisis.

In a letter to the Federal Deposit Insurance Corporation, which is to decide on the rules in the next few weeks, the state pension funds say the measures would have "a chilling effect on private capital participation in the acquisition of failed banks". "The 15 per cent capital requirement is unduly restrictive and will limit the ability of these banks to be recapitalised," write the investors, which include funds from Connecticut, North Carolina, Pennsylvania, Florida and Missouri. "The combined effect of discouraged participation, low-ball bids and induced focus on high-risk activities would make this programme unsuccessful.

The FDIC has indicated it might lower the capital requirement in its final rules – partly because another banking regulator, the Office of the Comptroller of the Currency, has also raised concerns about the proposals – but has not said to what level. Private equity bidders have not been a factor in the auctions of failing banks in recent months. No buy-out fund is believed to have bid for Colonial, an Alabama-based bank that was sold to BB&T, another regional lender, last week. Private equity firms are also not expected to feature among the lead bidders for Guaranty Financial, a struggling Texas bank which is being sold by the FDIC.

Private equity firms’ opposition to the new rules is heightened by the fact they have struggled to find lucrative investment opportunities since the onset of the financial crisis cut off their supply of cheap debt. Many had hoped to be able to put some of their vast funds to work on failing banks. In its comments to the FDIC, for example, Lone Star, a large private equity firm that has spent $60bn buying distressed banks and other financial assets around the world, said the proposed rules displayed a "strong bias against, and suspicion of, ‘private’ capital".




Calpers Takes Another Property Hit
The California Public Employees' Retirement System has given up control of its stake in a trophy office tower in Portland, Ore., a sign that even the largest institutional investors are cutting their losses rather than throwing good money after some badly battered real-estate assets. The decision by Calpers, the country's largest public pension fund by assets, to walk from its investment in the Koin Center, one of Oregon's tallest buildings at about 509 feet, nicknamed the "mechanical pencil" for its signature shape, also shows that leasing problems are cropping up in even the country's healthier markets. While it is on the rise, downtown Portland's Class A office vacancy rate was 6.1% as of June 30, below the average of 12.9% for major U.S. downtown markets, according to Colliers International.

Despite Portland's relative health, in July a partnership that includes Calpers and CommonWealth Partners LLC of Los Angeles, a real-estate investment company, defaulted on the Koin Center's $70 million mortgage provided by New York Life Insurance Co., according to court papers. A state circuit court judge approved New York Life's request that a receiver be appointed to control and possibly sell the property. The partnership in 2007 paid a top-of-the-market $109 million to buy about 355,000 square feet of space in the bottom 19 floors of the brick building and some adjacent property, according to Colliers. The upper 11 floors of the building contain residential condominiums and weren't included in the deal.

Large pension funds like Calpers typically have reserves or other means of handling underperforming properties during difficult periods, said Michael Holzgang, senior vice president of corporate services for Colliers in Portland.
"Calpers is the gold standard, and it's surprising that their backup plan is to walk away," Mr. Holzgang said. "It's further indication that the impairment of commercial-property values is very real." The loss of the Portland property comes as Calpers suffered its worst annual performance ever. Calpers reported a preliminary decline of 23% in the value of its investment portfolio for the fiscal year ending in June.

Declining returns in its real-estate investments were partly to blame. As of March 31, Calpers's $17.6 billion real-estate portfolio, a majority of which is invested in commercial properties while about 5% is invested in residential, reported a one-year decline of about 35% in its value. The Koin Center property wasn't the first commercial property that the pension fund had lost control of during this economic downturn, according to an emailed statement by Calpers's spokesman Clark McKinley. Calpers declined to say how many other properties it has lost. But failures include the pension fund's $970 million investment in LandSource, a property venture that filed for bankruptcy protection last year.

Calpers's pinned the troubles at the Koin Center to insufficient cash flow. "The partnership didn't believe a capital investment was appropriate at this time," Mr. McKinley wrote in the email. He said Calpers and CommonWealth retained ownership of the nearby land it acquired with the office building. Designed by Zimmer Gunsul Frasca Partnership and completed in 1984, the Koin Center's red-brick facade and blue top are a prominent feature in the city's skyline. The Calpers partnership bought the property from Louis Dreyfus Property Group. The building has been struggling with a rising vacancy rate, brokers said. Last year, the law firm of Ater Wynne LLP moved out of about 50,000 square feet of space in the tower. While estimates vary, Colliers said the building's office vacancy rate is expected to rise from about 7.9% in the second quarter to the 26% range by about October.

At the same time, demand for Portland office space has stalled, making it difficult for the partnership to realize expectations that it had for the building, brokers said. Alternative-energy-related industries and some high-tech companies have been a source of office demand in the Portland area, but a number of mortgage and housing-related companies have closed or consolidated in the wake of the recession, said Eric Haskins, vice president of Grubb & Ellis in Portland. Mr. Haskins estimates the Calpers partnership bought the building expecting the property to fetch rents in the $28-to-$32-a-square-foot range annually. Buildings like the Koin Center are signing leases in the mid-$20 range, Mr. Haskins said.




Treasury Demand Enough to Absorb Supply, Goldman Says
Demand for Treasuries will be sufficient to absorb the record amount of debt the U.S. is selling amid a $12.8 trillion pledge by policy makers to combat the recession, according to Goldman Sachs Group Inc. Purchases by foreign investors will be augmented by appetite from U.S.-based buyers looking to add to savings or increase the duration of their assets, Michael Vaknin, an analyst for Goldman Sachs in London, wrote in a note today. President Barack Obama has pushed U.S. marketable debt to an unprecedented $6.78 trillion as the government seeks to revive the world’s biggest economy.

Billionaire investor Warren Buffett said it may pose a threat as ominous as the crisis itself. The Federal Reserve has more than doubled the size of its balance sheet in the past 12 months to $2.02 trillion by buying Treasuries and other securities to unlock credit markets. "When you add up the picture on Fed buying, foreign participation and domestic savings, you get a fairly supportive picture for Treasuries," Vaknin said today in an interview. "Over the past year, bond yields have drifted meaningfully higher relative to what could have been justified by macro fundamentals and the decline in yields from the local highs in early June can be partly seen as a valuation correction."

Gains for Treasuries will push the yield on the benchmark 10-year note to 3.3 percent in three months and 3.0 percent in six months, according to Goldman Sachs. The yield fell 7 basis points to 3.44 percent as of 11:18 a.m. in New York today, according to BGCantor Market Data. Private buyers will add Treasuries to their holdings as they increase savings and sell agency- and mortgage-backed securities in the Fed’s $600 billion corporate-bond program, Vaknin said. Foreign central banks in export-led economies will also keep buying as the global economy improves, he said in the note.

"The demand dynamics will remain strong enough to accommodate the upcoming supply pipeline," Vaknin wrote. The U.S. must address the "gusher of federal money" it’s pumping into the financial system, Buffett wrote in a New York Times commentary yesterday. "Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects," Buffett, 78, said. "For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself."




Corporate bond issuance bursts through $1 trillion
Global corporate bond issuance has risen above the $1,000bn (£604bn) mark - the first time it has broken through this threshold in a single year - with four months remaining of 2009. The boom is because of the difficulty companies face in obtaining bank loans and strong demand from investors, who can gain a big yield pick-up on corporate paper compared with government bonds. Investors have switched more of their cash into corporate bonds because these offer better returns than the low interest rates on bank deposits.

Corporate bond issuance has risen to $1,103bn so far this year, beating the annual record of $898bn in 2007, according to Dealogic, the data provider. The jump in issuance has been seen in dollar, euro, yen and sterling-denominated deals. Volumes in dollar, euro and sterling have risen to record annual highs, only eight months into the year, while volumes in yen are close to record levels. Dollar issuance has risen to $487bn, euro to $299bn, yen to $64bn and sterling to $53bn. In contrast, volumes of syndicated bank loans this year are 52 per cent down on 2008 and 69 per cent down on 2007. Banks are more reluctant to lend as they repair their balance sheets. So far this year, syndicated bank lending has risen to $1,052bn compared with $2,182bn during the same period in 2008 and $3,369bn at the same point in 2007.

Richard Batty, investment director at Standard Life Investments, said: "Corporate bonds are the number one asset choice. We are very overweight in corporate bonds. The spread of corporate bond yields over government bond yields more than compensates for any company default risk." But investors are much more choosy about the bonds they buy than before the credit crisis. Most of their money is parked in the big, established investment-grade companies in sectors such as utilities and oil and gas. Of the $1,103bn raised this year, $989bn, or 90 per cent, has been in investment-grade bonds, with 30 per cent issued by companies in the utilities and oil and gas sectors.




Amish see the recession as a challenge and a blessing
The roar of power tools fills the air as workers jog across the cramped and busy floor of the Jayco recreational vehicle factory, hustling to complete the labor-intensive task of building a travel trailer. The scene could resemble any U.S. factory save for one thing. Here, as at many RV makers and suppliers in Elkhart and neighboring LaGrange County, members of the local Amish community work side-by-side with the non-Amish, handling power tools, driving forklifts and operating machinery with a speed and comfort level that seem at odds with their traditional dress and long beards.

For decades, even as members of this Amish community in northern Indiana have tended to small family farms, sewed their own clothing and traveled by horse and buggy, economic necessity has forced an increasing number to make their living by working for the RV makers and suppliers that dominate the landscape, and economy, here. An estimated 53 percent of the area’s Amish men under age 65 were working in factories as of 2002, according to Steven Nolt and Thomas J. Meyers, academics at nearby Goshen College who have written extensively about the Amish.

Now, a severe downturn in the RV industry has pushed hundreds of Amish people out of the factories, forcing some to pursue more traditional — but often less lucrative — work such as baking, woodworking, making jam and selling homegrown produce. But despite the loss of jobs and income, many in the Amish community here say they see the recession as a blessing, because it has caused them to refocus on the key principles of their community: family and faith. "I think maybe that’s what the good Lord’s trying to teach us," said Cletus Lambright, whose business, Lambright Woodworking, has seen a big drop in demand for custom-made cabinets and other items. "Family values should never be pushed aside."

In a community that tends toward large families, the lack of factory jobs also has brought some men back into home-based businesses, where they can be closer to their children and where their work is more ingrained in family life. Factory work is "not conducive to the family life," said Chris Miller, a deacon in the Amish church who also runs Creekside Bookstore, a Shipshewana business that caters primarily to the Amish. "It takes away from our values." The recession also is forcing many to rediscover a tradition of living simply and frugally, which some say had fallen away in recent years as people here grew used to the high salaries of factory work.

