Francis Sayre Jr., baby, with Woodrow Wilson.
The President and new grandson, less than a year after the death of his wife Ellen.
Ilargi: As Stoneleigh delves deeper into renewable energy issues, let me ask you just this one thing: how renewable would you reckon debt is? For the US government, I gather, not all that much. Why else would they want more all the time? They're asking Congress to raise the debt ceiling yet again, and, as you might have guessed, they say it's for the greater benefit of the people and that highly valued democratic system they live in.
Stoneleigh: The Automatic Earth has received quite a number of viable renewable energy questions lately, particularly with regards to my own personal energy strategy. People have also asked why I work in grid connections for renewable energy, given that I do not believe we are going to see a wholesale societal conversion to renewable power as fossil fuels deplete (see Renewable Power - Not in Your Lifetime). Someone even suggested I was facilitating something I knew would not work. That, however, is not the case. Please allow me to explain.
Renewable power will never be able to run an energy-profligate industrial society such as the one most of us have grown up in, due to, among other reasons,
- low energy density,
- low EROEI,
- lack of energy storage capacity,
- mismatched supply and demand profiles,
- poor grid infrastructure,
- inability of distributed renewable energy to sustain grid operational parameters,
- looming financing difficulties,
- receding horizons,
- inability to scale up RE production before the credit crunch puts the brakes on
- etc. etc.
Still, that does not mean renewable energy (which I'll from now on refer to as RE) has no value. On the contrary, it has the potential to be extremely valuable to those who install it while it is still possible to do so, although debt must be avoided and, as several readers have pointed out, maintenance may well be a significant problem as parts and expertise may not be locally available. It is a matter of knowing what renewable power can and cannot do and making the most of the latter while not pinning our hopes on the impossible. It reminds me of a passage I came across, which ran something like this:
Grant me the strength to change what I can, the serenity to accept what I cannot change, and the wisdom to know the difference.
There is an important distinction to make between grid-tied and stand-alone RE systems. For household-scale RE systems I think grid connection generally makes little sense. Some jurisdictions pay a premium for renewable power, especially if it is generated by very small systems, and this may tempt some people.
Here in Ontario for instance, rooftop solar less than 10kW will be paid about 80 cents/kWh (about 10 times what is paid for conventional energy sources). However, the income will be taxable and the ability to earn an income may also result in an increase in property taxes. In Ontario this is not yet the case, but only because the property tax agency (MPAC) is reactive, not proactive. It is entirely possible that homeowners could make very little money after tax.
In addition, premium payment programs may require renewable generators to sell all the power they produce to the grid and then obtain their own supply back from the grid, with no potential for storage and use of their own power during blackouts. This is a serious compromise to make, as back-up power is a major advantage of owning renewable power generation. If the only advantage is to be the -potential- money made, and most of that could be clawed back in taxes, then there would be little point in installing a system.
A grid connection could also allow power generated to be commandeered without payment ‘for the public good’ in times of crisis. This is unlikely to happen soon, but as mains power becomes increasingly unreliable in a collapsing economy, circumstances may change. The premium payments that are supposed to be guaranteed for 20 years could easily be repudiated if they become a political liability.
For larger systems, such as farm-based or community power projects, a grid connection may well be necessary in order to make best use of the generation potential in supplying a larger area. For instance, a farmer supplementing his dairy manure with off-farm organic wastes could generate 500kW from methane produced through anaerobic digestion, and this would exceed farm-load considerably. He could use a grid connection to supply many close neighbours, and be paid a premium price for his power.
Taxes would still be an issue though, as would the debt that most would need to incur in order to finance the construction of such a project. Grid reliability is likely to be much reduced in the future, but even unstable areas generally have some power, so exporting power to neighbours could still be viable intermittently. The importance of storage, of gas or electricity or both, would increase significantly under those circumstances.
Alternatively a farmer could design a smaller system using only his own on-farm waste streams to supply only his own load. It would be harder to find the money for construction without an income stream, and some components would have to be oversized in order to cover demand peaks, further adding to the cost. A farmer who could afford to do this would have a secure source of power, assuming at least some maintenance expertise and access to parts, and could therefore be able to continue producing food - and electricity-. Of course, finding someone who could afford to buy his produce could be difficult, as it was during the Great Depression, but not producing food has its own obvious consequences.
There is no guarantee that building an RE project will provide what the owner is looking for, given all the confounding factors approaching once the credit crunch resumes, but doing nothing is risky too. People will have to choose the risks they feel they can live with. In general, minimizing demand before attempting to provide supply is a good idea.
For a stand-alone project, supplying only the essentials will be most cost-effective. Obtaining spare parts in advance and learning how to install them independently is highly advisable. Building a robust system with as few moving parts and complex components as possible would be best, but complex components are hard to avoid. Energy storage will be an essential component. Back-up power will probably be called for.
Cash reserves for maintenance costs would help, assuming parts and expertise are available, which they probably will be in some areas and not in others. In some ways renewable power is best regarded as a bridge between our current comfortable reality and a much less comfortable lower energy future. For those who can afford them (a small minority unfortunately), these systems can buy some time to make mental and physical adjustments to a new reality.
Our own 3kW solar array is not grid connected. It will continue to operate in a stand-alone manner, feeding the battery bank that runs the essential loads 24/7. It was installed for the power, not in order to produce an income. The essentials (well pump, sump pump, circulating pumps for the outdoor wood furnace and the solar thermal system, fridge, freezer, security system, minimal lighting) are powered from the batteries through the inverter.
We have six 4V Rolls Surette 4ks-25ps connected in series, which provide 1350 amphrs of battery storage. They are manufactured specifically for solar and other renewable energy applications, with dual-container construction, a ten year warranty and up to a twenty year life span. We can charge the batteries from the panels, or from a gas generator, or from a diesel generator run by the tractor, or with the mains. The batteries are meant to keep these essentials running for at least four days of no sun, no mains and no generator.
