Boy looking at Xmas toys in a shop window in New York
Ilargi: On Christmas Eve, in No Morals, No Hazard, I talked about Eric Sprott’s report "Is it all just a Ponzi scheme?", which suggests that $704 billion in purchases of US Treasuries cannot be accounted for, since they are on file as purchases by what the Federal Reserve Flow of Funds Report labels the "Household Sector", which, it turns out, doesn't exist. It's merely a name under which all unknown purchasers are grouped, while remaining unknown. The purchaser may be the Fed itself, unwilling to admit to more purchases than are already on file.
Alternatively, as someone suggested, the Treasuries may never have been issued in the first place, and the entire thing may be an empty charade aimed solely at keeping up the appearance of a functioning US sovereign debt market.
This possibility, which Sprott failed to mention, opens up whole new vistas, and would certainly lend a lot more credence to the idea that US finance policy, as designed and engineered by the Treasury Department and the Federal Reserve, is indeed nothing but the giant Ponzi scheme Sprott suspects it may be.
The Tyler Durden collective at ZeroHedge takes Sprott’s suspicions a step or two further, one might say, in a little directive called "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else".
Durden looks at what the net issuance of US fixed income has been in 2009, after you subtract the part purchased by the Fed (which is after all not a real purchase, but just money going from one's left pocket to the right one, I’ve used the metaphor numerous times in relation to US financial policies).
What Tyler Durden then finds is that net US$ denominated fixed income issuance was only $200 billion this year. For 2010, though, since the Fed is set to leave the scene stage left along with Quantitative Easing sometime early spring, over $2.06 trillion will have to be sold to parties other than the Fed. Durden:
Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.
And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion.
The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.
Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010.
Now, let's be clear: it's entirely unclear who the buyer of the $2.06 trillion will be. Not only do the usual suspects, China, Japan, have increasing doubts about amassing USD denominated paper including Treasuries, Japan also plans to be as aggressive a seller as the US. And of course there are many other countries who desperately need to sell sovereign bonds in order to pay for get their often already accepted and implemented budgets. And that's just the nation states. Corporations and lower levels of governments, in every nook and cranny of the planet, wants to sell you their debt. Badly.
Obviously, this will drive up interest rates on all this debt. It's impossible to foresee at this point how high the rates my rise, but it looks to be painfully obvious that there will be a lot of pain involved. You can bet that many if not most of the managers and budgeteers involved have done their clever calculations based on low interest rates. And they won't get those. Which will lead to new deficits, new budget cuts, new job losses etc.
But in case you were starting to think that we bring only sorrowful tidings, here's a ray of light for you. For Wall Street, things may not be all that bad. Not at all. The major US banks, as their European counterparts, have access to enormous amounts of funds (yours) at ultralow interest rates. All they need to do is borrow at one of the Fed windows, walk across the street (I know they don’t have to do that, but I'm going for the George Bailey era image here) and buy themselves some Treasuries.
In practical terms, say Bank (of) A borrows $1 billion at 0.25% from the Fed, and buys Treasuries that pay 5.25% (oh yes, we’ll get there, and beyond). All a banker needs to do is sit back, or play golf, and make 5%, or $50 million, on that $1 billion. Since it’s that easy, why not borrow, say, $200 billion, leverage that 10-fold, buy the $2 trillion in Treasuries, and make $100 billion just for sitting still?
Would work like a charm. The debt gets sold, the White House and the media can convince everybody this means that the economy is doing great, and the only sucker in all of it is the taxpayer who’s losing $100 billion a year while the principal of his debt keeps growing, sort of like in a non-amortization loan. Or if the banker doesn’t like the sitting still part, (s)he can use the Treasuries as collateral for more loans (covered by the full faith and credit of the American taxpayer), and go play in the derivatives casino down the street.
Now all we need to do is find a buyer for the trillions in mortgage backed securities the country's choking on.
Reality for the non-banking part of the population is starting to become clearly visible in for instance Japan's falling prices, and in Ireland, where government salaries across the board are cut by 10-20%. It would be wise for most workers and their unions to look very closely at what happens in Eire, since it is their foreland.
Unfortunately, everyone today is firmly stuck clinging to the official global party line that promises a return to prosperity and growth, and no-one sees a need to temper demands. Workers' organizations should be calling for their members to accept voluntary pay-cuts in exchange for watertight employment contracts for the next 10-20 years. But they don't, it's not palatable in the face of what the federal government and the media report on the recovering economy and the risk of inflation.
Boy oh boy, are we ever going to drive into that wall with our eyes wide open and our pedal to the metal! If nothing else, it'll sure be spectacular.
We’ll show 'em yet we know how to do a climax better than anyone.
Ilargi: There is still time to send in your donations for The Automatic Earth. Get yourself a front seat for the main event.
Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else
by Tyler Durden
As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).
If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.
In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.
Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.
And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.
Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.
As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.
And while things are hair-raising in "gross" country (not Bill...at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).
Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.
Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.
As for Japan - the country has plunged into its nth consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.
Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.
None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.
How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.
Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.
What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:
- Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
- Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
- Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.
If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.
Celtic Tiger finished off by debunked ‘miracle’
The worst Christmas in the history of the modern independent Irish State? As the sales season begins today for the first time on St Stephen’s Day, many are wondering if 2010 can be any worse than the outgoing year. For the nation’s public sector workers, pay next month will reflect cuts of between 5 per cent and 20 per cent, levels of reduction not experienced since the 1920s, even when not taking into account previous levies imposed since the Celtic Tiger economic "miracle" began unravelling a year ago.