The signs of this economic shift abound. Around the two counties, residents say they have seen a dramatic increase in signs advertising things like eggs or produce, while longtime Amish business owners say they are fielding many questions from people seeking to start similar enterprises. In the small town of Middlebury, a farmer’s market has sprung up featuring Amish and non-Amish vendors, while massive Shipshewana Auction and Flea Market nearby also is attracting more interest from Amish sellers. Dean R. Miller, senior vice president at First State Bank in Middlebury, said he’s seeing more Amish entrepreneurs applying for business loans. "The Amish families definitely aren’t ones to sit back and wait for something to happen," he said.

But even as more Amish people go into business for themselves, many here say that traditional Amish businesses also are suffering because of the recession. The downturn has crimped demand for items such as hand-made cabinets and metalwork and even has caused some longtime Amish businesses to lay off workers. Experts say Amish businesses elsewhere in the country are suffering as well. There are an estimated 233,000 Amish people living in 27 states and the Canadian province of Ontario, according to the Young Center for Anabaptist and Pietist Studies at Elizabethtown College in Pennsylvania.

Some in the Amish community, which tends to eschew much modern technology, are now grappling with ways to boost business in a world that is increasingly dependent on e-mail and Web sites. "We went from being order-takers to being marketers," said Lambright, the furniture maker. The drop in both home-based and factory work also has been hard for many Amish families, who like many other Americans are struggling to pay their mortgages, feed their children and provide for basic needs amid the worst recession in decades.

Some in this northern Indiana community, one of the nation’s largest Amish settlements, have even accepted unemployment benefits, a big step for a sect that traditionally has shunned public benefit programs such as Social Security and Medicare. The Amish community also has a tradition of helping each other with medical and other expenses, but that can be a challenge when so many families are struggling at once. "I still think that one of the great assets that we have is that (we want) to help each other in hard times," said Lambright. "I just don’t want to see that lost." Another hallmark of the community that seems to have served them well in this recession is an extremely strong work ethic.

"Of all the people that got laid off, I can’t think of one Amish person I know that is out of a job and is at a place where he doesn’t know what to do," said Ray Troyer, a deacon in the Amish church who works at Yoder’s Hardware in Shipshewana. Wilbur Lehman has worked on and off in factories for years, most recently until he was laid off last November. Since the layoff, he has been making baseball bats in his wood shop and working to expand his wife’s small donut-making business. Using his skills from factory work, he and his wife recently purchased and retrofitted a small RV, which they are using to make and sell the donuts at the flea market and other locations.

Lehman said he prefers working for himself because he can be his own boss, but he concedes the factory work offers a financial stability that his own businesses can’t. Still, in a community that values frugality, he thinks there has been a broader benefit to people earning less. "In some ways it was good that the factory (work) went down because there was a lot of money spent freely," he said.




Learn to Love the Depression
by Bill Bonner

A V-shaped recovery? A W-shaped recovery? Forget it…there ain’t no letter in the alphabet that describes a "recovery" we’re likely to have. We say that in the spirit of mischief as well as elucidation. Of course, the world won’t stay in a depression forever. And even depression ain’t so bad, once you get used to it. The world economy will probably drag around a bit on the bottom…with low, or negative, growth rates in most places…until it finds a new model. The old model is dead. The authorities can put on as much rouge and powder as they want. They could even give the corpse jolts of electricity to make it sit up. But they can’t revive it. It’s finished. Over. Kaput.

The old model involved lots of players playing lots of different roles. But the main protagonists were the USA. and China. Not to put too fine a point on it, but China was the maker; the United States was the taker. It was a relationship that seemed to serve both parties well…but one that actually enabled foolish and, ultimately, destructive behavior – especially on the part of the United States. When we were growing up, China was a ‘Red Menace.’ It was full of mad people doing mad things. They humiliated people by making them wear dunce hats and march through town. The Chinese made steel in backyard barbecues. They built hidden palaces for Mao (the Great Helmsman)…wore odd outfits…and threw female babies onto trash piles. (We’re not making any of this up!)

But then came a period of sanity. Deng Xiaoping decided to turn the whole country in the direction of capitalism. At first, this was thought to be a great boon to the West. We had won! And suddenly, there were a billion more consumers in the world economy. Company executives went to sleep with sweet dreams: ‘If we can sell one refrigerator to just one out of every 1,000 Chinese…’ The dreams became nightmares. Instead of selling American-made refrigerators to the Chinese, the Chinese sold Chinese-made refrigerators…and toaster ovens…and tables…and every gadget, gizmo and whatchamacallit known to man…to Americans.

Instead of being a consumer…China became a manufacturer – taking the ‘export route’ to prosperity, pioneered by Japan in the ’60s and ’70s…and perfected later by Korea and Taiwan. Instead of adding to the world’s demand for products made by the developed countries, China became the biggest supplier of stuff on the planet. China made…China sold…China took its money, bought US Treasury paper, thereby helping to keep lending rates low in the United States, and made some more. It worked beautifully as long as Americans were willing and able to continue spending. But no camel’s back is infinitely strong. The final straw came in 2007 – with total debt equal to 370% of GDP.

And now the jig is up. The old formula won’t work – neither for Americans nor for the Chinese. Despite the urging of their government, Americans cannot be expected to take on more debt in order to continue consuming more stuff from China. Nor can the Chinese reasonably expect to work themselves out of an overcapacity problem by creating more of it. But the officials in both countries seem equally benighted. They don’t seem to think very deeply, no matter what language they think in. On one side of the Pacific, the Americans think they can bring a recovery by encouraging consumers to borrow and consume more stuff. On the other, officials offer credit to entrepreneurs and industrialists – encouraging them to build more factories and add more capacity so they can make more stuff. Neither seems to realize that the real problem is THAT THE WORLD HAS TOO MUCH STUFF ALREADY.

In the United States, the private sector drags its feet; it’s had enough of debt. But along come the feds like Fred Astaire or Arthur Murray…ready to borrow and spend until the champagne runs out. When it comes to self-destruction, the feds are no slouches. They’re borrowing and spending trillions – $8 trillion is to be added to US debt over the next 8 years. So far, this money has done nothing to relieve the underlying problem: the consumer has too much debt and too little income. The government can give him a tax rebate…or give him a check for a clunker. These giveaways will produce a temporary boost. But when the giveaways give way there is nothing left. Does the guy who bought a car with government cash in 2009 buy another one in 2010? Does the fellow who brought his mortgage up-to-date with a tax rebate in 2008 go out and buy a new house in 2009?

The problems are real…at the heart of the real economy. They are not problems that can be solved by monkeying with the money supply, interest rates, or even fiscal policy. They are problems that need to be solved by the real economy…in the real economy…by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world – adapting their capacity so as to produce things for people who can actually afford to buy them. It’s a long process…with many bankruptcies and disappointments along the way… That process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery…and no return to the old model – ever. Look for more layoffs…more foreclosures…more cutbacks and workouts…

Look for more depression, dear reader… And learn to like it; it will be with us for a long time.

The Dow bounced yesterday…up 82 points, after a sell-off on Monday. This leaves it still about 1,000 points shy of the comparable rally of 1930. Will it continue bouncing until it equals the 1930 level? Or is the rally over? We wait to find out… It is hot here in France. After weeks of cool weather, we are finally getting something that feels like summer. The mornings are still fresh and beautiful. We sit outside to drink our coffee and eat our croissants. But in the afternoon, we barricade ourselves behind closed shutters…waiting for the heat to pass.

Our son Will and an associate from Buenos Aires are here working on a new project. They were asked to take charge of the family office. What’s a family office? Ah…glad you asked. A family office is a way for a family to deal with its money in an organized, disciplined fashion. The idea is to treat the family itself as though it were a business…and to maximize its return on capital and labor invested. Your editor follows the markets every day. But he does not necessarily invest, manage his money, minimize his taxes, or control his expenses any better than anyone else. And yet, he has available to him one of the finest groups of analysts and advisors in the world.

The Family Office – run by Will – is a way for us to put 2 and 2 together…to use the resources we already have at our fingertips. We aim to manage our family money in a more professional way…to reduce the effect of taxes (especially estate and gift taxes…from one generation to the next)…and to manage our resources better. As Yu Faz put it: "Making money is hard. Losing it is easy." We’ll let you know how the family office works out.




Dealers Quit 'Cash for Clunkers,' Calling Uncle Sam Too Slow to Pay
Dozens of auto dealers in the New York area and at least one in Maryland are pulling out of the U.S. government's popular "Cash for Clunkers" program because of problems in getting reimbursed. The general manager at Toyota of Bowie said the dealership stopped participating earlier this week because it cannot afford to advance the money for more rebates while waiting on the government to pay. And about half of the 425 members in the Greater New York Automobile Dealers Association have also left the program, according to the group's president.

"We're sitting with $1 million out," said Jim Bee, general manager of the Toyota of Bowie dealership. He said he has taken in between 150 and 160 clunkers and has not been paid a dime from the government. Under the government's clunker program, people who scrap their gas guzzlers can get a voucher worth up to $4,500 toward a new, more fuel-efficient vehicle. Dealers essentially front the money for the cash incentive with the understanding that the government will reimburse them once they file the necessary paperwork online and the deal is approved."Let's say we've given the customer a $4,500 voucher," Bee said, "we've given that money in good faith. But if the clunker isn't approved, we'll have to eat that $4,500."

Mark Schienberg, the president of the New York area automobile dealers group, said the government needs to speed up the approval process because dealerships are cash-flow businesses. He said many of his members have complained about the length of the 10-page-plus application and about rejections that do not give clear explanations of what the problem was. If dealers that are already living hand-to-mouth do not get repaid soon, he said, it could force them into bankruptcy. "The program was becoming too difficult for them to get through, and they couldn't float any more money," Schienberg said of the dealers that have pulled out.

Transportation Secretary Ray LaHood told reporters Wednesday that he understands some dealers are frustrated about delays in getting paid. "They're going to get their money," LaHood pledged. "We have the money to provide for them. There will be no car dealers that won't be reimbursed." LaHood said the Obama administration plans to provide more details this week on how much longer the car incentive program will last. He had previously said that a recent $2 billion boost in funding for the effort would carry the program until Labor Day.