The next most important things (geothermal back-up system, furnace fan, microwave, another freezer, ceiling fans, and a few sockets) are wired into a generator panel. We can run those from the mains or with a generator if we have fuel for it. If we have no mains power, no fuel and no sun for more than four days, we can still keep warm, heat water and cook using a 1928 kitchen wood range and two supplementary wood stoves.
We can also run radiators connected to the outdoor wood furnace, so we can distribute the heat from outside using only the circulating pump rather than the furnace fan, as the furnace fan is too large a load to run off a renewable energy system. We also have two bicycle powered generators and portable battery packs that we can use to power incidental things if necessary.
Independence in the face of great uncertainty over energy supply comes from flexibility and a degree of redundancy. Redundancy is important as one does not know quite what one will be facing, what resources will be available when, and how long one may have to cope alone. Having more than one way of doing the essentials expands the range of circumstances one can handle. There needs to be more than one way of doing essential things, so that one can adapt to changing circumstances quickly.
RE investments probably need to be made sooner rather than later, as they would tend to fall into the category of items that will not be available later, although there could be a period where they may be cheaper for those who have managed to preserve purchasing power as liquidity. The need to make such investments at today’s high prices will unfortunately restrict the number of people who are able go the RE route without taking on debt.
While one could argue that such an investment will only make one a target for confiscation or vandalism, vulnerability will depend greatly on local circumstances. These risks are real, but will not be equal everywhere, and risk cannot be avoided no matter what people choose to do. We are simply moving into a high-risk world that all of us will find acutely uncomfortable.
Geithner asks Congress for higher U.S. debt limit
U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit on Friday, saying that it could be breached as early as mid-October. "It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters.
Treasury officials earlier this week said that the debt limit, last raised in February when the $787 billion economic stimulus legislation was passed, would be hit sometime in the October-December quarter. Geithner's letter said the breach could be two weeks into that period, just as the 2010 fiscal year is getting underway. The latest request comes as the Treasury is ramping up borrowing to unprecedented levels to fund stimulus and financial bailout programs and cope with a deep recession that has devastated tax revenues.
It is expected to issue net new debt of as much as $2 trillion in the 2009 fiscal year ended September 30 and up to $1.6 trillion in the 2010 fiscal year, according to bond dealer forecasts. The request to increase the debt limit will likely raise the ire of Republicans who have accused President Barack Obama of runaway spending. They may try to hold up the legislation in effort to win concessions on Obama's health care reform plan.
Geithner urged Reid to not let politics hamper U.S. credit-worthiness and said he looked forward to working with the Nevada Democrat to secure enactment of legislation on the debt limit as early as possible. "Congress has never failed to raise the debt limit when necessary. Because members of both parties have long recognized the need to keep politics away from this issue, these actions have traditionally received bipartisan support," he wrote. "This is clearly a moment in our history that calls for continuation of that tradition."
Job Growth Lacking in the Private Sector
For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring. The accompanying charts show the job performance from July 1999, when the economy was booming and companies were complaining about how hard it was to find workers, through July of this year, when the economy was mired in the deepest and longest recession since World War II.
For the decade, there was a net gain of 121,000 private sector jobs, according to the survey of employers conducted each month by the Bureau of Labor Statistics. In an economy with 109 million such jobs, that indicated an annual growth rate for the 10 years of 0.01 percent. Until the current downturn, the long-term annual growth rate for private sector jobs had not dipped below 1 percent since the early 1960s. Most often, the rate was well above that.
As can be seen from the charts, there were some areas of strength in the economy. Health care jobs continued to grow, particularly jobs that involve caring for the elderly. Home health care employment rose at an annual rate of 5 percent, a rate that indicates a total gain of more than 60 percent. On an annual basis, that was twice the overall rate for health care of 2.4 percent a year. There were also job gains in education and in a host of service industries, including lawyers (0.7 percent a year), accountants (0.9 percent) and computer systems designers (2.4 percent). The field of management and technical consulting leaped at an annual rate of 5 percent.
But while designing computers and related equipment was a growth field, building them was a very different story, as the manufacturing shifted largely to Asia. The number of jobs making computer and electronic equipment in the United States fell at an annual rate of 4.4 percent, substantially more than the overall decline in manufacturing jobs, of 3.7 percent. That was a better showing than that of the automakers, which shed jobs at a rate of 6.7 percent a year. By contrast, auto dealers cut jobs at a much slower rate of 1.3 percent a year, although that rate may accelerate later this year as General Motors and Chrysler dealerships are closed.
Hard as it may be to believe, the consumer economy of the United States actually lost retail jobs over the decade, at a rate of 0.2 percent. There were fewer people working in food stores. But the category of general merchandise stores — like Wal-Mart and Costco — showed an impressive gain of 1 percent a year, even though the category also includes department stores like Macy’s, where the number of jobs has fallen. For a good part of the decade, the construction business was a growth industry. But there are now fewer jobs there than there were a decade ago.
The total picture is of an economy that has changed in substantial ways over the decade. After the recession ends, job growth is likely to resume. But there is no indication that the secular trend toward a more service-oriented economy will reverse. A decade from now, there are likely to be still more jobs at architecture and engineering firms (up 1.2 percent a year over the last decade) and at bars and restaurants (up 1.8 percent a year). But few expect that manufacturing will reverse its long decline as a major employer in the United States.
Alabama's Jefferson County lays off two-thirds of its workers
Alabama's debt-ridden Jefferson County laid off about two-thirds of its 3,600 employees on Monday because of plummeting revenues, a move that will sharply curtail services in areas ranging from roads to courthouses. The cuts are just the latest blow to Jefferson, whose population of 660,000 includes Birmingham, the state's largest city and its economic powerhouse. They come after the county racked up around $4 billion in debt by using exotic financial instruments to fund a revamp of its sewer system.