Ireland, the first eurozone nation to enter recession, is struggling to emerge from beneath a blizzard of frighteningly negative economic statistics after Brian Lenihan, the Finance Minister, delivered a stinging Budget this month with a target of cutting €4 billion (£3.6 billion) in spending. It is an extraordinary reversal of fortunes. As recently as 2007, a Bank of Ireland report smugly described a country that was home to 33,000 millionaires and €800 billion of domestic wealth.
Credit to the Irish private sector nearly doubled between 2002 and 2007, by which time the country’s houses were the most overvalued in the Western world and construction accounted for one fifth of national output. Losing sight of the origins of its recent fortune — a low-cost but highly educated English-speaking workforce — the price of goods soared to 27 per cent higher than the average for the European Union. Gross wages were 40 per cent more generous.
Now output is 7.3 per cent lower than it was a year ago. The inflation rate has fallen as low as minus 3 per cent and the fiscal deficit has exploded to 12 per cent of output. Ingmar Kiang and Darina Roche-Kiang believe that they are a near-perfect case study of Ireland’s helter-skelter ride. "We saw the Eighties as well, when you took the first boat to London or plane to New York after college, but this is far worse," Ms Roche-Kiang said from her magnificent home in the desirable Dublin commuter town of Greystones. "I’m embarrassed to be Irish at this stage."
She and her husband joined the exodus and landed well-paid jobs with Island Records in London, returning to Ireland as the country’s fortunes rose. "Our house is being forcibly put on the market," she said. "We were given six months to sell it because a €98,000 mortgage is being called in." Nothing had prepared them for that news. "We thought we were just being called in for a routine interview," she said. "We have borrowed with Irish Nationwide for 15 years over three houses. They were so anxious to get us to borrow more money, we actually refused to take more 18 months ago."
Michael Fingleton, who retired as chief executive of Irish Nationwide in April after nearly 37 years in charge, has still not paid back a €1 million bonus he promised to return eight months ago. The 2008 bonus was paid in spite of the building society posting a pre-tax loss of €243 million for that year, its first in living memory. It will begin to receive €2 billion of state capital next month as the National Asset Management Agency (Nama) takes €8.3 billion of its loans — the vast majority to property developers — off its books. The Irish taxpayer is funding the clean-up of €77 billion of toxic loans by Ireland’s main financial institutions to the tune of €54 billion.
The trappings of wealth — fine wines, luxury cars and country houses — are all being sold off by liquidators. The number of insolvencies in Ireland has more than doubled to 1,209 this year. House prices have fallen by 26.7 per cent since February 2007 and now stand at October 2003 levels, according to the latest permanent tsb/ESRI House Price Index. Ms Roche-Kiang’s career as a fine artist boomed during the Celtic Tiger years, but she says that her sales have slumped by 98 per cent this year. Her husband, a music producer, is retraining as a picture-framer.
"We are all to blame, really," Ms Roche-Kiang said. "All I saw around me was one hell of a party. People went bonkers. Property was an obsession. It was all people talked about. "But reckless lending played its part. We all knew that houses were too expensive. We are an insanely corrupt country, worse than Greece or Italy. Who would want to live here now?"
Beyond the pale: Ireland in 2009
- January Government nationalises Anglo-Irish Bank, the Republic’s third-largest lender, amid the collapse of its share price and reports of large-scale deposit withdrawals. The move was prompted by fears that the bank could be declared insolvent, which would trigger a state guarantee and leave the Government responsible for nearly €100 billion of liabilities
- February Credit default swaps spreads, which measure risk involved in investing in Irish government bonds, peak, hitting 400 basis points
- April Government forced to resort to emergency Budget with a €3 billion package of tax rises and spending cuts. Ireland reels in the face of soaring unemployment, a housing market crash and a collapse of consumer spending by a fifth
- September Legislation to create the National Asset Management Agency (Nama) is passed by the Dáil. The State agrees to pay €54 billion for €77 billion of assets — toxic debt in the form of loans to purchase land and property — from the main banks
- October Mary Harney, the Health Minister, warns that Ireland could be forced to go to the International Monetary Fund for help if the country cannot implement the necessary cuts in the December Budget. Voters approve Lisbon Treaty in reversal of their decision in May last year
- November Patrick Honohan, a professor, is appointed Central Bank Governor, the first non-civil servant to be given the role, a sign that the Government is serious about cleaning up its banking sector. The European Commission confirms that it will give Dublin a one-year extension to its 2013 target to restore stability to the public finances
- December Brian Lenihan, the Finance Minister, announces the harshest Budget in the history of the Republic. Stripped of profits made by US companies in Ireland, gross national product declined by 1.4 per cent, leaving the economy 11.3 per cent smaller than a year earlier
Debt-laden Japan shocked by $1 trillion spree to ‘save lives’
Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country’s biggest ever postwar budget: a 92.3 trillion yen (£630 billion, $1 trillion) spending spree aimed at "saving people’s lives". The unprecedented budget, which supposedly shifts Japan’s fiscal spending focus "from concrete to lives", comes amid rising concern about the solidity of sovereign debt in the world’s second-largest economy.
The new budget will require additional debt issuance of Y44.3 trillion — within the Government’s expected band, but still at a level that will raise Japan’s debt-to-GDP ratio to nearly 195 per cent. Of foremost concern, analysts for Nomura said, is that Japanese tax revenues are expected to fall to Y37.40 trillion this year, the lowest that they have been since 1984. It was, analysts said, a watershed moment — the first time that new debt issuance has exceeded tax revenues since the Second World War. Mr Hatoyama said: "We were just able to stay at a level in which we can maintain fiscal discipline."
Mr Hatoyama swept to power in August with grand promises that the era of wasteful public spending would end. Japan’s unnecessary and notoriously expensive "roads to nowhere" public works projects would be curtailed and the money diverted to supporting beleaguered households.