To deal with the onslaught of applications, the National Highway Traffic Safety Administration has said it plans to triple the number of contract workers and federal employees processing the paperwork, to 1,100, by the end of the week. So far, government officials said 435,102 transactions, worth $1.8 billion, have been turned in under the clunker program. Most of the trade-ins have been trucks and sport-utility vehicles. The Toyota Corolla, Honda Civic and Ford Focus have been the top three new vehicles bought under the program.




Commercial Property Values Fall as Rent Drop Forecast
Commercial real estate values in the U.S. fell 27 percent in the year through June and rents for offices, shops and warehouse space may continue to drop through 2010 as the recession saps jobs and consumer spending. The Moody’s/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody’s Investors Service said in a report today. A rebound isn’t likely until the second half of next year, the National Association of Realtors forecast in a separate report.

Unemployment of 9.4 percent, falling industrial production and a drop in consumer spending curbed property demand, NAR said. Falling rental income and scarce credit are hurting both landlords and investors in securities backed by commercial property loans. Defaults and late payments on commercial mortgage-backed securities may surpass 7 percent by year-end, according to research firm Reis Inc. "It’s too soon to call the bottom," said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report. The 1 percent drop in Moody’s index is the smallest monthly decline since February, when it fell by 0.6 percent. The measure fell more than 7 percent in both April and May.

The Moody’s survey found a 4 percent increase in office prices in the second quarter compared with the previous three months, the only gain among the four property types measured. Industrial properties, mainly warehouses and distribution centers, fell 20 percent in the quarter, while apartments fell 16 percent and retail properties 8 percent. The reason for the increase in office prices wasn’t immediately evident, said Neal Elkin, president of Real Estate Analytics, a New York firm that provides the data for the Moody’s report.

Office rents likely will fall 14.1 percent this year and 10 percent in 2010, the Chicago-based Realtors organization said. Rents for industrial space may drop 11 percent this year and almost 12 percent in 2010, while retail rents will fall 6.1 percent in 2009 and 4.9 percent next year, NAR said. "The reduction in commercial real estate activity is expected at least through the first quarter of 2010," NAR chief economist Lawrence Yun said today in a statement. "Any meaningful recovery is not likely to occur before the second half of next year."

The dollar value of commercial property sales climbed almost 40 percent in June from May to $4.4 billion, according to Moody’s. Elkin called the increase a hopeful sign. "We shouldn’t be popping champagne bottles yet, but one month in the right direction is better than one month in the wrong direction," he said. Moody’s/REAL Commercial Property Prices Indices are based on the repeat sales of the same properties across the U.S. at different points in time.




Fed Assets Increase to $2.06 Trillion on Buying of MBS, Treasuries; Money Supply Shrinks
The size of the Federal Reserve’s balance sheet rose 2.3 percent as the central bank bought more U.S. Treasuries and mortgage-backed securities. Fed assets gained $46.2 billion to $2.06 trillion in the week that ended yesterday, the central bank said today in Washington. Holdings of mortgage-backed securities jumped $66.6 billion to $609.5 billion, and the Fed’s portfolio of U.S. Treasury securities increased $7.1 billion to $736.1 billion. U.S. central bankers kept the benchmark lending rate in a range of zero to 0.25 percent at their Aug. 12 meeting and extended a $300 billion Treasury purchase program until the end of October. The Fed said economic activity is “leveling out,” and conditions in financial markets have “improved further.”

Chairman Ben S. Bernanke has flooded the banking system with reserves, providing billions in financing and liquidity for banks, and the commercial paper, asset-backed securities and mortgage-backed securities markets. Fed officials are studying the tools needed to roll back monetary expansion. Credit extended through the Fed’s Term Auction Facility, a mechanism to provide greater distribution of reserves to commercial banks, declined by $12.5 billion to $221.1 billion. Discount-window lending to commercial banks stood at $29.9 billion yesterday versus $38 billion the previous week. Commercial paper held by the Fed under an emergency program begun in October fell to $49.5 billion from $53.8 billion. Biweekly TAF auctions were reduced to $125 billion in July from $150 billion and cut to $100 billion in August. I

n June, the Fed extended the currency swaps and other facilities by three months to Feb. 1. Currency swaps, where the Fed provides dollars to other central banks to lend in their countries, stood at $69.1 billion yesterday, down from $75.2 billion a week earlier. Credit extended by the Fed in connection with the rescue of insurer American International Group Inc. fell to $76.3 billion from $77.8 billion. In June, AIG announced that it agreed to hand over stakes in two overseas units to the New York Fed to reduce its central bank debt by $25 billion. Federal agency securities held by the central bank increased by $1.8 billion to $111.8 billion. Wall Street bond-dealer borrowings stood at zero for the 15th straight week. On May 13 the amount fell to zero for the first time since Sept. 10, just before the collapse of Lehman Brothers Holdings Inc.

The Fed also said the M2 money supply fell by $5.6 billion in the week ended Aug. 10. That left M2 growing at an annual rate of 8.5 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target. The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds. For the latest reporting week, M1 fell by $13.4 billion, and over the past 52 weeks, M1 rose 17.5 percent. The Fed no longer publishes figures for M3.




Americans: Serfs Ruled by Oligarchs
by Paul Craig Roberts

    li>“In a little time [there will be] no middling sort.  We shall have a few, and but a very few Lords, and all the rest beggars.”  R.L. Bushman
  • “Rapidly you are dividing into two classes--extreme rich and extreme poor.”   “Brutus” 


Americans think that they have “freedom and democracy” and that politicians are held accountable by elections.  The fact of the matter is that the US is ruled by powerful interest groups who control politicians with campaign contributions.  Our real rulers are an oligarchy of financial and military/security interests and AIPAC, which influences US foreign policy for the benefit of Israel.
Have a look at economic policy.  It is being run for the benefit of large financial concerns, such as Goldman Sachs.  

It was the banks, not the millions of Americans who have lost homes, jobs, health insurance, and pensions, that received $700 billion in TARP funds.  The banks used this gift of capital to make more profits. In the middle of the worst economic downturn since the Great Depression, Goldman Sachs announced record second quarter profits and large six-figure bonuses for every employee.  
The Federal Reserve’s low interest rate policy is another gift to the banks.  It lowers their cost of funds and increases their profits.  With the repeal of the Glass-Steagall Act in 1999, banks became high-risk investment houses that trade financial instruments such as interest rate derivatives and mortgage backed securities. With abundant funds supplied virtually free by the Federal Reserve, banks are paying depositors virtually nothing on their savings.

Despite the Federal Reserve’s low interest rate policy, beginning October 1 banks are raising the annual percentage rate (APR) on credit card purchases and cash advances and on balances that have a penalty rate because of late payment.  Banks are also raising the late fee. In the midst of the worst economy since the 1930s, heavily indebted Americans, who are losing their jobs and their homes, are to be bled into bankruptcy by the very banks that are being subsidized with TARP funds and low interest rates.

Moreover, it is the American public that is on the hook for the TARP money and the low interest rates.  As the US government’s budget is 50 per cent or more in the red, the TARP money has to be borrowed from abroad or monetized by the Fed.  This means more pressure on the US dollar’s exchange value and a rise in import prices and also domestic inflation. Americans will thus pay for the TARP and low interest rate subsidies to their financial rulers with erosion in the purchasing power of the dollar. What we are experiencing is a massive redistribution of income from the American public to the financial sector.  

And this is occurring during a Democratic administration headed by America’s first black president, with a Democratic majority in the House and Senate. Is there a government anywhere that less represents its citizens than the US government?  

Consider America’s wars.  As of the moment of writing, the out-of-pocket cost of America’s wars in Iraq and Afghanistan is $900,000,000,000. When you add in the already incurred future costs of veterans benefits, interest on the debt, the forgone use of the resources for productive purposes, and such other costs as computed by Nobel economist Joseph Stiglitz and Harvard University budget expert Linda Bilmes, “our” government has wasted $3,000,000,000,000--three thousand billion dollars--on two wars that have no benefit whatsoever for any American whose income does not derive from the military/security complex, about which five-star general President Eisenhower warned us.

It is now a proven fact that the US invasion of Iraq was based on lies and deception of the American public.  The only beneficiaries were the armaments industries, Blackwater, Halliburton, military officers who enjoy higher rates of promotion during war, and Muslim extremists whose case the US government proved by its unprovoked aggression against Muslims. No one else benefitted.  Iraq was a threat to no one, and finding Saddam Hussein and executing him after a kangaroo trial had no effect whatsoever on ending the war or preventing the start of others.  

The cost of America’s wars is a huge burden on a bankrupt country, but the cost incurred by veterans might be even higher.  Homelessness is a prevalent condition of veterans, as is post-traumatic stress.  American soldiers, who naively fought for the munitions industry’s wars, for high compensation for the munitions CEOs, and for dividends and capital gains for the munitions shareholders, paid not only with lives and lost limbs, but also with broken marriages, ruined careers, psychiatric disorders, and prison sentences for failing to make child support payments.

What did Americans gain from an unaffordable war in Iraq that lasted far longer than World War II and that put into power Shi’ites allied with Iran?   The answer is obvious: nothing whatsoever. What did the armaments industry gain?  Billions of dollars in profits.

Obama is the presidential candidate who promised to end the war in Iraq.  He hasn’t.  But he has escalated the war in Afghanistan, started a new war in Pakistan, intends to repeat the Yugoslav scenario in the Caucasus, and appears determined to start a war in South America.  In response to the acceptance by US puppet president of Columbia,  Alvaro Uribe, of seven US military bases in Columbia, Venezuela warned South American countries that the “winds or war are beginning to blow.” 

Here we have the US government, totally dependent on the generosity of foreigners to finance its red ink, which extends in large quantities as far as the eye can see, completely under the thumb of the military/security complex, which will destroy us all in order to meet Wall Street share price expectations. Why does any American care who rules Afghanistan?  The country has nothing to do with us.  

Did the armed services committees of the House and Senate calculate the risk of destabilizing nuclear armed Pakistan when they acquiesced to Obama’s new war there, a war that has already displaced two million Pakistanis?   No, of course not.  The whores took their orders from the same military/security oligarchy that instructed Obama. The great American superpower and its 300 million people are being driven straight into the ground by the narrow interest of the big banks and the munitions industry. People, and not only Americans, are losing their sons, husbands, brothers, and fathers for no other reason than the profits of US armaments corporations, and the gullible American people seem proud of it. 