The work-force cuts will hit the roads and transportation, revenue and security departments, and reductions will also affect the courthouse and information technology department as well as laborers paid on an hourly basis, according to a senior county official. One senior county employee said his land development department was slashed from 29 employees to just eight but they were nevertheless adjusting, a process eased because there were fewer queries from the public on Monday.
"Our traffic has slowed (because) ... people are following the news. People did not take a chance by waiting until this week to do their business," said Bo Duncan, deputy director of land development at the county. "We are having to make do," he said. For some families, the layoffs were particularly hard, he said, adding he knew one family in which both husband and wife had lost their jobs.
Jefferson County has been forced to make drastic cuts because of a lawsuit questioning the legality of a county occupational tax, which raised $78 million annually and was vital to the county's operation. Although the revenue is still being collected, it is being held in escrow under orders from an Alabama Supreme Court justice pending a decision on the tax case. Some members of the state Legislature hope to pass a new tax bill this month to raise revenue for Jefferson County. County workers placed on administrative leave under the cuts will be entitled to unemployment and some health-care benefits and will be called back after 45 days, according to a senior county official.
Guess What? Unemployment's Really at 16.3 Percent
How is it possible for the unemployment rate to essentially remain unchanged when 247,000 jobs have been lost? Because the number of people who gave up and stopped looking for work rose dramatically. The announcement today that the unemployment rate declined slightly to 9.4 percent in July while only 247,000 additional jobs were lost has been greeted as good news. The change in the unemployment rate puts the rate at what it was in May. Yet, even a rough look at the numbers indicates that the true unemployment rate has been getting significantly worse over the last few months.
How is it possible for the unemployment rate to essentially remain unchanged when 247,000 jobs have been lost? The reason is simple -- the number of people who stopped looking for work rose dramatically. Six hundred thirty-seven thousand additional people no longer consider themselves looking for work. This is by far the largest drop in the number of people who consider themselves in the labor force during the last year. -- It is almost twice the 358,000 increase in the people who left the labor force during June and almost four times the average monthly increase of 167,333 over the last year.
Jobs are sufficiently scarce and the prospects of people finding them at wages that they are willing to work for so low that many individuals don't think that it is worth their time to even look for a job. Part of the drop in unemployment is also due to the fact that some people are running out of unemployment benefits and taking part-time jobs. There is usually a big increase in the rate that people find jobs during the last few weeks that they have unemployment benefits. In July 102,670 people saw their unemployment benefits run out. That number rose to 141,538 in August and is expected to soar to 486,049 in September.
It will keep on rising each month hitting 1.5 million in just December alone. This past Sunday on ABC's "This Week" Treasury Secretary Tim Geithner only promised "to look very carefully at [these lost benefits] as we get closer to the end of this year." Larry Summers, President Obama's chief economic advisor, was similarly noncommittal when he was interviewed that same day on CBS's "Face the Nation."
If we include the normally counted number of unemployed as well as those who have recently given up looking for work and those who have taken a part-time low paying job because they can't find full-time work, the implication is that the unemployment rate for July would be at 16.3 percent These discouraged workers will again look for work once the economy starts to improve, but this 6.9 percentage point gap between publicly discussed unemployment rate and these discouraged workers is unusually large.
The changes in unemployment also mask the large drops that are still occurring in private employment -- construction, manufacturing, retail trade, and professional and business services all suffered large declines. The two of the three areas where employment has increased are government related, either education and health services or general government employment.
These changes do coincide with what is happening with GDP. During the second quarter the private sector kept on shrinking at an annual rate of 3 percent. Overall, GDP declined by "only" 1 percent at an annual rate, but that was because real federal government consumption expenditures and gross investment soared by 11 percent. Real state and local government consumption expenditures and gross investment increased, too, but by a more modest 2.4 percent. The large and growing number of discouraged workers will make the real unemployment rate hard to bring down in the future
Max Keiser on US Unemployment Numbers
How To Blow A Bubble
by Simon Johnson
Matt Taibbi has rightly directed our attention towards the talent, organization, and power that together produce damaging (for us) yet profitable (for a few) bubbles. Most of Taibbi’s best points are about market microstructure – not the technological variety usually studied in mainstream finance, but more the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses. (This is also, by the way, how things work in Pakistan.)
In addition, of course, all good bubble-blowing needs ideology. Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets.
It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”. (David Wessel’s new book is very good on this period and the Bernanke-Greenspan relationship.)
Now it seems the ideological initiative may be shifting towards Goldman Sachs.
As Bloomberg reported on August 5th, “Goldman economists, led by Jan Hatzius in New York, now see a 3 percent increase in gross domestic product at an annual rate in the last six months of this year, versus a previous estimate of 1 percent. The new projections were included in a research note e-mailed to clients.”
Goldman’s public thinking, of course, has been that we face such slow growth that interest rates should be kept low indefinitely. There is, in their view, no risk of inflation – and no such thing as potentially new bubbles (e.g., in emerging markets). The adjustment process will go well, as long as monetary policy stays very loose – it’s back to Bernanke’s 2003 line of thinking.
This line of reasoning has been very influential – reinforcing Bernanke’s commitment not to tighten monetary policy in the foreseeable future and fitting in very much with the Summers model of crisis recovery. Just a couple of weeks ago, in his July 14 report, Jan Hatzius argued, “further stimulus remains appropriate” and “the appropriate debate is not whether fiscal and monetary expansion is appropriate in principle but whether it has been sufficiently aggressive.” I don’t know if he has revised this line in the light of the big upward revision in his growth forecast or whether he is still saying, “Ultimately, we do expect further stimulus, but it may take significant disappointments in the economic data and the financial markets before policymakers move further in this direction.”