Four months on from that victory and Mr Hatoyama has spent more than any of his predecessors and has yet to make any serious impact on the wider effort of repairing Japan’s shattered economy. Unemployment is falling from its March highs, but not at anything like the pace in other Asian economies. Mr Hatoyama has also been hurt personally by the arrest of a former aide this week amid a money scandal that bore all the hallmarks of the politics of "old Japan" — precisely the sort of venality that Mr Hatoyama and his Democratic Party of Japan (DPJ) were elected to crush. Prosecutors in Tokyo accused Keiji Katsuba, 59, of falsifying funding reports beginning in 2000 and listing dead people as donors.
Political analysts said that the episode would not be crippling to Mr Hatoyama, who has denied knowledge of the matter and does not face charges, but it adds to pressures that already include a weakened domestic economy and strained relations with the United States. Seiji Adachi, senior economist with Deutsche Bank, said: "The scandal in itself is not so serious, but it tarnishes his reputation further and diminishes his power to be an effective prime minister."
The Government hopes that the budget’s inclusion of steps such as allowances for families raising children and free public high school education will boost its popularity before an Upper House election next summer. That election is critical for Mr Hatoyama and the DPJ. Only by winning an outright majority in the Upper House can the new Prime Minister be free of the various coalitions that have hampered his first months in power. "I believe that we have delivered all we can without compromising fiscal discipline," Mr Hatoyama said. "Our country’s economic and employment conditions are very severe. The most important thing for us is to protect the lives of the Japanese citizens."
The budget plan will contain Y53.4 trillion in policy spending; 51 per cent of that will go to social security programmes. This is the first time that social security has received more than half of policy spending, reflecting the new Government’s focus on jump-starting consumption rather than the big public works projects carried out by former administrations. Tax revenues are expected to make up less than half the Government’s 2010-11 budget, falling behind new debt borrowing for the first time since the Second World War after a deep recession that devastated company profits.
Japan's Consumers, Businesses Try to Adapt to Falling Prices
Consumer prices in Japan fell in November for the ninth month in a row, the government said Friday, a worsening trend that is shifting consumer spending and imperiling a nascent recovery in the world's second-largest economy. The effect can be seen in the behavior of consumers like Tokyo housewife Yoshiko Sunabe. Shopping this week at an electronics superstore, Mrs. Sunabe, 64 years old, dithered over which washing machine to buy, bewildered by the numerous special offers. "Ten years ago my washing machine cost over 100,000 yen, now they are so much less.... It's so confusing," said Mrs. Sunabe.
Japan's consumer price index fell 1.7% in November from a year earlier, the government said Friday. The drop suggests Japan faces a lengthening spell of deflation, which began to plague its economy in the latter half of the 1990s and undermined economic growth until around 2006. Deflation -- a decline in the general level of prices for goods and services -- undermines corporate profits, leading to cutbacks and layoffs, and keeps consumers on the fence waiting for new bargains.
Such effects could bring to an end Japan's two consecutive quarters of economic growth, which has been driven largely by demand from other countries for its electronics, cars and other exports. Prices have dropped broadly. Domestic durables prices have dropped 23% over the past three years; children's clothing has fallen 7.1%; fruit has dropped 8% and beverages have dropped 4%. Food overall has risen 2.6% over the past three years but fallen 0.5% in the past year.
Japanese companies are trying to cope by finding profitable ways to sell to increasingly thrifty consumers. In an Isetan department store in Tokyo, Masae Tezuka, a 28-year-old assistant designer, purchased black suede high-heeled court shoes that cost 13,650 yen ($149). They were originally 19,000 yen. "I'm very happy to get exactly what I wanted at the reasonable price. This year prices are definitely lower," she said.
Price competition has been particularly intense in fast food, as low-cost businesses feel pressure. A plain hamburger at a Tokyo Wendy's this week cost 290 yen, compared with 100 yen for a hamburger at the McDonald's across the street. Two decades ago, as Japan's asset bubble was near its peak, that McDonald's burger cost 210 yen.
Citing price competition, Japan's Wendy's franchisee, which acquired the business in 2002, said this month it plans to end its agreement Friday, shutting its 71 outlets, which are mainly in the Tokyo area. Kazuharu Hattori, a 47-year-old taxi driver who once favored lunchtime bento boxes that cost 500 yen, says he now prefers to buy instant noodles in bulk, costing him little more than 100 yen per meal. He also buys 100-yen rice-ball snacks at convenience stores. Seven & I Holdings Co.'s Seven-Eleven Japan, the nation's biggest convenience chain by locations, has thrown more than 10 rice-ball discount campaigns this year. Rival chains have held similar campaigns. "Whenever I see the cheaper 100-yen rice balls left on the shelf at convenience stores, I grab them all," Mr. Hattori said.
In the Yurakucho area of Tokyo, restaurant owner Daisuke Chiba has cut lunchtime serving staff to two from three, and is offering a free bowl of rice with meals. His diner, part of a chain called Pepper Lunch, charges 980 yen for a fried steak with bean sprouts. A year ago, he was charging 1,100 yen. For the first time on Wednesday, Mr. Chiba was offering a rib meal for 740 yen. Businessman Yasuyuki Someya, 32, said: "For the price the meal is very tasty, if it cost 1,000 or 2,000 yen I'd be reluctant to pay."
Wataru Takano, a salaryman in his 30s who moved to Tokyo from Osaka earlier this year, snagged a free cafe au lait from a McDonald's in the Musashi Kosugi neighborhood but says he would otherwise rarely visit. Gyudon-style restaurants, which serve beef strips on rice, offer a better deal, he believes. "I found out about the recent price cuts [at gyudon chains] on TV. It's surely another reason to visit them more often," he said.