Those ribbon decals on their cars, SUVs and monster trucks proclaim their naive loyalty to the armaments industries and to the whores in Washington who promote wars. Will Americans, smashed and destroyed by “their” government’s policy, which always puts Americans last, ever understand who their real enemies are? Will Americans realize that they are not ruled by elected representatives but by an oligarchy that owns the Washington whorehouse?   Will Americans ever understand that they are impotent serfs?




The Entertainment Value of Snuffing Grandma
A nation of children roots for the Mafia
by Joe Bageant

Every day I get letters asking me to weigh in on the healthcare fracas. As if a redneck writer armed with a keyboard, a pack of smokes and all the misinformation and vitriol available on the Internet could contribute anything to the crap storm already in progress. Besides that, my unreasoned but noisy take on this issue is often about as welcome as a fart in a spacesuit. None of which has ever stopped me from making a fool of myself in the past. So here goes.

There ain't any healthcare debate going on, Bubba. What is going on are mob negotiations about insurance, and which mob gets the biggest chunk of the dough, be it our taxpayer dough or the geet that isn't in ole Jim's impoverished purse. The hoo-ha is about the insurance racket, not the delivery of healthcare to human beings. It's simply another form of extorting the people regarding a fundamental need -- health.
Unfortunately, the people have been mesmerized by our theater state's purposefully distracting and dramatic media productions for so long they've been mutated toward helplessness.

Consequently, they are incapable of asking themselves a simple question: If insurance corporation profits are one third of the cost of healthcare, and all insurance corporations do is deliver our money to healthcare providers for us (or actually, do everything in their power to keep the money for themselves), why do we need insurance companies at all? Answer: Because Wall Street gets a big piece of the action. And nobody messes with the Wall Street Mob (as the bailout extortion money proved). Better (and worse) presidents have tried. Some made a genuine effort to push it through Congress. Others expressed the desire publicly, but after getting privately muscled by the healthcare industry, decided to back off from the idea. For instance:
• Franklin Roosevelt wanted universal healthcare.
• Harry Truman wanted universal healthcare.
• Dwight Eisenhower wanted universal healthcare.
• Richard Nixon wanted universal healthcare.
• Lyndon Johnson wanted universal healthcare.
• Bill Clinton wanted -- well we can't definitely say because he made sure that if the issue blew up on him, which it did, Hillary would be left holding the turd. Is it any wonder that woman gets so snappy at the slightest provocation? First getting left to hold the bag on healthcare, then the spots on that blue dress.

So why did American liberals believe Obama would bring home the healthcare bacon? Because they live in an ideological cupcake land. It's a big neighborhood, a very special place where "Your vote is important," and "by electing the right candidate, you can change our beloved nation." Most of America lives in that neighborhood, even though they've never personally met. It's a place where the shrubbery and flowerbeds of such things as "values" and "hope" bloom. Hope that our desires coupled with the efforts of a good and decent president can affect "change." Evidently these voters never heard the old adage, "Hope in one hand and piss in the other, and see which one fills up first."

The slaughter of the innocents by the healthcare lobby has pretty much extinguished the political usefulness of the word hope. Nobody, especially Obama, uses it now. The first on-stage scuffle of the Obama administration, government assured healthcare, quickly settled down into the accustomed scenario of very rich and powerful people in expensive suits "finding middle ground," otherwise known as the status quo. Single payer healthcare soon became "a consumer government alternative to private insurance," and is now "a system of health cooperatives. Next comes "slightly better health insurance (but not medical services) than before, from the same insurance companies but at twice the price; don't worry though, we're increasing your tax load so you can afford it."

The televised screaming matches, having served their purpose, are over now. The presidency and the nation have settled back into the normalcy of the officially sanctioned state consciousness and its curious non-language, one modified and shaped daily by corporate and government symbiosis. Over generations we've come to internalize this imagistic language, which is quite theatrical when heated up for public consumption and dully bureaucratic when attention is to be avoided. But always it is void of content and any sort of truth. In the corporately managed theater state, it's not whether a thing is true that matters, but how it sounds and looks and what you call it. Call end of life counseling a "death panel," and you've just turned mercy and choice into one more Great Satan.

In the end though, healthcare American style comes down to the preferences of two elite castes, Congress and corporate powers, neither of which can exist without the other. Corporations need the government to sanction their methods of extracting wealth from the public. Congress needs corporations to finance its campaign chariot races. Right now members of Congress have an excellent chance of putting the arm on healthcare industry lobbyist for some real cash:
Senator Smedley Heathwood: "Oh, I dunno, I'm sort of liking Obama's alternative."
Godzilla Healthcare Inc.:  "Here, take this suitcase full of gold bullion, call me if you run short. And remember, we've got that ‘Life is a pre-existing condition' bill coming up in the Senate soon."

Siamese twins, joined at the hip, they share the same goal, preservation of control -- the government's social control and the corporations' economic control. And you cannot have one without the other. Obama got elected on hope of reform, despite that one cannot reform a mafia, only pay increased extortion moneys. He's fortunate that it was not a genuine demand for reform, just hope. We're fortunate we did not demand reform because we're not going to get it. Obama doesn't have to reform the healthcare industry mob. All he has to do is look like he took a shot at it, and hope it's convincing enough.

What we've seen is probably his best shot, too. Why not? There is always the off chance it might work, in which case his "presidential legacy" would be assured. And if it doesn't, well, the serious progressives who are screeching mad at him now will still have to vote for him as the incumbent in 2012. Or learn to love somebody like Mitt Romney, Sarah Palin, Mike Huckabee, Jeb Bush, Rick Santorum (take your pick) or some as-yet-unknown the GOP drags out from under the hen house and ballyhoos as a "new face." Luckily, Dick Cheney is out of the question, barring a coup by the far right wing of the schizophrenic GOP. But still, after Palin, one shudders at the prospects.

Whatever happens, we will not see Congress stand up against the extortion of its people by the healthcare industry. We will not see even the most ordinary kind of healthcare declared as a human right, as it is in so many other nations. We will see, however, greater access to the public treasury by the insurance corporations. Every nation in the world is now party to at least one treaty that addresses health as a human right, including the conditions necessary for the delivery of health services. Healthcare is a right under the Universal Declaration of Human Rights. Hell, even Saddam Hussein provided healthcare.

That Americans cannot grasp this fundamental aspect of human rights (but then we cannot even get child nutrition, or limiting the number of times you can taser an old lady in an airport, out of the starting gate) and join the civilized world and assure its people of such things is testimony. Testimony that we live in a vacuum exclusive of the accepted standard of mercy and decency common to civilized democratic nations elsewhere. Testimony that even we the citizenry would rather maintain and spread lies than accept truths such as most people in countries with universal healthcare would not ever give it up in favor of the U.S. system.

Most of all though, it is testimony that we live under an induced mass hallucination where spectacle replaces fact, information and common sense. In place of actionable information, we are served up screaming red faces -- angry mobs manufactured for TV protesting "government interference in the people's healthcare choices." One must wonder what inchoate anger is really being tapped by the organizers of these strange "citizen protests." As usual, the straw boogeyman of socialism is once more invoked. "Oh my god! I'll have to give up my $1,100 a month insurance bill, which only pays 80% of my insurance costs AFTER I pay the initial $5,000 of those costs! If that ain't Joe Stalin all over again, I don't know what is!" We get the false media drama of "death panels."

And being captives of spectacle and hyperbole, we friggin love it. The idea of death panels plays to our childish attraction to the extreme and entertaining. Killing Grandma is far more entertaining to our imaginations than say, guaranteed access to chest screens and blood pressure medicine. Two generations into this national infantilization, it's now the only national life we know -- the ideological spectacle made real.

To steal a page from Guy Debord, society has become ideology. We live in an antidialectical false consciousness, imposed at every moment on everyday life as spectacle. We are held in thrall. Our faculty of ordinary encounter has been systematically broken down. In its place we now have our unique social hallucination. Never do we encounter anything directly, yet we get the illusion of encounter. This includes encounter with each other. Anyone who lives in meatspace with his or her fellow Americans could not deny 57 million of them health. In this society no one is any longer capable of recognizing anyone else. Instead, we see others as the screamers at the town hall meetings, or as communists who want to give free healthcare to illegals and establish death panels. Or as Christian fundamentalists, or as liberals or conservatives. Or as celebrities or as nobodies.

But most importantly, whenever we must reach any significant agreement as human beings, whether it be about something as globally insignificant as U.S. domestic policy (we are only 6% of the world population, and though it hasn't soaked in yet to most Americans, we're also broke and owe the Chinese loan shark a wad) or as significant as global warming, we immediately cede the field to ideology. We simply don't know how to do anything else.

Ideology has utterly triumphed. It has separated us from ourselves and built itself a home inside our consciousness, from whence it operates now as our reality. There is no going back, only forward. Given that we are a nation of children who prefer to close our eyes and make a hopeful wish with Tinkerbelle, rather than give hope the piss test, then let us hope to high hell. We may as well go for broke. So let us hope that, in going forward, new and unforeseen developments in the national consciousness occur. Developments that offer an escape from this one so deeply colonized by the corpo-political machinery we created -- and which in turn recreated us. One that will break us loose from enthrallment. Maybe collision with a giant asteroid. Or that Garth Brooks will be barred from making a fifth comeback tour.

That's one hope. A consciousness shattering event by American standards. Another hope is for an absolute and total collapse of the system. At this point, I'll take what I can get.


99 comments:

Anonymous said...

Well the lawyers and bankers are all sitting fat and complacent. Vast majority of people still have jobs. Most people giving the recession a passing care. Sorry Ilargi, but I am not sure it is as bad as you are making it out to be.

thethirdcoast said...

@ ogardener:

I chose to no longer participate in Western cultural philosophy during the early nineteen seventies.

Sounds like a good plan to me.

Perhaps this is also why I find Asian women so delightful?

Anonymous said...

@ ANON 10:37PM

"Most people giving the recession a passing care."

I have a name for those people, prey species.

Ilargi said...

"Sorry Ilargi, but I am not sure it is as bad as you are making it out to be."

The stats are (almost) all from official reports, not me. I just present them and ask some questions about the viability of numbers that hardly seem to fit together.