Much faster growth than expected is, of course, in today’s context a good thing. But it also brings complications. If you keep monetary policy this loose for much longer, you will feed bubbles. And if you encourage even looser monetary and fiscal policy, there will be a costly reckoning not too far down the road.
Monetary policy orthodoxy under Greenspan did not care about bubbles in the least. Now we (led by Greenspan) have massively damaged our financial system, our real economy, and our job prospects, this view is under revision.
Of course, in principle you should tighten regulation around lending but, just like 2003-2007, who is really going to do that: the US, China, the G20? On this point, all our economic leadership is letting us down – although they are getting a powerful assist from people like Goldman (and Citi and JP Morgan and almost everyone else on Wall Street.)
Next time, our big banks will take another massive hit – quite possibly bigger than what we saw in 2008. Goldman and its insiders are ready for this. Are you?
Congress may extend unemployment benefits
The U.S. Congress will consider extending unemployment benefits after it returns in September to help 1.5 million Americans who risk exhausting them, Senate Majority Leader Harry Reid said on Friday. "Soon after Congress returns to Washington we'll need to address this matter," Reid said. "There is an economic case to be made for extending unemployment benefits." The unemployment rate eased to 9.4 percent in July from 9.5 percent the prior month, according to Labor Department data released on Friday. It was the first time the U.S. jobless rate has fallen since April 2008.
But the number of long-term unemployed continues to rise as the country struggles with the longest recession since the Great Depression of the 1930s, and many analysts attributed the dip in July to people giving up the job hunt. Data ranging from home sales to manufacturing have pointed to an economic revival, but the unemployment rate is expected to remain high, which could lead to an anemic recovery. Obama administration officials say they still expect the unemployment rate to reach 10 percent this year.
As of July 25, 6.31 million people were collecting long-term unemployment benefits, according to Labor Department data. Some 1.5 million of those people could exhaust those benefits by the end of the end of the year, according to the National Employment Law Project. "We must help those who are suffering as a result of an economic crisis they did not create," Reid said.
Congress has already extended unemployment benefits for up to 79 weeks and Obama administration officials and Democratic leaders in the House of Representatives have said they will work to extend them further. But that could widen the already yawning budget deficit, which shot up another $300 billion in July to reach a record $1.3 trillion for the first 10 months of fiscal 2009, according to the Congressional Budget Office.
The CBO expects the budget deficit to top $1.8 trillion for the fiscal year which ends September 30, in large measure due to a $787 economic stimulus bill passed by Congress in February. Polls show rising public unease with the record deficit and Republicans have sharply criticized it. "Instead of seeking new ways to expand the government, this Congress needs to get back to the basics of deficit reduction," Republican Senator Judd Gregg said in a statement.
Nine Roadblocks to a Bull Rally
Before the bulls break out the champagne here, I would warn them not to get too far ahead of themselves.
After all, euphoria is a dangerous emotion that can lead to big losses — in this market, or in any other, for that matter.
And as for Dennis Kneale's breathless prediction that the "recession is now over," the picture on that score is about as clear as mud. . . the U.S. Economic Outlook is murky, to say the least.
What is crystal clear, however, is that our problems are actually getting worse, not better. Fundamentally, is as bad as it has ever been — even though the bulls have broken out the party hats, insisting that somehow the markets really can grow to the sky.
Of course, we know otherwise. If only it were so. . .
Instead, I'm firmly in the camp that believes a "new normal" has begun, and it's based more upon frugality more than frivolity.
That's because as unemployment surges, home prices continue to drop, and more wealth evaporates, consumers are more likely to try a least to live within their means. . . no matter how hard that may be.
As a result, without an uptick in jobs and a boost in income, a repeat of the debt-financed binge we just lived through simply isn't going to happen.
It can't be recreated either — even though the Fed is trying its best to do just that.
So, what we're essentially left with is a classic case of a reluctance to borrow or consume: a big problem, since that is what the lion share of the U.S. Economy has been based on since 1982.
As a result, we have too many cars, we have too many houses, and we have too many debt holders teetering on the brink.
What we don't have — or what we have a lot less of — are people with the cash flow to support it all. Sure, money still exists and there is lots of it, but it has very little velocity when a nation of "Good Time Charlies" suddenly turns frugal.
That being said, I thought we would play a game of connect the dots today as we view the current rally not only with awe, but also a deep-seeded suspicion.
Here are nine reasons why the champagne will have to stay on ice for the time being. . .
9 Hurdles to the U.S. Economic Outlook
1. The Wealth Effect in Reverse
During the heydays, rising asset prices were all it took to get consumers to spend themselves into deeper into debt. However, these days the reverse is actually true.
Because according to the Federal Reserve, U.S. household net worth fell by $1.3 trillion in the first quarter, proving that green shoots are something of a fairy tale — at least for the American consumer.
In fact, since its peak in the third quarter of 2007, household wealth has decreased by 21.6%, or more than a fifth. That is the most dramatic fall in the series since reporting began more than 50 years ago.
Yet somehow, the bulls keep pounding the table, saying there is light at the end of the tunnel, even though consumer spending is over 70% of the U.S. GDP. The truth is when taking huge losses, belts usually get tightened, not loosened.
2. The Heavy Chains of Debt
Meanwhile, consumer debt is still off the charts. In fact, household debt as a proportion of disposable income hit 133% as the recession began. Since then it has eased a bit to 128%, but its still way too high — not to mention unsustainable. At minimum, consumer debt should be 100%, and even that is a slippery slope.