According to data compiled by the Organization for Economic Cooperation and Development, Japan's poverty rate, or the percentage of those living on less than half of the median income, rose from 12% in the mid-1980s to 14.9% in the mid-2000s, the fourth highest among OECD countries after Mexico, Turkey and the U.S. In 2007, 15.6% of Japanese households surveyed said they hadn't always been able to afford food in the past year, according to recently released study by the National Institute of Population and Social Security Research, a government-affiliated think tank.
U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy
The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday. The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each. Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said.
Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s. "The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note." Treasury officials couldn't be reached for comment Friday.
So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring. In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.
The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.
Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies. The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.
The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies. The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.
Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority. The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.
For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million. When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator. At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.
Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer. At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.
The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie. He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable." The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.
Here's The Secret Reason We Eliminated The Bailout Caps On Fannie And Freddie
On Christmas Eve, when the news was assured of getting no coverage whatsoever, The White House announced that it had eliminated the maximum bailout cap for Fannie Mae and Freddie. As some observers have pointed out, all the move really did was formalize what everyone has figured for decades, that the two zombie GSEs were truly organs of the federal government, and that their debts would be backed up ad infinitum. So, why the move, and why then? Credit analyst Edwart Pinto shares his theories.
What the Treasury’s lifting of the bailout caps on Fannie and Freddie might portend for 2010
Might Treasury be taking these steps in anticipation of the following?
1. Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.
2. Fannie and Freddie taking on a greater role in the near term to support their own mortgage backed securities (MBS). Now that the Treasury’s and the Federal Reserve’s own support programs are in the process of winding down, the administration’s actions may be preparing Fannie and Freddie as the vehicles for continuing this support. The Treasury’s December 24, 2009 announcement raises the portfolio limits to $900 billion each, thereby providing Fannie and Freddie with the ability on a combined basis to increase their portfolios by a total of $275 billion. At the current rate of the Fed’s MBS purchases, this new capacity would last about 4-5 months.
3. Fannie and Freddie growing their portfolios on a long term basis to provide continued support to the MBS market. Given the recent uptick in mortgage rates due to increasing Treasury rates, the lifting of the bailout caps may be designed to reassure investors in an effort to keep MBS spreads from widening relative to Treasury rates. By providing a more open ended capital commitment, along with the greater portfolio capacity now, Fannie and Freddie are in a position to grow their portfolios early in 2010. If the market accepts their purchases without wider spreads, then even higher portfolio dollar limits can be created with the stroke of a pen;
4. The administration’s announcement in February regarding the future role of Fannie and Freddie. In a separate press release also issued on December 24, 2009 it was revealed that the executive pay packages at Fannie and Freddie do not include a common stock component. This fact, along with the lifting of the bailout caps and the expanded portfolio capacity, may well indicate an intention to formalize Fannie and Freddie’s continued status as government agencies. If this were to happen, Fannie and Freddie’s outstanding common stock likely becomes worthless, making it of no use as an employee incentive. . This action would be justified by stating that Fannie and Freddie are just too important to the economic recovery to re-privatize.
5. Increasing the demand for Fannie and Freddie’s MBS by reducing the multiplier for bank risk based capital requirements from 20% to 10%. This action would help serve to keep spreads to treasuries narrow. Banks would only need 0.8% risk based capital to support their holdings of Fannie Freddie MBS versus the 1.6% needed today. The earlier noted lifting of Treasury’s capital support caps could provide the justification for this reduction in capital requirements, since it signals an increase in the government’s commitment to Fannie and Freddie..
The above actions would preserve and strengthen the government’s involvement and control over the country’s housing finance system and make it harder to reintroduce substantial private sector involvement later on. They would also continue distortions in the marketplace leading to who knows what unintended consequences. Finally these steps would do nothing to deleverage the housing finance system, a key step in returning it to any degree of normality.
Chinese Premier Wen Calls for Action on Property Speculation as Prices Soar
China’s Premier Wen Jiabao called for policies to curb property speculation, an indication the government is ready to tighten policies to prevent the economy from overheating. Wen, speaking in an interview with the official Xinhua News Agency, said property prices have risen too quickly in some areas and that tax and interest rates are among tools that could be used to control speculation. His remarks were broadcast online today.
China’s property prices climbed last month at the quickest pace since July 2008, adding to concern that record lending may create asset bubbles in the world’s fastest- growing major economy. Wen isn’t the only one concerned about overheating: central bank adviser Fan Gang said Nov. 18 that "double-digit" growth wouldn’t be good in 2010 amid the rising risk of bubbles in stock, real estate and commodity prices.
Wen said in the interview that China isn’t experiencing inflation and that consumer price increases will be kept in a "reasonable range." "China will keep its loose stance at least in the first half of next year as inflation is expected to stay within tolerable levels," said Shen Minggao, chief economist for Greater China at Citigroup Inc. "There won’t be significant changes to maintain policy stability, but some industries with excess capacity have seen credit tightened."
China’s growth may surge to as much as 12 percent next year, increasing the risk from inflation unless the government raises interest rates, Zhu Jianfang, chief economist at Citic Securities Co., said Dec. 23. Residential and commercial real-estate prices in 70 major cities rose 5.7 percent from a year earlier, compared with a 3.9 percent increase in October, the National Bureau of Statistics said on Dec. 10. The nation is poised to overtake Japan to become the world’s second-biggest economy next year, according to International Monetary Fund projections. The government’s $586 billion stimulus spending, record bank lending and subsidies for consumer purchases helped the economy expand 8.9 percent last quarter, the fastest pace in a year, amid the global recession.
China raised its 2008 growth estimate to 9.6 percent from 9 percent and said this year’s quarterly figures will increase, narrowing the gap with Japan, the statistics bureau said Dec. 25. A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year drove a recovery in the economy and increased the risk of bubbles in property and stocks. The economy may be boosted by a rebound in exports and domestic spending next year, said Zhu at Citic, who expects the benchmark lending rate to increase by between 27 basis points and 54 basis points from 5.31 percent. A basis point is 0.01 percentage point.