Anonymous said...

Ilargi - I agree that the numbers look like squat, but what I cannot understand is the dosconnect between the statistics and the reality for the majority of people. Most are just going about business as usual.

ogardener said...

Outstanding intro Ilargi.

Anonymous said...

BTW Ilargi, I find it frustrating since I am taking steps to protect my wealth and everyone just keeps on with life. I feel like a fool for being prudent.

ogardener said...

Blogger thethirdcoast said...

Perhaps this is also why I find Asian women so delightful?

You're asking yourself a question?

Starcade, now from Leviathan said...

You see, here's the problem:

Now that the credit bubble has burst, everything dependent on it will go away as well:

-- Health care as we've known it.
-- The just-in-time delivery model
-- Commerce as we've become used to...

... and the people whose lives cannot continue to function without them and many more conveniences about to leave us (or leaving us now, or have already left us).

Right now, I'm just waiting for the first TSHTF civil unrest.

Anonymous said...

Starcade - Not a doomer but sometimes I think I overreact and nothing really bad is going to happen.

Ilargi said...

".... what I cannot understand is the dosconnect between the statistics and the reality for the majority of people."

Many things look good just before a storm hits.

What I find hard to understand are the statistics that supposedly indicate hosanna, vs the fast worsening reality for a fast growing minority of people.

A society about exclusively based on borrowing can stretch its habit quite a bit before it hits the wall. But the society needs to keep moving forward, and the wall ain't going anywhere.

scandia said...

@Anon 11:22,I know what you mean. Watching business as usual is surreal.
When I begin to doubt my sanity I go back to the data and especially what I am now learning about systems. From that place current imbalances and extremes plus lack of transparency don't bode well for business as usual.
Keep up with the preparations and the conservations.

Americano said...

I decided to sign up so I am recognizable.

Ilargi - I don't get it either. Perhaps, I, you, we, are just dellusional. The market goes up. Most people have jobs and can pay their bills. Spend on miscellaneous items. I don't spend much and feel like I am doing something wrong.

David said...

WHAT BILL FOUND OUT WHEN HE WENT TO WASHINGTON DC

8/27/08
THE MYTHICAL FDIC FUND
By William M. Isaac
William Isaac, former Chairman of the Federal Deposit Insurance Corporation, (FDIC)

…When I became Chairman of the FDIC in 1981, the FDIC's financial statement showed a balance at the U.S. Treasury of some $11 billion. I decided it would be a real treat to see all of that money, so I placed a call to Treasury Secretary Don Regan:

Isaac: Don, I'd like to come over to look at the money.

Regan: What money?

Isaac: You know . . . the $11 billion the FDIC has in the vault at Treasury.

Regan: Uh, well you see Bill, ah, that's a bit of a problem.

Isaac: I know you're busy. I don't need to do it right away.

Regan: Well . . . it's not a question of timing . . . I don't know quite how to put this, but we don't have the money.

Isaac: Right . . . ha ha.

Regan: No, really. The banks have been paying money to the FDIC, the FDIC has been turning the money over to the Treasury, and the Treasury has been spending it on missiles, school lunches, water projects, and the like. The money's gone.

Isaac: But it says right here on this financial statement that we have over $11 billion at the Treasury.

Regan: In a sense, you do. You see, we owe that money to the FDIC, and we pay interest on it.

Isaac: I know this might sound pretty far-fetched, but what would happen if we should need a few billion to handle a bank failure?

Regan: That's easy - we'd go right out and borrow it. You'd have the money in no time . . . same day service most days.

Isaac: Let me see if I've got this straight. The money the banks thought they were storing up for the past half century - sort of saving it for a rainy day - is gone.
If a storm begins brewing and we need the money, Treasury will have to borrow it. Is that about it?

Regan: Yep.

Isaac: Just one more thing, while I've got you. Why do we bother pretending there's a fund?

Regan: I'm sorry, Bill, but the President's on the other line. I'll have to get back to you on that.

Ilargi said...

"Most people have jobs and can pay their bills."

14+ million unemployed, median time 6 months, 4 million foreclosures in 2009 alone, I say we have a contender. A depression doesn't start out with a 90% jobless number. WHat fun would that be?

Americano said...

Ilargi - Best educated guess. Where do you see unemployment ending up at its peak?

NZSanctuary said...

@Frank
"While y'all are beating [yourself/anyone not a sanctimonious ascetic] up, you might reflect that the same civilization you despise is what made it possible for there to to be 7 billion people, rather than a tenth as many, in the first place... You actually have to take the good with the bad."

No need to beat yourself up, agreed, but you really could try facing facts, so that you get an idea of what changes we need to make.

Our civilisation is based on falsehoods, temporary resource plunder, a lack of understanding about complex systems, and grandiose ideas that need the cr@p beaten out of them if our descendants are to have a shot at decent lives. BTW, 7 billion people is half the problem... it isn't a good thing. It's not a blessing. It's not a marvel of modern civilisation – it is part of the fcuk up.

Anonymous said...

Propaganda campaign machines of the past and in fiction novel like 1984 and Brave New World, don't really give an accurate road map to the present day clusterfuckery being cobbled together in the name of preserving corporate mafioso as an endangered financial species.

A funny thing happened on the way to the Marketing of Lies Forum held in DC, sponsored by Wall St, pimped and catered by K St.

The marketing geniuses, who consider themselves to be MOTU, are starting to run out of magic money show tricks and sleights of hand.

The Obama-nation BS Summer Tour 2009® has run out of gas.

It looks like a Garth Brooks fifth comeback tour attempt. Oh no.

It use to be that you weren't suppose to wear white after Labor Day, but as the hazy of summer BBQ's and umbrella drinks fade, many will become white when the blood drains from their heads as the last of their assets are siphoned from their accounts by Da Boyz. Double Oh No.

Who coulda known?

This economy is one sick puppy.

The Shanghai index is falling off the cliff, just like last year, and is a leading indicator, but this time around, it portends Main St America tanking after Labor Day while attempting a spectacular 'Recovery Cannonball' to impress the Crowd from the High Board into an empty pool.

Ouch.

This is going to be quite graphic.

The criminal classes' only real diversion left is to hope for a really big pandemic in October.

All Saints Day is open.

It's a date then.

I. M. Nobody said...

First post here after lurking for a few weeks. I&S have unusually good vision IMHO, as do a number of the commentors.

@anon 12:44

Well said!

My calendar is open for that period. Formal or casual? BYOB?

Anonymous said...

Ilargi hit’s the unemployment nail on the head again--the same nail that will trip up the “recovery.”

What a great--in a chilling sort of way-- set of articles tonight. I like Bonner more and more every time I read him. He makes way too much sense. Paul Craig Roberts is anything but subtle and diplomatic; he kicks jingoism in the nuts and slams a crowbar into the skull of political partisanship. As for Joe Bageant, well, we might be talking about a prophet and a genius. He digs deep, way down there where most are afraid to look

Aesthete

Anonymous said...

What explains this Wall Street over Main Street dichotomy?
Monty Python - Always Look on the Bright Side of Life

jal said...

Re.:
"... The criminal classes' only real diversion left is to hope for a really big pandemic in October. "

What kind of succession tax exit in the US?
A pandemic could be a big loto winner for the gov.
jal

Anonymous said...

"Some less-well-known sites reprint articles outright, or large parts of them, without permission, a clearer copyright violation."

Uh oh. I think I hear the sirens coming Ilargi.

A.P. Cracks Down on Unpaid Use of Articles on Web

Bukko_in_Australia said...

"Most people have jobs and can pay their bills."

Revised version: "The poster has a job and can pay his bills, so why should HE care?"

New American motto: "I got mine Jack. Good luck with yours."

To quote a few other philosophical people, I like Michael Moore's rhetorical question in "Sicko": "Are we a 'Me' country or a 'We' country?" I see a lot of comments from people on the "me" side.

I think Bageant turned a good phrase with "theatre state." I've lived in a lot of area that had elaborate movie or drama halls called "The State Theatre." But America is so attuned to the hologram of media unreality that it IS the theatre state. I wonder if that makes it any easier for the suffering people; like it's not their one and only life slipping away, it's just a bad role they're playing?

As for the bogus optimism in light of bad econonumbers, and people disbelieving there's a crisis, isn't there some savant here who likes to toss around a saying about "You have to dig your well before the water runs out"? But like Noah and his mythical Ark, people are going to scoff while you're preparing for something that hasn't happened yet.

Americano said...

Bukko - Please don't make pronouncements on me, since you don't know me. I care about what happens to people around me. I don't appreciate your comment.

Bukko_in_Australia said...

Sorry Americano. I was getting your line mixed up with the "Whatmeworry?" anonymous at the top of the thread.

Americano said...

Bukko - I see. Sorry for jumping to conclusions on you. No worries?

zander said...

it's seems to me to be just like how the typical contrarian view comes together eventually. (eg. prechter turning bullish circa march '09 when bullish sentiment was only 3%)and typical of market turns generally.
What is happening here is that even the very people who know for a fact that things are going to go awry start doubting the irrefutable evidence in front of their very eyes, and once we convince ourselves that maybe we got it wrong THAT is when it will turn down with a vengeance.
Think about it, if we are starting to believe the unbelievable It's real close, it's coming.......When we least expect it.

Anonymous said...

From a genealogy list based in eastern Ontario: "My cousin arrived here yesterday after attending a family reunion in Lansing, Michigan. He was informed that the Governor is getting rid of the genealogical records of the state by selling them as the state needs money. The reasoning is very disturbing. Any of our members from Michigan maybe can tell us what is going on?"

Hugh

VK said...

http://www.zerohedge.com/article/global-trade-collapsing-china-now-japans-top-trade-partner

Global trade has collapsed by around 35%!

Ilargi said...

"Americano said...
Ilargi - Best educated guess. Where do you see unemployment ending up at its peak?"


I think it's important to know what definition to use for "employment". In the sense we presently use it, 50% is certainly in the cards.

el gallinazo said...

I think U3 is headed for zero after everyone uses up their benefits :-(

Anonymous said...

Only a couple things hold up the housing market. Jobs hold up housing, but then jobs are housing when you consider how many jobs are housing related.

The other thing that holds up jobs is import/export related jobs, which also overlap housing.

Cheap crapola from China to fill up the McMansions represents a big chunk of retail.