By comparison, the consumer debt level coming off of the tech bubble in 2003 was around 85%, which tells you where all that "growth" came from: Households levered up. This time that's impossible — for a whole host of reasons. So the while the FED has cut this rate to zero, it hasn't done much to get people to the mall this go-round. . .
So just looking at it from a balance sheet perspective, either wages have rise quite a bit or debts have to be reduced dramatically. Otherwise the numbers for the average consumer just won't add up.
3. Rising Unemployment
On a day when the stock market shot up by more than 250 points two weeks ago, the Fed minutes from June were quite a bit more sobering. Unemployment, according to the Fed, will top 10% this year. . . while most Fed policy makers said it could take "five or six years" for the economy and the labor market to get back on a path of full health in the long term.
So it looks like 2015 will be the year to look forward to. At best, the recovery will be jobless — which makes you wonder how it could be called a recovery at all.
Here's betting unemployment tops 11%.
Meanwhile, 7.2 million people have lost their jobs since December 2008, making this the only recession since the Great Depression to wipe out all of the job growth from prior periods of expansion:
By the way, the real unemployment rate, or U-6, is 16.5% It accounts for those poor folks who are unemployed but are so discouraged that they have stopped looking.
4. Tax Revenues are Plummeting
California's fiscal woes are only the tip of the iceberg. Falling tax revenues in 45 of the 50 states have left all of them facing fresh budget shortfalls.
In fact, according to a recent report from the Rockefeller Institute of Government, tax collections dropped by 11.7 % the first quarter — the largest fall on record. Meanwhile, early figures for April and May show an overall decline of nearly 20 per cent for total taxes. That will undoubtedly reduce demand and slow down the recovery, since government spending accounts for 18% of U.S. GDP:
As for the Federal government, there has been a 22% drop in individual tax receipts so far this year, along with a 57% drop in corporate taxes.
In short, while the government is always out of money, it has never been close to this bad. Without the printing presses, we would already be bankrupt.
5. Rising Prime Mortgage Defaults
Remember when subprime mortgages began to blow up? Of course you do. . . that's old hat at this point. Today, those defaults have moved right on up the value chain.
Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier, as prime mortgages 60 days or more past due climbed to 2.9 percent through March. Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier. Meanwhile, mortgages 60 days or more past due rose 88 percent from last year.
The good news is this is the last of the mortgage dominoes. After prime mortgages, there's nothing left to fail. Unfortunately, this is the biggest domino of them all.
6. Oh, but Wait. . . I Forgot about Option ARMs
As my pal Ian Copper has been writing for some time now, Option ARM resets will be tougher for the economy to handle than subprime and we will see greater numbers of bank failures, foreclosures, delinquencies, and economic hardships because of it.
What should concern you is that about $750 billion worth of option ARMs were issued between 2004 and 2007 and will begin resetting shortly. Worse, as of December 2008, about 28% of option ARMs were either delinquent or in foreclosure, according to reports.
But here's the kicker: nearly 61% of option ARMs originated in 2007 will eventually default, according to a Goldman Sachs report. And due to the way these mortgage nightmares are structured, the rest of them won't fare much better.
61%??? That's enough to make a banker take a leap.
7. Next Up: The Credit Card Debacle
According to reports earlier this month, credit card losses are continuing to accelerate with Capital One reporting that write-offs have reached 9.4%. . . with no end in sight. Meanwhile, American Express Co. (AXP), the largest U.S. credit card company by purchases, wrote off 10 percent of its own loans.
Simultaneously, revolving credit totaled $939.6 billion in March and the Federal Reserve reported that 6.5 percent of it was at least 30 days past due. That is the highest percentage since the Fed began tracking this number back in 1991.
What has evolved is an environment where banks are much less eager to hand out the plastic, since the business isn't exactly what it used to be. And as a result, banks sent out only about 500 million credit card solicitations in the first quarter. That is fewer than in any year since 2000, as overall available credit shrinks.
And when the credit card swamp finally gets drained, a "new normal" will be here to stay.
8. The Commercial Real Estate Crash
At this point in the cycle, most people recognize that commercial real estate is following the same exact path as the housing bubble — the exact same path!
And we all know how that one turned out.
In fact, losses on commercial loans could reach as high as $30 billion by the end of the year as property values plummet, rents decline, and defaults reach record levels. All of this is a recipe for disaster. . . and industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will shut their doors over the next year.
That means that we're maybe only in the second inning here as this crisis unfolds.
So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will FAIL TO QUALIFY for refinancing, you have to wonder how it will all get done.
The short answer is. . . it won't.
In fact, as Federal Reserve Bank of Atlanta President Dennis Lockhart said earlier this year, the mortgage bonds due this year and next "are coming up against capital markets not active enough to deal with those maturities."
When that happens. . . big companies go under.
9. The Ghost in the Machine
Here's a chart that speaks for itself. It is a measure of U.S. Industrial capacity that shows almost one third of US industry is now sitting idle:
Now if there is a pony somewhere in all of that mess, I just can't find it. And I haven't even brought up the prospect of higher taxes through cap and trade, or what a massive health care package will do to small businesses.
Meanwhile, I think we are going to find out this fall that the government doesn't have any of the answers after all.
Besides, violent bear market rallies are entirely commonplace. In fact, some of strongest occurred after Black Monday in 1929.
Take a look:
So while the bulls have had their way here lately, the bigger picture lurks in the background.But to see it, you have to have the courage to connect the dots.
That means that now, more than ever, it's a stock picker's market — especially if you have a taste for champagne.
Colonial BancGroup faces criminal probe, FDIC action
Colonial BancGroup Inc said it faces a criminal probe by the U.S. Department of Justice (DoJ) related to accounting irregularities at its mortgage lending unit, and the struggling lender warned it may be put under receivership. In a regulatory filing, the company said the Alabama State Banking Department may appoint the Federal Deposit Insurance Corp as receiver or conservator for its banking unit after August 12.