China’s central bank reaffirmed Dec. 23 plans to keep a "moderately loose" stance for 2010 and to restrict credit for industries with excess capacity. The Chinese economy grew 8.9 percent from a year earlier in the third quarter, 7.9 percent in the second and 6.1 percent in the first as the global economy recovered from the worst slump since World War II. Economic growth in the fourth quarter will exceed the 8.9 percent of the three preceding months, Xu Xianchun, deputy head of the National Bureau of Statistics, said Dec. 23.
China won't be pressured over yuan peg - Wen
Chinese Premier Wen Jiabao on Sunday struck a defiant note about the country's controversial exchange rate policy, saying the government would not give into foreign demands to let the yuan rise. Wen said the currency was facing growing pressure to appreciate, but insisted that China was committed to keeping it stable, having virtually pegged it to the dollar since the global financial crisis worsened in the middle of last year.
"We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures," he said. "The true purpose (of these calls) is to contain China's development," he added in an interview with the official Xinhua news agency. The yuan has fallen against the currencies of most of its trading partners this year because it has been fixed to a weakening dollar, while China's economy has bounced back strongly. U.S. senators have asked for an investigation into whether current yuan policy represents a form of subsidy that would justify tariffs on Chinese imports.
Wen also repeated an oft-made declaration that the stable yuan had contributed to the global economic recovery. A series of foreign policymakers, including U.S. President Barack Obama, European Commission President Jose Manuel Barroso and International Monetary Fund chief Dominique Strauss-Kahn, have visited China in recent months to press for an appreciation of the yuan. But many analysts believe that Chinese leaders will want to see several consecutive months of increasing exports before letting the yuan resume the path of gradual appreciation it followed from 2005 to mid-2008. The market expects a roughly 2.7 percent appreciation of the yuan over the next 12 months, according to offshore forwards pricing.
Wen gave a cautious outlook for the domestic economy in 2010, saying it was too early to wind down the government's stimulus policies but that officials needed to be attentive to surging property prices and incipient inflation. Although China would continue to encourage citizens to buy homes for their own use, differentiated interest rates would be used as a tool to fight property market speculation, Wen said.
He was apparently referring to a policy proposal that China could keep preferential mortgages -- a discount of up to 30 percent on benchmark lending rates -- for people buying their first homes but eliminate them for additional home purchases. More broadly, Wen warned on imbalances rising from too much bank lending while defending China's use of a 4 trillion yuan stimulus package to fend off the global economic crisis. "Parts of the economy are not balanced, not coordinated, and not sustainable," Wen said, repeating previous statements. It would be better if lending by Chinese banks was not on such a large scale, Wen added.
China's overall lending situation had improved in the second half of the year, when banks dramatically slowed their pace of credit issuance after a record surge in the first half, Wen said. Chinese bank are on course to lend an unprecedented 9.5 trillion yuan ($1.4 trillion) this year, double last year's total. The market expects new loans to fall to about 7.5 trillion yuan next year. This time last year, central planners facing a sharp downturn in external demand for Chinese exports worried the country would be unable to reach the 8 percent growth deemed necessary to maintain employment and avert social instability.
With the country on track for about 9 percent growth this year and an even faster expansion next year, concerns have instead shifted to whether pockets of the economy are overheating and whether inflation could flare up. Wen warned that although there is no sign of inflation at present, this year's exceptional money supply growth could stoke inflationary expectations and that inflation could appear. But he said the government was committed to seeing through its massive two-year stimulus package, launched in late 2008. "If we have a too-early exit of the stimulus policies, we may lose all that we have already achieved," he said.
Pounding for Gordon Brown over UK debt crisis
A group of leading economists has attacked the government for its "irresponsible" failure to set out "even the rudiments" of a convincing plan to reduce Britain’s £178 billion budget deficit and warns of "alarming complacency" in the face of the country’s fiscal challenges. In a letter to The Sunday Times, the economists, including Tim Congdon, Patrick Minford and Gordon Pepper, warn of "heightened risk" of a downgrade of Britain’s sovereign debt rating.
The signatories, several of whom are on the "shadow" monetary policy committee, say that the integrity of UK fiscal and monetary policy is at stake because of the huge budget deficit. They warn that international investors could see the Bank of England’s £200 billion quantitative easing programme, mainly the purchase of UK government bonds (gilts) as "driven by a politically-motivated desire to ease the government’s funding difficulties".
Some of the economists, who also include Peter Warburton — who this year topped The Sunday Times table for forecasting accuracy — Peter Spencer and David Smith, favour immediate action to cut the deficit, while others say the need is for a medium-term plan. "While there is room for debate about the pace of reducing the budget deficit in the initial phases of recovery, there should be no debate about the need for a clearly set out fiscal consolidation programme for the medium term based on spending discipline rather than higher taxes," they write.
"We were particularly concerned that the pre-budget report announced additional public spending for later years, as well as higher taxes, at a time when the priority should be to reduce public spending to levels compatible with the UK’s tax base." The Conservative party should set out its intentions before the election, they say. "This would give voters and markets a clear choice between a governing party prepared to indulge in risky procrastination about the scale of Britain’s fiscal problems and an opposition prepared to take the necessary action," they conclude.
In another report, the Centre for Economics and Business Research (CEBR) will warn that uncertainty over Britain’s public finances could push sterling below parity against the euro between now and the election. "If opinion polls show the Tory lead dropping well into single figures, the markets will have kittens and probably start a sterling sell-off," writes Doug McWilliams, chief executive of the CEBR. "Rating agencies are looking for an excuse to downgrade the UK government from its AAA rating, following countries such as Greece".