So as housing is swirling down the hopper, exports and imports are collapsing, taking with them the last scrap of hope for 'recovery'.

What's left of any genuine stock market reaction to real bad news is going to freak out at the trade numbers. China's trade has basically collapsed seven months into the year -- 32% drop in imports, 37% drop in exports, and 44% drop in exports to the U.S.

So how are the Corporate Media Mafia going to lie, cheat and steal their way out of these numbers?

Housing is being propped up with the corpses of Freddie and Fannie, who's going to prop up trade numbers? The military/industrial mafia will buy up lots and lots of Chinese crap by swapping with weapons exports, all borrowed from the FED's large shoebox of T-bills it 'bought' at failed Treasury auctions?

Sounds like a plan to me.

Just do it out in broad daylight and the Sheeple will never suspect anything.

Stealing and lying in public is the new 'reality TV' of America the Beautiful from sea to shining sea.

el gallinazo said...

A 8:13

"Housing is being propped up with the corpses of Freddie and Fannie, who's going to prop up trade numbers? The military/industrial mafia will buy up lots and lots of Chinese crap by swapping with weapons exports, all borrowed from the FED's large shoebox of T-bills it 'bought' at failed Treasury auctions?"

Most of the Chinese crap is consumer. What would the MIC do with it?

Doesn't sound like much of a plan to me. The $64 question is how long this Wile E Coyote moment can last. The Feb can't do this "quantitative easing," i.e. eating their own vomit, forever. Eventually the bond market will say "no mas." When is the question.

ca said...

Ilargi/Stoneleigh --

Marc Faber is saying that while we haven't seen the market low in real terms, we have seen it in nominal terms. Is this possible?

Anonymous said...

"Most of the Chinese crap is consumer. What would the MIC do with it?"

They will stock the PX's with some of it and use the rest to 'buy' the cooperation of the local indigenous peoples of Suburbia so they won't line the roads with IEDs.

(I'm not sure if the local indigenous peoples of Suburbia are smart enough to handle IEDs, most can't change a lawn mower blade)

Anonymous said...

Larry Flynt - yes, that Larry Flynt - wrote today on Huffington Post:


The American government -- which we once called our government -- has been taken over by Wall Street, the mega-corporations and the super-rich ... Both Democrats and Republicans dance to the tune of their corporate masters. In America, corporations do not control the government. In America, corporations are the government.

This was never more obvious than with the Wall Street bailout, whereby the very corporations that caused the collapse of our economy were rewarded with taxpayer dollars. So arrogant, so smug were they that, without a moment's hesitation, they took our money -- yours and mine -- to pay their executives multimillion-dollar bonuses, something they continue doing to this very day. They have no shame. They don't care what you and I think about them. Henry Kissinger refers to us as "useless eaters"...

The reason Wall Street was able to game the system the way it did -- knowing that they would become rich at the expense of the American people (oh, yes, they most certainly knew that) -- was because the financial elite had bribed our legislators to roll back the protections enacted after the Stock Market Crash of 1929.

Congress gutted the Glass-Steagall Act, which separated commercial lending banks from investment banks, and passed the Commodity Futures Modernization Act, which allowed for self-regulation with no oversight. The Securities and Exchange Commission subsequently revised its rules to allow for even less oversight -- and we've all seen how well that worked out. To date, no serious legislation has been offered by the Obama administration to correct these problems.

Instead, Obama wants to increase the oversight power of the Federal Reserve. Never mind that it already had significant oversight power before our most recent economic meltdown, yet failed to take action. Never mind that the Fed is not a government agency but a cartel of private bankers that cannot be held accountable by Washington. Whatever the Fed does with these supposed new oversight powers will be behind closed doors...

The real war is not between the left and the right. It is between the average American and the ruling class. If we come together on this single issue, everything else will resolve itself. It's time we took back our government from those who would make us their slaves.
http://tinyurl.com/62wa9t

el gallinazo said...

A 8:56

"They will stock the PX's with some of it and use the rest to 'buy' the cooperation of the local indigenous peoples of Suburbia so they won't line the roads with IEDs."

Well you could consider that a more efficient method of promoting the Kash für Klunckers program.

CS said...

Ilargi, Stoneleigh,
I'm interested to know if your perception of how the market responds to QE is based purely on the financial impact (i.e. QE on top of x billion in bonds equates to a dilution of y%) or is it the signal it sends? (i.e. QE = someone, high up, somewhere doesn't think we can persuade the global bond markets that our monthly requirement of slave tokens are going to sell.)

i.e. Do you think the level of QE we've seen both in the US and UK is sufficient to cause real 'dilution' - or are the changes in exchange rates that usually occur after announcements based more on psychology and perceived weakness?

TIA

Anonymous said...

Existing housing sales up much more than expected. Looks like housing Armageddon has been put on hold for another month. Certainly the 80% drop in prices from top to bottom has a long way to go to realization, if it happens at all. I'm skeptical if it'll happen at all. Given where bucky is going, the bottom might be in as we speak. I don't think this means prices will rise from here though. Perhaps sideways until the year 2050? Hehehe....

Anonymous said...

For anyone doubting the real state of the economy, all one really needs to follow is Z1. Illargi performs a yeoman's job of analyzing different statistical reports & commenting on the daily MSM spin, but in the end it's really all about deflation v inflation.

Since our most recent period of economic "growth" was nothing more than massive credit expansion bubble, it serves to understand that there won't be any lasting "recovery" without the resumption of secular asset appreciation + debt leverage (ie securitization).

The Z1 report tells the tale of the tape. It's clear & plain for all to see that while credit expansion has been flat or declining in each major category, it's the 800 lb gorilla, aka 'household sector', where the real action lies.

Notwithstanding the expansion in federal gov't & agency debt, the overall impact is one of continued deflation. At the end of the day, this is all one really needs to know.

No credit expansion, no economic growth. The central gov't can never make up for the lost organic process by which billions of people around the world individually & collectively willingly spent money/incurred debt to purchase "things".

Human behavior is the ultimate momentum play. Net out the effect of the depreciating dollar against the market rise, and one can reasonably conclude that all QE has managed to achieve is stasis.

In actuality, the other shoe has already dropped; it's simply the timing that is off. Ever see an artillery shell fire & hit 5 miles out? It takes a few seconds for the sound to reach after the damage has already been done.

Anonymous said...

"Looks like housing Armageddon has been put on hold for another month."

Good. More prep time, and I'm grateful.

Don't forget though, what happens in September. You should see the numbers in October.

Punxsutawney said...

"We saved the world from disaster", Bernanke says,

Wow! Who has he saved? Certainly not me or anyone I know. I guess I don't know the right people.

Well I guess I'll inore the reality around me, borrow a bunch of money and buy a big suv. Happy times are here again.-sarcasm

Every month in my area, another employer lays people off and moves production to China. Those jobs are lost and most likely never coming back.

To Anon 10:37, I know I'm only a survey of one, but very few of the people I know are going about business as usual whether employed or not. Everyone is nervous. I see the same "For Sale" signs on houses that have been there for months. Of the dozen people I am aware of who have lost their jobs in the last 9 months, only one has found new employment. And BTW, if U3 was at 49%, I guess you could say most people are employed, but I wouldn't call it a great economy.

Dan W. said...

Coal usage in power plants down 14% year on year for the US. Would be down even further if the coal plants could stop some of their must-take deliveries and run other units on the cheap natural gas.

Just thought I'd inject a piece of sunshine.

Breathe my friends. Breathe.

Some form of WE will get through this and whoever that is will be the better for it when this brief period of insanity known as Globalized Industrial Capitalism has come to an end.

Anonymous said...

Punxsutawney,

Today's housing stats are transient green shoots at best. I think in the long pull life as we know it goes away for good. The only thing I quibble with is the timing of the end. This could very well play out as death by a thousand cuts, which will take place over years rather than months. Too many around here have us giving up the ghost imminently. Perhaps that'll be the ticket, but that timing of outcome is not a fait accompli.

Anonymous said...

@ Anon 11:18,

Me thinks the reason for this bizzyness as usual disconnect is because the unemployment benefits are still flowing to "most" percentage wise. And, they will likely be extended and extended until the era of big growth resumes and fixes all those menacing problems yet once again.

knothead

Ilargi said...

The fact that prices are down 15% in the past year, while taxpayer owned entities buy up any and all loans offered (Ginnie Mae took over $1 trillion that Fannie and Freddie couldn't anymore) tells me the entire market is fake and at great risk. A look at mortgage delinquencies and foreclosures shows how much inventory will rise going forward.

The alleged bottom exists only because everybody buys everybody else a home. While everybody is getting poorer through job losses, home losses and credit cuts, and everybody else is too.

We've been doing it so long, this credit and borrowing game, that we easily fail to see the consequences of going in deeper. Sort of like the boiling frog.

If your mortgage debt is 300% of your income, that is overseeable. But if your home loses 33% of its value (Case-Shiller average) and your income drops 20% or more, a normal situation for millions of people, that percentage moves skyward fast.

There is a limit. We just don't want to see it. It has to hit us over the head.

I often wonder what makes the people who keep on looking at the roses think they are the only game in town, what gives them the impression that repressing the negative will do them any good.

As societies, we all refuse to prepare. It's an interesting phenomenon, for sure. But if the good tidings start to hamper and stutter, it'll also be a very destructive phenomenon. And we could catch much of that fall, simply by admitting it's possible, and including that possibility in our plans for what's to come.

We don't, which confirms that we are pretty much like amoeba. No long term planning possible, other than in theory. At least amoeba don't waste all their time feeling they have to pretend planning. Who's the smart guy here? The outcome is the same.

Yeah, we make all sorts of stuff amoeba can't. But what good is that if that stuff kills off our progeny? At least amoeba make sure their kids survive. While we actively kill off ours.

I know, it looks like I'm wandering off topic, but I don't really. Magical thinking is the same all over the place, be it in religion or in the economy.

Anonymous said...

The point I'm making is that they've (debt merchants) bought more time than I thought possible only six months earlier. How much more time can they buy? Months? Years? Decades? No one really knows for sure.

VK said...

This is an interesting podcast from earlier on bloomberg radio today. Tyler Durden of ZH talks about high frequency trading/ stealing and Lamoureux talks about buying the long end of the curve to prosper from deflation.

Durden on `Flash' Trading, Lamoureux on Deflation: Audio

http://media.bloomberg.com/bb/avfile/Markets/Analyst_Calls/vrT.qGWIoYPk.mp3

Punxsutawney said...