Earlier this week, the agency that investigates misuse of U.S. banking bailout money raided Colonial's mortgage warehouse lending division in Orlando, Florida. The U.S. Securities and Exchange Commission also issued subpoenas to the company seeking disclosures related to its participation in the U.S. Treasury Department's Troubled Asset Relief Program (TARP) and its accounting for loan-loss reserves.
Colonial announced in December that it was to receive $550 million in TARP money. Shareholders subsequently filed a class action lawsuit accusing Colonial of failing to disclose that the TARP money was contingent on the company raising $300 million in private financing. Taylor, Bean and Whitaker Mortgage Corp, the 12th-largest U.S. mortgage lender, had offered $300 million to help keep the troubled Montgomery, Alabama-based lender afloat, but the agreement fell apart last week.
In the following week, Taylor Bean shut down its mortgage lending operations after the Federal Housing Administration barred it from making loans that the agency insures. The DoJ's allegations of irregularities relate to more than one year's audited financial statements and regulatory financial reporting, Colonial said in the regulatory filing. Colonial said it intends to cooperate with the investigation.
The company operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets. If it fails, it would be the largest failure this year. The company said it continues to explore all possible capital-raising alternatives to comply with the regulatory orders. Colonial did not immediately return calls seeking comments. The State of Alabama Banking Department and the FDIC, which insures deposits of up to $250,000 per account, declined to comment.
In June, the banking unit had agreed to a cease-and-desist order with regulators, requiring the bank to increase capital levels and reduce problem assets, among other things.
The company has been badly battered by the credit crisis, as higher charge-offs and rising foreclosures in the bank's Florida construction-loan portfolio continue to strain its balance sheet. The company's shares, which have lost 90 percent of their value in the past year, were down 19 percent at 57 cents in morning trade on the New York Stock Exchange. The stock traded as high as $13 in September last year.
Angry Americans disrupt town-hall healthcare talks
At scattered events across the United States, protesters are confronting members of Congress whose summer "town hall" meetings aim to get a sense of how Americans feel about overhauling healthcare. Boiling Springs in South Carolina -- population 4,500 -- was true to its name on Thursday, giving U.S. Representative Bob Inglis a taste of rising anger among conservative voters toward President Barack Obama's reform plan.
"There is no way, shape or form we need to have a national healthcare system. No! Nothing! None! It's got to stop now," said one man who addressed the audience of 300 people to sustained applause. The plans seek to provide coverage to nearly 46 million uninsured Americans and bring down healthcare costs. Conservatives say they will lead to a nationalized healthcare system where government, rather than doctors, will make medical decisions. They say the plans will end up costing them more and boost the federal deficit.
With lawmakers gone from Washington for a month and much of the plans still to be drafted, the rancorous battle has spread to usually staid, relaxed town hall meetings. A chorus of people in the audience heckled, shouted down and interrupted Inglis, a Republican, even as he tried to explain why he opposed the plans put forward by Obama, a Democrat who became president six months ago.
"I consider myself just an average American but there is not a day or a week that goes by that I don't hear talk about revolution in our country because (of) the government," said a man who called himself a "conservative, mainstream American." "We (the United States under Obama) have gone so far out of the Constitution," he said to a standing ovation. Other speakers asked about "martial law" and "forced vaccinations" and when the topic turned to illegal immigrants in the Bible Belt town, someone shouted: "Bus them home."
Last week, a crowd in Philadelphia directed boos at Obama's Health and Human Services secretary, Kathleen Sibelius, and Democratic Senator Arlen Specter. Protesters disrupted another meeting on Thursday in Tampa, Florida, with cries of "tyranny," and police made arrests at a similar meeting in St. Louis, Missouri. Opinion polls show that many Americans feel the U.S. healthcare system, the costliest in the world, is in need of reform. They also show millions of Americans with health insurance are satisfied with it.
A group called the Tea Party protesters -- named for the Boston tax revolt that helped spark the American Revolution -- has launched a campaign to disrupt Democratic town hall meetings on healthcare. "Public opinion is the only way the Republicans can stop this," said James Ceaser, a political science professor at the University of Virginia. "They need to check Obama's momentum."
Around a thousand miles northwest of Boiling Springs -- in Oconto Falls, Wisconsin -- the mood was different. Vic Bast, 86, a World War Two fighter pilot and retired school principal, attended a meeting with Democratic Congressman Steve Kagen. "I'm a veteran, so I have good healthcare. But my daughter has just retired and she has to pay $1,000 a month in premiums," Bast said. "Healthcare costs are getting out of control. I don't know if this bill will pass, but something must be done."
"We are engaged in the most critical debate in our country in this century," Kagen told Reuters after meeting around 50 constituents in the dairy farming community of around 2,800. "We don't have an option, we have to reform or this country will go broke," he said, but added: "People in my district are afraid of what they don't know, which is why I'm here." Kagen's district tends to vote Republican and he is the target of radio advertisements attacking his policies in an attempt to undermine support for his reelection bid in 2010.
In Boiling Springs, Inglis was repeatedly interrupted when he said government could in some cases play a positive role in people's lives -- a sign that conservative anger could potentially threaten some Republicans as well as Democrats. A few people waved pink slips to suggest he should lose his job and a banner read: "Inglis loves big government." Aides praised Inglis for standing his ground. The lawmaker later told Reuters the mood at one town hall meeting did not reflect the entire district.
"Fear is driving people to the extremes," he said. "Tonight we had people that are very fearful about President Obama and very distrustful of him as a person and his agenda." White House spokesman Robert Gibbs urged that people go on discussing the issues but without the rancor. "It's important that people be civil. We can discuss these issues without being uncivilized. It's the same thing I tell my 6-year-old," he told reporters on Friday.