"Whether markets react to Britain’s fragile public finances before they react to the divergence of performance in the euro zone will determine whether sterling drops below parity. If I had to bet, I would bet on the side of parity being broken." Treasury officials maintain that a credible plan is in place for reducing the deficit and that they have been cautious about their revenue assumptions for the future. They say that the pre-budget report contained a more aggressive deficit-reduction plan than those adopted by other countries.
As Slump Hits Home, Cities Downsize Their Ambitions
Mesa, Ariz. -- The police department in this city of 470,000 has lost about 50 officers, and is hiring lower-paid civilians to do investigative work. The Little League has to pay the city $15 an hour to turn on ball-field lights. The library now closes its main location on Sundays, and city offices are open only four days a week. This holiday season, the city didn't put up festive lights along the downtown streets. Mesa's tax receipts, depressed by the recession, will likely come back one of these days. But Mayor Scott Smith doesn't believe city services will return to prerecession levels for a long time, if ever. "We are redefining what cities are going to be," says Mr. Smith, a Republican who ran a homebuilding company before his election last year.
The redefinition isn't sitting well with residents like Sandra West, 67 years old, who has lived in Mesa for more than four decades. She's noticed the city's parks looking a bit ragged, is unhappy the library has cut back hours and misses the Christmas lights. "It was really beautiful," she says. Months after many economists declared the recession over, cities are only now beginning to feel the full brunt of it. Recessions often take longer to trickle down to local government, in part because it takes time for the sales and property-tax revenues on which municipalities depend to catch up with a depressed economy.
But the sting this time around is expected to be far more acute and long-lasting then in previous recessions. Projected deficits are especially deep in some places and tax revenues could be pinched for years as consumers turn thrifty and real-estate prices remain diminished. That means the relatively painless measures such as borrowing, deferred payments to pension plans and scattered layoffs that have been used during past episodes of fiscal strain are unlikely to be effective in some cities.
In the decade through 2008, municipal tax revenues grew at a rate of 6.5% a year, faster than the overall economy's 5.1%, unadjusted for inflation. Those revenues have started to slip. A national tally isn't yet available, but state tax collections fell 11% across 44 states in the third quarter of 2009, from the same period a year ago, according to a report by the Nelson A. Rockefeller Institute of Government at the State University of New York. In a recent survey by the National League of Cities, 88% of city budget officers said they were less able to meet their financial needs than they were a year ago.
The specter of lean budgets for years ahead has some of the nation's 89,000 local governments rethinking what services to provide and how to pay for them. From Mesa to Philadelphia, this means some combination of higher taxes and fewer services. In some places, it means more and higher fees for permits and recreation programs. Museums, pools and the like are relying more on income from fees charged to users and from nonprofit organizations, and less on taxpayers.
These cuts matter greatly to the economy at large. Local government spending accounts for 8.8% of the nation's total output, including everything from employee salaries to snowplows. The sector employs one in nine workers -- 14.5 million in all, or about 8 million in education and 6.5 million elsewhere. More Americans work for cities, counties and school boards than in all of manufacturing.
More likely to be union members, government workers tend to be better paid and have greater job security than many of the taxpayers who pay their salaries. Benefits are often better, too. Virtually all full-time state and local workers have access to retirement benefits; in the private sector, about 76% of full-time employees had retirement benefits. Employment in local government peaked in August 2008 and has fallen by 117,000 since then, or less than 1%, compared with a 6.3% fall in private employment from its December 2007 peak.
About one third of the federal $787 billion fiscal stimulus was aimed at state and local government. The money has helped some local governments keep police and school teachers on the job, and has gone toward building new firehouses and police stations. Another stimulus program subsidizes municipal borrowing by paying 35% of local government's interest cost on borrowing for infrastructure. But some cities have complained that too much of the stimulus was absorbed at the state level. President Barack Obama is promising to do more, calling in a recent speech for more "relief to states and localities to prevent layoffs."
Just as the recession has spurred businesses towards more efficiency, it has forced some cities to do the same. In upstate New York, for instance, the Village of Lake George and the neighboring town of Lake George are debating a consolidation plan that would create one government from two sets of lawmakers, two planning boards and two zoning commissions.
The move would save about $350,000 a year, or about 10% of the combined town and village budgets, according to Fairweather Consulting, which was hired to study the proposal. But some locals say the two places might sound alike on paper, but in reality are very different: Residents of the quaint village, which thrives on tourism, worry services could decline, while residents of the town, whose primary commercial center is a highway-adjacent strip with a Howard Johnson, worry that taxes will rise. "It's the unforeseen," says Robert Blais, mayor of the Village of Lake George. "They know what they've got and they're happy with it."
In Philadelphia, where sales and corporate taxes have taken a hit, budget cuts are limited by the large fixed costs of city workers' pension and benefits plans. About one fifth of the city's $3.7 billion budget goes for health-care and pension costs for current and retired workers. The city's overall tax revenue has fallen 6% over the past two years, while pension costs have risen 6% and health-care costs 11%. Philadelphia Mayor Michael Nutter, a Democrat, is pushing union employees to pay more of their health costs and is looking to move new employees to a less generous pension plan.
The city has cut about 800 positions in the past year, mostly through attrition, and suspended some services citizens used to take for granted. It has stopped providing snow removal on some smaller, one-way streets, except in emergencies, and it suspended mechanical leaf pick-up in some spots. This fall and early winter, older, tree-lined neighborhoods like Mt. Airy and Chestnut Hill were littered with rotting leaves. "Intellectually, I understand budget cuts need to be made but I do not think this was thought through," says Liz Macoretta, who lives in the West Mt. Airy neighborhood. "You're going to have half the street full of leaves and then you're going to have one-way traffic. I feel let down."