Anon at 11:32

Yes I agree that the timing is important, and things may slowly unravel in fits and starts with periods of improvement before the next leg down, without some big blowup and crash. I really don’t know, but I’m pretty sure I see the trend.

And per my Bernanke quote: Maybe they saved the world today, but at what cost to the future? I suspect it's all illusion.

Problem Is said...

"US July jobless claims in surprise rise"

A surprise to whom, Mr. Ilargi?

A surprise to the idiot propagandists who populate the corporate news media? Yes I would believe that.

A surprise to any one who is aware of, or analyzes the manipulation of the unemployment statistics? Not a surprise to us. Read John Williams analytics on Shadow Gov't Stats:

http://www.shadowstats.com/article/employment

Is Williams' work just arcane nit picking over mathematical models on a graph? Or are there real life implications on why 70k to 130k unemployed are subtracted off of the numbers monthly (see Birth/Death ratio)… When reading unemployment numbers, readers may want to know:

If you run out of unemployment insurance benefits, then you become marginally attached and are no longer counted as unemployed by U3...

Are you any less unemployed?

If you are a construction worker and there are no construction jobs for you to apply for in your area, then you are marginally attached and not counted as unemployed by U3...

Are you any less unemployed?

The Obama administration cuts deficit projections based on a major decrease in bank failures? Who's smoking opium in the White House? Larry and Tim?

I am sure you have referenced Yves Smith at Naked Capitalism for correct analysis of banking insolvency…

Foreclosures will decline as the economy improves 3rd and 4th quarter 2009 and into the 2010 recovery? Who's smoking crack in the White House? Larry and Tim?

I am sure you have referenced Bill at Calculated Risk for correct analysis on foreclosure and housing market trends…

Or is it as Mr. Ilargi suggests propaganda... a discrepancy between the facts, reality and the party line public disclosure that a regime represents as fact.

The spin, if you will that a less and less successful corporate owned administration is using to manufacture consent among the clueless American public...for the next Wall Street bailout, the next tax cut or loop hole for the richest 1% and corporations.

Ilargi said...

""US July jobless claims in surprise rise"

A surprise to whom, Mr. Ilargi?"


Not my line. Maybe that's where your problem starts.

Problem Is said...

That is a good point Mr. Ilargi...

After the Bush hack, Wall Street crony James B. Lockhart stuffed Fannie and Freddie with as much Wall Street bank fraudulent "assets" as possible, he sailed off into the sunset with a "Mission Accomplished!" banner over his yacht.

At which point the confidence game of sticking the American tax payer with the losses moved on over to Ginnie Mae where... surprise! surprise! Ginnie exploded bubble style with huge increases in worthless Wall Street mortgage paper. Murin another Bush hack left in place by Wall Street toady Obama...

Karl Denninger at the Market Ticker educated me on this one:

http://market-ticker.denninger.net/archives/1333-Ginnie-Head-To-Leave%3B-Tick-Tick.html

Ilargi said...

NY Post Outs ZeroHedge As A Banned Insider Trader

Problem Is said...

"Not my line. Maybe that's where your problem starts."

I think I was agreeing with you, Mr. Ilargi, using a rhetorical question.

Next time I will start the comment with:

"Excellent post. I agree with you 100%..."

Ilargi said...

I talked about Lockhart and Murin's departures last week. I don't think Ginnie will be the one to implode, but as long as all GSE books remain closed anything is possible and all paper can be shifted between parallel universes. Still, letting Fan and Fred go six feet under would potentially be much easier, more effective and way more far-reaching.

I called for openness on their securities portfolio's quite a few times. Now that would be fun.

Without Fannie, freddie, Ginnie, the FHA, the FHLB etc. scooping up the risk while lenders rake in their fees, US home prices would average way below $100,000 by now, and most lenders would be hopping along with the dodo.

Problem Is said...

Okay, Mr. Ilargi, straighten me out:

"If you get to measure things using whatever you think is best to come up with a positive outcome, how can you lose?"

"Anyway, the idea is clear by now, I'm sure. We are all incessantly being subjected to number games that don’t add up, not even close. And that's how you get a recovery."

I thought you were alluding to the use of propaganda, essentially masquerading as news. It seems to me the chorus of distortions of anything and everything remotely positive, usually out of context, are designed to manufacture consent in the American public. The Obama administration's goal being to further the "pro corporate, pro Wall Street free tax money instead of prosecutions" policies.

In essence American Pravda...

Is that where I went wrong reading your piece?

"Maybe that's where your problem starts."

jal said...

For some, not everywhere, House prices are going down and Wages are going down.

If you bought an inflated house, not mortgaged any more, with an inflated income, Deflation could be a non issue for you.

If you remain employed without a wage cut, this is a buying opportunity, and getting better every day, for all of the "carpetbaggers".
jal

Problem Is said...

Yes Mr. Ilargi I remember reading your post on Lockhart a couple of weeks ago.

I also remember you writing something that has always stuck with me... and I am paraphrasing here:

You essentially ask how many mortgages would be written and homes sold if your neighbor was not under writing 2/3 of the mortgage market (or is it 3/4?) through the GSE's... or what would your home be worth without the Federal Government subsidizing mortgages with your neighbor's tax dollars?

I never thought of it that way (since I am an economic novice) but i thought it was profound.

Ahimsa said...

Naomi Wolf on Obama "He Can Lockup Any Citizen Without Warant"

http://revolutionarypolitics.com/?p=2272

Punxsutawney said...

jal –

If you have extra cash, there is certainly a price where buying real estate will get very attractive. I joked with a friend that if they were selling houses in my neighborhood for 1k apiece, that we would scoop them up right and left. Perhaps we have a future as slumlords.

Ahimsa said...

"Former CIA Agent: 'What the Agency Was Doing With Blackwater Scares the Hell Out of Me"

by Jeremy Scahill

http://www.alternet.org/workplace/142098/former_cia_agent%3A_%22what_the_agency_was_doing_with_blackwater_scares_the_hell_out_of_me%22/?page=2

Ahimsa said...

Ooops ... this is page 1 of article:

http://www.alternet.org/workplace/142098/former_cia_agent%3A_%22what_the_agency_was_doing_with_blackwater_scares_the_hell_out_of_me%22/?page=1

Tyr said...

Wow Zerohedge is run by crooks.

"On March 14, 2006, while in possession of that material, non-public information, Ivandjiiski bought 1000 shares of Hawaiian Holdings for $4.75 a share. On March 15th, when the new financing was publicly announced, the share price of Hawaiian Holdings increased 6%, to close at $5.30. On March 21, 2006, Ivandjiiski sold his 1,000 shares of Hawaiian Holdings stock for $5.53 per share, for a profit of $780."

$780 lousy bucks. I guess it's true what they say: the big thieves hang the little ones.

cowcharmer said...

Question for I or S:

If I'm understanding you correctly, you expect the dollar to have greater purchasing power in the near-to-medium future. My question is: How much greater?

Will today's dollar be worth five of tomorrow's? Or?

I ask because I am strategizing how to disperse my meager savings: Do I purchase things now that seem as if they'll have great value in the future (think tools, not iPods and flat screens), or do I hold onto my cash in the belief that it will have ever increasing purchasing power, even as I weigh the risk that some of these things might not even be available anymore.

I know ya'll ain't prophets, but seeing as how you've been stunningly accurate in your calls for the past few years (I'm a long time follower from TOD days), your thoughts on the matter would be a great interest to me.

Thanks

Ed_Gorey said...

Re: Unemployment and Equity Markets

Well it looks like the equity market herd was right yesterday. Bonds took a beating with all the housing euphoria. I think emotions will darken next week. Weekly unemployment numbers in August have been deteriorating. I'm betting that reality shows up in equities pretty soon. In anticipation of that, I jumped into SH @ $58.26. We'll see what happens.

Gravity said...

Do not try and bend the statistic,
that's impossible.
Instead, only try to realise the truth: a statistic concerning monetary valuation
is a moral argument.

Then you'll see, that it is not the market that bends, it is only your bubble.

Stoneleigh said...

Cowcharmer,

It is generally a good idea to hang on to savings, as earning income will become increasingly difficult and you will need to be able to afford the essentials. Also, the purchasing power of savings will increase over time as asset prices fall. People will be selling anything they can soon enough, so many things should be available at very low prices for those (few) who still have purchasing power.

You are right though that some things may simply cease to be available at all. If something is important for self-sufficiency and relatively rare in your area, so that there are unlikely to be any available for sale later, then it is worth purchasing it in advance when all you would need is the internet and a credit card. Water filters fall in this category. They are rarely available locally, but could be essential if municipal water treatment systems become less reliable. They don't represent a large investment, even at today's prices (approx $250 for the unit and about $100 for a pair of replacement filter elements).

Stoneleigh said...

CA,

Marc Faber is saying that while we haven't seen the market low in real terms, we have seen it in nominal terms. Is this possible?

Marc Faber is thinking in terms of high inflation, whereas our view is that we are facing deflation and that inflation will not be an issue for years. We interpret the on-going upward move as a sucker rally, not a new bull move, even in nominal terms. The rally is approaching its end, at which point people should start talking in earnest about deflation again. Forecasts of deflation only seem credible when the markets are falling, as falling market represent a pessimistic and fearful herd. The current optimism can give way very quickly, as mood can turn on a dime, so to speak.

Stoneleigh said...

CS,

I'm interested to know if your perception of how the market responds to QE is based purely on the financial impact (i.e. QE on top of x billion in bonds equates to a dilution of y%) or is it the signal it sends? (i.e. QE = someone, high up, somewhere doesn't think we can persuade the global bond markets that our monthly requirement of slave tokens are going to sell.)

i.e. Do you think the level of QE we've seen both in the US and UK is sufficient to cause real 'dilution' - or are the changes in exchange rates that usually occur after announcements based more on psychology and perceived weakness?


Psychological signals are far more important. QE is a smoke-and-mirrors confidence game. It's all about making promises you don't intend to keep, or couldn't keep if you wanted to, in the hope that by doing so you will inspire enough confidence that you wouldn't need to carry through on your promises anyway. Unfortunately, even empty promises can spook the bond market eventually, so that you end up with the worst of both worlds (economic collapse and high interest rates).

Anonymous said...