U.K. Insolvencies, Liquidations Soar
Company liquidations and individual insolvencies in England and Wales soared to record levels in the second quarter as the economy was throttled by recession and the global credit crisis, data from the government's Insolvency Service showed Friday. There were 33,073 individual insolvencies in the second quarter on a nonseasonally adjusted basis, the highest level since records began in 1960. That compared with 30,253 in the first quarter of this year and marked a 27.4% increase from the second quarter of last year.
Company liquidations totaled 5,055 on a seasonally adjusted basis, the highest level since that series began in 1998. That was 2.9% above the total seen in the first three months of this year and represented an increase of 39.1% from the second quarter of last year. Andrew MacCallum, managing director at restructuring and turnaround firm Alvarez and Marsal, said companies had survived the past year by significantly cutting costs, but many were now exhausted financially just as some positive signs on the economy were emerging.
"More than five thousand companies may have gone into administration in the last quarter, but we can expect to see that figure exceeded in every quarter until at least the end of 2010," he said in a note. "Credit is still tight and many businesses are loaded with debt that they can't service." The breakdown of the figures showed there were 1,457 compulsory company liquidations, 6.8% less than in the first quarter but 8.7% more than in the second quarter of last year. However, voluntary corporate liquidations totaled 3,598, a 7.4% increase on the first three months of the year and 56.8% higher than in the second quarter of 2008.
Nonseasonally adjusted figures showed there were also 1,529 other corporate insolvencies in the second quarter, including a 94.9% year-to-year increase in receiverships, a 19.8% rise in company voluntary arrangements, and 9.5% gain in administrations. The breakdown of the individual insolvency figures showed the number of individual bankruptcies rose 15.3% from a year earlier to 18,870. Individual voluntary arrangements -- a formal agreement drawn up through an insolvency practitioner for an individual to repay debt to creditors -- increased 27.4% on the year to 12,225. There were also 1,978 debt relief orders.
Housing downturn will leave property the domain of the wealthy
The recession has caused a huge shift in the housing market that will lock out first-time buyers and amateur landlords and leave only wealthy families, wealthy investors and Middle East billionaires with a chance of buying. Research carried out for The Times by Savills, the estate agent, suggests that many people who need a mortgage may have to abandon hope of ever owning a home.
The research shows that in the post-downturn housing market, the sort of new-build flats snapped up by first-time buyers and small buy-to-let investors before the credit crunch will fall into the hands of cash-rich investors and young people in receipt of big parental handouts. At every stage of the new-model housing ladder, equity-rich buyers will dominate, Savills said. The number of people who own their home outright has been growing steadily for the past 15 years and stands at 6.35 million, or 45 per cent of homeowners, against 7.98 million who have bought with a mortgage, according to the Survey of English Housing.
This shift will also skew the speed and scale of recovery for different types of property in different locations. Savills expects the average house price in the UK to fall 7.2 per cent in 2009 and 3.1 per cent in 2010, before returning to growth and rising by 26.7 per cent by the end of 2014. But prices at the bottom of the market are forecast to recover by only 10 per cent by 2014, compared with 43.6 per cent for five-bed family homes in London. Yolande Barnes, head of research at Savills, said: “In places where there is a lot of equity, we will see a lot more growth. Where there is more job uncertainty and reliance on mortgages, there will be less.”
Cash-strapped would-be buyers are already being squeezed out of the running by an acute shortage of homes for sale. They are being beaten in bidding battles by buyers with more cash to put down, as sellers see them as safer. Ms Barnes added: “In the equity- starved areas, where 20 years ago people on lower incomes were able to buy and work their way up the ladder, you will find that this won’t be able to happen any more as equity-rich investors will buy homes and let them.”
The predictions come amid claims that lenders are dragging homeowners deeper into debt by forcing them to pay extra charges. The Commons Treasury Select Committee has demanded that the Financial Services Authority (FSA) cracks down on the “intolerable” fees imposed on borrowers who are struggling to meet their repayments. It also reported that, so far, only six households have been helped by the Government’s Mortgage Rescue Scheme. The Committee said the City regulator must take a tougher stance on charges for those in mortgage arrears of up to £35 for a letter and £150 for a visit from a debt counsellor.
It also accused the FSA of putting the interests of lenders above those of consumers by failing to name the firms that are under investigation. John McFall, chairman of the committee, said: “I am shocked at the length of time it is taking the FSA to complete enforcement action against firms it suspects are breaking the rules. Many thousands of consumers will have suffered and some will have lost their homes.”
Ilargi: The Economist, ever more established as the magazine for the clueless.
How long till the lights go out?
In the frigid opening days of 2009, Britain’s electricity demand peaked at 59 gigawatts (GW). Just over 45% of that came from power plants fuelled by gas from the North Sea. A further 35% or so came from coal, less than 15% from nuclear power and the rest from a hotch-potch of other sources. By 2015, assuming that modest economic growth resumes, a reasonable guess is that Britain will need around 64GW to cope with similar conditions. Where will that come from?
North Sea gas has served Britain well, but supply peaked in 1999. Since then the flow has fallen by half; by 2015 it will have dropped by two-thirds. By 2015 four of Britain’s ten nuclear stations will have shut and no new ones could be ready for years after that. As for coal, it is fiendishly dirty: Britain will be breaking just about every green promise it has ever made if it is using anything like as much as it does today. Renewable energy sources will help, but even if the wind and waves can be harnessed (and Britain has plenty of both), these on-off forces cannot easily replace more predictable gas, nuclear and coal power. There will be a shortfall—perhaps of as much as 20GW—which, if nothing radical is done, will have to be met from imported gas. A large chunk of it may come from Vladimir Putin’s deeply unreliable and corrupt Russia.