Anyone who wants to have a parade in Philadelphia now has to pick up the tab. The city's Mummers Parade, where 10,000 or so string bands and other performers don bright costumes and march up Broad Street on New Year's Day, won't receive the $336,000 in prize money that used to go to the best string band and other parade participants. The last time that happened was during the Great Depression. "You used to get ten grand and a trophy, now you just get a trophy," says George Badey, chairman of SavetheMummers.com Fund, a nonprofit that helps fund the parade. The Mummers also had to pay $8,800 for security, clean up and other services, all of which the city used to provide free.
Mesa was founded in the 19th century by Mormon pioneers who built a grid of wide streets to accommodate settlers' wagons. It's been growing ever since, from a quiet Phoenix suburb to the nation's 38th most populous city. More people might have heard of Minneapolis or Miami, but Mesa has more people than either. The stretch marks of growth are everywhere, from new freeway lanes under construction to miles of red-roofed subdivisions with curvy streets.
The city's revenues come largely from state aid and sales taxes, both of which have been hit hard by the recession. As a result, Mesa has spent the past year slashing services it spent decades adding, stripping 13% out of its general fund budget and cutting 340 positions through layoffs and attrition. Mesa's voters also approved a property tax this year, something that the city's generally conservative citizens had long resisted. Mesa's police force now has 801 sworn officers, down from 858 last year. To keep the force just as visible on the streets, some detectives have been reassigned to patrol duty, leaving bigger case loads for the rest of the detectives.
The cuts have spawned new ideas. A nine-person investigative unit, based out of a Mesa substation on the eastern edge of town, consists of civilians, not sworn officers. Investigators make about $37,000 per year, versus $49,000 for officers, and carry out basic investigations for minor nonviolent crimes. They travel in unmarked white cars, don't carry guns and wear "business attire" -- usually a pressed shirt and pants -- instead of the blue uniforms sworn officers wear.
The team goes through 18 weeks of training, 20 weeks less than police officers do. Many of the classes are the same, but the course leaves out things like aggressive driving and time at the firing range. They come from a variety of backgrounds: One had been a police officer, a few had civilian desk jobs for the Mesa police department, while several others worked in retail stores including Costco and Barnes & Noble. Sgt. Stephanie Derivan, who oversees the program, says hiring civilians reduces costs while improving services. It gives police officers more time to patrol the streets, she says, and the specialized investigators never have to hurry through a crime scene to get to a break-in in progress or chase down robbers. "My folks have the time to spend with people," says Sgt. Derivan.
On a recent afternoon, civilian investigator Rachell Tucker was sent to check out a burglary at a Mesa trailer park. Ms. Tucker was an officer in the Los Angeles School Police Department eight years ago, where she patrolled public school buildings, before taking time off to have kids. At the trailer park, she dusted a window screen for fingerprints and asked neighbors if they'd seen anything suspicious. Becky Cumberland says she didn't notice that Ms. Tucker wasn't a police officer. "As long as she does what a police officer can do, that works for me," said Mrs. Cumberland as she sat on her back porch, sipping a Coke while writing down everything that had been stolen from her trailer, including an Xbox video game console and her son's birthday money.
Cuts in the parks department are easier to see. Michael Holste, Mesa's assistant director of recreation operations, pointed to the department's new brochure, which lists an after-school recreation program with kickball and other games with the word "cancelled" overlaid in bold letters. In one Mesa park, a green-and-yellow jungle gym is surrounded by dirt because the city couldn't afford sprinklers. At Powell Junior High School, which itself might be closed due to tight budgets, swimming classes are cancelled; the pool has been closed all year, and isn't likely to reopen.
It's far from certain the city will resume funding parks at the same level, even when tax revenues return. Cuts in the recreation department eliminated a city-funded programmer who organized disabled sports programs such as wheelchair basketball and flag football games for people with disabilities including autism and Down syndrome. Mesa Association of Sports for the Disabled, a local nonprofit, has hired its own coordinator at a lower salary and fewer benefits. Lane Jeppesen, the group's executive director, says the new arrangement may be permanent. "I don't think the city will come back with another full-time position for a very long time because we've picked up the slack," she says.
All the cutting has put Mesa in a financial position stronger than that of many cities. Expenses are now in line with revenues. Standard & Poor's rates the city's debt AA and calls Mesa's financial management "strong, well embedded and likely sustainable." And despite tight budgets, the remaining city workers are striving to add at least some services for the city's still-growing population. At a city council study session on a recent morning, library director Heather Wolf presented her idea for a new "express" library to open in 2010. "There is a need out there for library service and this is one way to fill the gap," says Ms. Wolf.
It wouldn't look much like Mesa's main branch, though, which sits downtown and is adorned with a plaque commemorating the library's 1980 dedication. Because of the shoestring budget, the new library would be housed in a mostly vacant strip mall, with two employees and open just three days a week. On days when the library is closed, the collection of mostly popular titles such as self-help books and airport fiction would be dispensed via vending machines similar to the DVD rental kiosks that sit in front of convenience stores in Mesa and many other U.S. cities.
Home sweet rental
No longer buying into the American Dream
Home ownership has often been considered a critical part of the American Dream -- an unwritten privilege of living in America bestowed on its financially secure citizens. Owning a home was the ticket to financial security and, for several years earlier this decade with home values soaring, seemingly the best investment Americans would ever lay their hands on. But in the wake of the housing crisis -- with home values down 35 percent or more and with little robust growth seen on the horizon -- it may be time to ask whether buying a home is still so vital to financial happiness.