Stoneleigh,

This latest rally seems like a compressed version of the 03 to 07 run up. It's really too much too fast, predicated largely from hot money vis a vis primary dealer cash flow courtesy of Fed debt monetization.

I remember your prognostication that the buying in the broader market would reach the level of mania, which arguably it has. It was at that point you speculated we might start rolling over (when everyone jumps in). Are we there yet? I'm going to watch money flows very carefully. Once fund money starts rushing in en masse we'll see if insider selling picks up. That'll be the first clue to the eventual dump.

Stoneleigh said...

Anon @4:35,

The level of irrational exuberance is reaching an extreme, but I'm not convinced it's quite there yet. We could be in for a bit of a scare in the meantime though. This is a high risk period in the markets for both bulls and bears IMO. Sitting on the sidelines in cash is definitely safest at this point. Once the rally is over there should be significant downside opportunities, but they will be risky as a seize-up could result in people not being paid, even if they turn out to have been on the right side of the trade.

Anonymous said...

Nobody says it like Ken Nordine, rhe Word Jazz master:

http://www.youtube.com/watch?v=h2Q9g_gSlbA&NR=1

Aesthete

Anonymous said...

Stoneleigh,

That's why I want to watch money flows real close going forward. I can't imagine the grief money managers are enduring, especially those who sat on the sidelines during this run up. I'm sure every lat one of em will be jumping in feet first. That'll be the final blow off, but i doubt it will be a steep as what we've seen since March, mainly because it will be sold into by the well connected pigmen who don't want to be left holding the bag the second time round.

Ed_Gorey said...

Re: Treasuries, Health Care Legislation, and Institutional Investors

I've been thinking about the impact of Health Care legislation on the market for Treasuries of all durations.

On one hand, passing health care legislation, which will entail major new outlays in federal spending, could be negative for the bond market. More govt. spending will necessitate more debt offerings, and that could lead to decreased demand for US sovereign debt and higher interest rates.

On the other hand, the health care legislation appears to require that all citizens buy health insurance, either on their own or through federal subsidies for the poor. Federal subsidies will be derived through tax increases of one form or another, and those increased government revenues could serve to placate some immediate concerns regarding US solvency. In addition, if the legislation lacks a public option, then it means that private insurance companies are going to have a lot of new customers. All of the new insurance premiums from newly enrolled (and previously uninsured) citizens will dramatically increase insurance company revenues. Insurance companies are a large and important component of the shadow financial system. If increased insurance company revenue is accompanied by government pressure to invest that revenue in Treasury secruities, then Health care legislation might be a net positive for the bond market.

On a somewhat related point, I've been wondering whether or not most large institutional investors in the US (e.g. pension funds, insurance companies, and university endowments) will come under growing political pressure to invest in Treasuries. Japan has sustained its enormous public debt (>200% of GDP) and very low interest rates through reliable sovereign debt purchases by Japanese banks, Japanese insurance companies, and Japanese Pension funds. Since high interest rates will bring the economy to a grinding halt, it seems logical to assume that increasingly radical actions will be taken to maintain demand for debt. Since investing one's limited capital is a zero-sum-game, then increased debt purchases must come at the expense of other asset classes. It seems to me, at some point, the equity market will be sacrificed to sustain the bond market. Lower equity prices will have a major pyschological impact on consumers, as their 401Ks shrink, but the political/economic center will still hold. In that sense, sacrificing equities for bonds is the least bad option.

Anonymous said...

WASHINGTON (Reuters) - The Obama administration will raise its 10-year budget deficit projection to roughly $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.

"The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year," said the official, who is familiar with the plans.

"Our budget projections are now in line with the spring and summer projections that the Congressional Budget Office put out."

http://tinyurl.com/mth2b2

The smell of impoverishment on a Friday afternoon.

Ilargi said...

"The smell of impoverishment on a Friday afternoon."

And two failed banks already by 6 PM. Does the FDIC have big plans? Everyone waits for the Guaranty announcement, 11th biggest failure in US history.

Ilargi said...

And now it's three.

• ebank
• First Coweta
• CapitalSouth

Anonymous said...

Ilargi do you like the iPhone 3GS or would you prefer the Samsung Omnia? :)

Ilargi said...

Guaranty makes 4.

VK said...

Bernanke has his "Mission Accomplished" moment via Marketwatch.

There must be some good joints at Jackson Hole!

In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster.

"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."

Past financial panics have exacted an "enormous toll in both human and economic terms," Bernanke said. "In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."

The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."


ROFL!!! Next year's meeting shall certainly be interesting to say the least.

Bigelow said...

George Ure pointed out that each of these banks have local branches. When you look at the bank failures that way there have been in the thousands. Recession's over right?

VK said...

Recession's over right?

Yes! Just close your eyes and believe. That's what Timmy said remember? We can will it to happen.

jal said...

Bigelow said...
George Ure pointed out that each of these banks have local branches. When you look at the bank failures that way there have been in the thousands. Recession's over right?
-----
Duhhh!

You must be trying to compare the bank failures with the failures during the depression.

Now why would this be an unfair way of making a comparison?
jal

Bigelow said...

It would be Duhhh!

But so many believe the lies.

Bigelow said...

Don't startle the herd.

Anonymous said...

"..he and his central bank colleagues saved the world from a bigger disaster..." gagcoughgagpuke

The fact that Bernanke has saved his biggest, fattest Lie til last is telling.

It's means his is either truly insane (doubt it) and in the throws of a psychotic break or he knows it's the End of the Line this Fall and just wants to fakeout the Sheeple one last time before scurrying into his Green Zone Spider-hole with his loot before the flu pandemic erases all memories of financial skulduggery from the mind of the unwashed masses with it's unmitigated horror.

Big Lies need big cover ups.

Anonymous said...

Re: Bernake's golden moment

This is deja-vu, all over again!

It was about a year ago that Paulsen gave a speech in Washington, saying how he'd rate himself as a 10 out of 10. We all know what happened a few weeks later.

I'm reminded of two things. The scientific study about incompetents being unable to determine whether or not they're incompetent.

Also, FDR's inauguration, or just before, when he had to spend a couple hours listening to Hoover and his people talking about their crazy theories of the market. It sounded like they were trying to brainwash him into adopting their madness.

Anonymous said...

Guaranty Bank goes down. The FDIC is officially insolvent now. Take cover.

Chaos said...

Of course, that's going to be Bernanke's line...he saved it from being much much worse. Impossible to disprove, just like Obama's "saved" jobs stat. KD has a good post on this speech. Oh, and here's a good one from cnn...headline reads: State Unemployment Shows Improvement. First paragraph:
"The number of states posting a decrease in the unemployment rate in July more than tripled from the previous month, according to a government report released Friday."

Pursuing the truth further, as Charlie Chan would say, we find in the third and fourth paragraphs:
"The Labor Department said 17 states and the District of Columbia reported a drop in unemployment rates in July, compared with 5 states in June.

Increases in unemployment rates were reported in 26 states, and 7 states posted no change from the previous month."

I hate doing math, but even I can figure this one out...

jal said...

@ Bigelow

Re.: bank branch closings

1. How many branches are closed?
2. How many are empty or for sale?
3. How many people got laid off?

jal

Ilargi said...

"The FDIC is officially insolvent now."

No, it's not. Those rumors are very one-sided.

rapier said...

RE Michigan genealogical records.

Per my sister who does genealogical work. Based on her general understanding of the situation.

The states extensive genealogical collection is housed in the State Library which is being closed. The collection is being disbursed within the states university system.

Selling seems unlikely if not impossible.

Ilargi said...

New post up.

rapier said...

There is an extreme amount of fluidity in the status of the FDIC.

Fact one. Their funds from collection of fees from member banks is now virtually gone. (They stopped collecting the fees from many banks sometime in the mid to late 90's. Another of the bizarre side stories in this mess. Not the least of which is who decided the unlucky ones that still had to pay?)

The rest are facts as I know them. Somewhat randomly.

A couple of months ago congress gave the FDIC a $500 billion 'line of credit'. It was stated in the press I saw as for the purpose of funding PPIP, the trashy asset purchase program which is moribund.

What the legislation actually spells out as to the use of these funds I have no clue.

Then is this story.
F.D.I.C. Seeks to Attract More Buyers of Banks

http://www.nytimes.com/2009/08/21/business/21fdic.html?pagewanted=1&ref=business

One oddity is that the story says ". That could require the F.D.I.C. to tap a multibillion-dollar lifeline from taxpayers, through an emergency borrowing program run by the Treasury Department, to finance loan sales and other short-term obligations."

Which I assume is the 500 billion that we were told was the FDIC's two months ago. You can see where this is going. Into the weeds. Nobody seems to know. One supposes a few congress people and their starffs know but that makes no difference. All that matters is what Geithner says.

The idea that this money is going to subsidize Private Equity groups is beyond a nightmare.

The fly in this ointment is that the Treasury has to go out and borrow this money. With the large auctions next week and for the next 5 till the end of the fiscal year, heavy borrowing could be a problem. Then too just two days ago the White House declared a better than expected fiscal 09 deficit of only 1.58t instead of 1.84T. The better than expected part is probably due to the slow disburement from the stimulus package and also the delay in borrowing for Tim's slush funds. Whose needs have been mitigated by the return of TARP money, which also feeds into the lower final deficit number.

Poorly written, Sorry.

Anonymous said...

@ Ilargi & Stoneleigh

Are you on twitter?

Ed_Gorey said...

Re: Banks chipping away at investor access to Inverse ETFs

We are now clearly on the path toward blocking retail investor access to all forms of shorting. Add Wells Fargo to the growing list of firms that are either discouraging, blocking, or planning to block investor access to inverse ETFs. Other firms include UBS and Fidelity as well as other I can't remember right now.

Something is brewing.

"Wells Fargo Advisors is no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts."
Wells Fargo Shuns Some ETFs

Anonymous said...

Much as I concur with several aspects to this blog...there comes a time when either the vision you see comes to fruition... or its necessary to revise the model.

I detect TAE (like many other similar blogs) are starting to say in effect..."just you wait, the turning point downward is right around the corner".

That works, but only for a limited time. Cry wolf too often without it coming to past and you get relegated to the bleachers.

Ilargi said...

"Cry wolf too often without it coming to past and you get relegated to the bleachers."

We're on track, better even than we could have wished. And reactions like these are very much part of that.