Many of Britain’s neighbours may find this rather amusing. Britain, the only big west European country that could have joined the oil producers’ club OPEC, the country that used to lecture the world about energy liberalisation, is heading towards South African-style power cuts, with homes and factories plunged intermittently into third-world darkness. In terms of energy policy, this is almost criminal—as bad as any other planning failure in New Labour’s 12-year reign (though the opposition Tories are hardly brimming with ideas). British politicians, after all, have had 30 years to prepare for the day when the hydrocarbons beneath the North Sea run out; it is hardly a national secret that the country’s nuclear plants are old and its coal-power stations filthy. Recession has only delayed the looming energy crunch. How did Britain end up in this mess?
To the extent that successive governments had a strategy, it was on the face of it an attractive one: they believed in open energy markets. Beginning in 1990, the state divested itself of control of the energy industry. Power plants were privatised and a competitive internal electricity market was set up. Whereas most continental power providers, often state-backed, tied in supplies through long-term contracts (notably with Russia), British firms happily tapped the North Sea and planned to top up as necessary on the open market. This approach for the most part kept consumer prices down, but practical problems have long been clear.
Most obviously, the rest of Europe (wrongly) failed to liberalise wholeheartedly too. The market is thus a highly imperfect one: Britain was unable to buy gas at any price in 2004 and 2005, for example. Meanwhile, without any clear guidance from the government, Britain’s electricity providers have had little incentive to start adding the sort of capacity that would help the system as a whole function more robustly—let alone diversify the sources. Tony Blair spent most of his prime ministership running around the issue of nuclear power (at the last minute deciding it was all right). Asked about energy, Gordon Brown has tended to waffle on about his (unfulfilled) ambitions for renewable energy. Nobody has been willing to discuss pipelines, terminals and power generation.
To make matters worse, the new capacity that is in the works is probably the wrong sort. With no official energy policy, the power firms look sure to go for the easiest option—building more gas plants, which are cheap, relatively clean and quick to build. Britain’s dependence on gas for its electricity seems set to rise from just under half to three-quarters in a decade. Even if this new dash for gas happens fast enough to keep most of the lights on, which is by no means certain, it would leave the country overly reliant on one power source.
Electricity prices in Britain would be tied directly to gas prices, which can fluctuate wildly. Although many sources of gas are already bound up in long-term contracts, optimists think Britain might be able to get more of it fairly easily. Norway’s North Sea reserves have life in them yet. New technology to capture gas from coalfields has recently boosted supplies, which could help keep prices down. But those sources are unlikely to meet all the extra demand, leaving Britain in a position familiar to many of its neighbours: relying on Russia. It is not just that relations with Russia are at their worst since the cold war; Mr Putin’s crew seem more interested in terrorising their customers than developing new gasfields.
With gas too risky, coal too dirty, nuclear too slow and renewables too unreliable, Britain is in a bind. What can it do to get out of it? At this stage, there is no lightning-bolt solution, but two things would prevent matters from getting worse.
The first has to do with infrastructure. Companies must be cajoled or bribed into building gas storage. At the moment there is barely a week’s worth, so there is nothing to lessen the impact of price rises and the shenanigans of foreign powers. More cross-Channel power cables would help, allowing Britain to import electricity directly from its better-supplied neighbours (and also helping create a Europe-wide power grid, thus improving security for all EU members).
Second, carbon must be taxed if firms are to invest in long-term, expensive, technology-heavy projects such as nuclear plants, cleaning up coal and taming renewable sources of power. Carbon is already assigned a price through the European cap-and-trade mechanism, but the system is focused on the short term, vulnerable to gaming and plagued by hugely fluctuating prices. A tax on carbon is hardly going to stop the lights going out in a few years, but it would provide a floor price for power, giving investors a clearer sense of likely profits. In the meantime you know who to blame.
Scientists study huge plastic patch in Pacific
Marine scientists from California are venturing this week to the middle of the North Pacific for a study of plastic debris accumulating across hundreds of miles (km) of open sea dubbed the "Great Pacific Garbage Patch."A research vessel carrying a team of about 30 researchers, technicians and crew members embarked on Sunday on a three-week voyage from the Scripps Institution of Oceanography, based at the University of California at San Diego.
The expedition will study how much debris -- mostly tiny plastic fragments -- is collecting in an expanse of sea known as the North Pacific Ocean Gyre, how that material is distributed and how it affects marine life. The debris ends up concentrated by circular, clockwise ocean currents within an oblong-shaped "convergence zone" hundreds of miles (km) across from end to end near the Hawaiian Islands, about midway between Japan and the West Coast of the United States. The focus of the study will be on plankton, other microorganisms, small fish and birds.
"The concern is what kind of impact those plastic bits are having on the small critters on the low end of the ocean food chain," Bob Knox, deputy director of research at Scripps, said on Monday after the ship had spent its first full day at sea. The 170-foot vessel New Horizon is equipped with a laboratory for on-board research, but scientists also will bring back samples for further study. Little is known about the exact size and scope of the vast debris field discovered some years ago by fishermen and others in the North Pacific that is widely referred to as the "Great Pacific Garbage Patch."
Large items readily visible from the deck of a boat are few and far between. Most of the debris consists of small plastic particles suspended at or just below the water surface, making it impossible to detect by aircraft or satellite images. The debris zone shifts by as much as a thousand miles north and south on a seasonal basis, and drifts even farther south during periods of warmer-than-normal ocean temperatures known as El Nino, according to information from the National Oceanic and Atmospheric Administration (NOAA).
Besides the potential harm to sea life caused by ingesting bits of plastic, the expedition team will look at whether the particles could carry other pollutants, such as pesticides, far out to sea, and whether tiny organisms attached to the debris could be transported to distant regions and thus become invasive species.