The current economic environment is making a strong case that renting a home and smartly investing your savings can be just as rewarding. When making the decision to buy vs. rent, people usually consider several factors -- the rent vs. mortgage payment being the primary question. But there are other financial factors to consider, including:
- Your insurance premium.
- Property taxes (which are usually higher than any tax deduction you get from your mortgage interest).
- Maintenance (pipes break, electricity problems, etc.).
- Utilities (utilities and maintenance for renters is often reflected in the rental price, but it's not reflected in a mortgage when you own).
- Yard work, pest control, remodeling, etc. (again, rents usually have this built into the price, but mortgages don't).
And let's not forget those initial costs that always seem to add up to more than you expect:
- A down payment of at least 15 percent, which is $90,000 on a $600,000 home.
- Closing costs, usually 5 percent of loan amount, or another $25,000.
- Initial remodeling costs.
Remember that you are completely out of that cash down payment you made because even if you sell, homeowners usually roll over that initial down payment into a new house for tax purposes. Cash is king and many prefer having cash in the bank. Okay, so when you buy you definitely spend more per month and your initial costs mean that the house has to appreciate 10 percent-to-20 percent on Day 1 in order for you to break even. But that's supposed to be okay because you have the house as an investment, right?
Well, except for earlier this decade, it's been a so-so investment. Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices that have made these numbers a lot worse), housing went up a dismal 0.4 percent annually vs. 8 percent for the stock market, according to the Social Security Advisory Board.
Critics of renting point to real estate being an asset as opposed to throwing money away renting. But they forget about the massive amounts of money that it takes to get into the home ownership game. Rather than spend $100,000-to-$200,000 on a home's initial cost -- and that has become completely illiquid as long as you own the house -- you can put that money in a portfolio of diversified real estate investment trusts, including residential investment trusts, if you truly believe in the housing market.
Renting in today's market and investing your savings will allow you:
- To diversify your savings, something buying a home prevents you from doing.
- To keep your assets liquid, a real security blanket, particularly in times of stress.
- To keep from becoming way too leveraged in housing for a significant chunk of your portfolio.
So while the banking industry, the White House and your Uncle Bob are all telling you to buy a house already, your portfolio may be better set if you rent a place to live. And maybe you can get your landlord to shovel the snow.
How Overhauling Derivatives Died
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.
The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.
But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges. A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an "educational" process by dealers and customers that resulted in "a grudging recognition" that many uses of derivatives didn't fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital Hill.
For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school. Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin.
Dealers persuaded lawmakers to make exemptions to the clearing rules for some customers, including those covering foreign-exchange contracts, hedging by "end users" such as energy firms and airlines, and activities to offset "balance sheet risk," said Adam White, derivatives analyst at White Knight Research & Trading in Atlanta. Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements. Ohio Democrat Dennis Kucinich said in a statement he voted against the bill because it "contains a number of loopholes that sophisticated industry insiders will exploit with ease."
In an interview, House Financial Services Committee Chairman Barney Frank, who led efforts to craft the bill, defended the legislation, saying it is tougher than critics say. He said its clearing and trading provisions would require greater disclosure of trades and resulting risks, and give regulators more power to monitor and manage such risks. The Massachusetts Democrat disputed Mr. Kucinich's implication that Wall Street dealers will be able to exploit the bill's exceptions, but said House Republicans had blocked some of his own efforts to make the bill tougher.
Wall Street executives say requiring end users to post additional margin could boost costs. An executive from Chicago utility Exelon Corp. told the Senate in September that requiring it to execute its electricity hedges on exchanges could require billions in additional cash outlays for margin that could boost prices to consumers. 3M Co. and Boeing Co. also warned of costs. The Obama regulatory reform plan unveiled in June envisioned imposing higher capital requirements on dealers for customized, nonstandard derivatives that aren't cleared—to encourage dealers to send more to clearinghouses. But the House bill said only that capital and margin standards for off-exchange trades should be appropriate "for the risk associated with the noncleared swap," leaving specifics to regulators.
Some credit-default swaps clearing has already begun this year at the IntercontinentalExchange Inc., known as ICE, and CME Group Inc. The biggest derivative clearing operation, LCH Clearnet Group Inc. in London, already clears about one-third of roughly $200 trillion in interdealer interest-rate swaps. A report Dec. 17 by Morgan Stanley analysts estimated that the volume of derivatives cleared could increase from a current 20% of the total to as much as 60% by 2012—a backdoor confirmation of critics' charge that 40% of the universe won't be covered.
Do we need a new reserve currency?
A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis", says Martin Wolf, associate editor and chief economics commentator of the Financial Times.
Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.
Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.
"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money." Indeed, Wolf said he's in complete agreement with China's Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly".
"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession, the dollar is not adequately supported." The US currently has a national debt in excess of $12 trillion (Dh44trn) or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108bn. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.
Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf. "There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."
As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable". "This is simply the American way of shifting the recession from them(selves) to their trading partners," said Wolf. "What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."
"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable." "Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.
"The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. "We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.
"And it's a tremendous mess, a horrifying mess and that's where we are, I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years, I'm sure of it. We're going to get there. The only question we have to decide is, how we're going to get there."
Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07trn from a year ago. However, according to The Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010. China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.
Ilargi: Robert Shiller wants government to issue stocks (equity) instead of only Treasury bonds (debt), in order to give investors a share in future GDP growth. Nice idea, you might say, at first glance, but if you do, please note that Shiller does not once address either the possibility that there may be no growth, or the consequences this would have for investors.
A Way to Share in a Nation’s Growth
by Robert J. Shiller
Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national "profit," as measured by gross domestic product.
Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century. Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now? Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession.
In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call "trills," short for trillionths. Let me explain: Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.
If substantial markets could be established for them, trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices.
If trills were issued by Canada, for example, they would pay about 1.50 Canadian dollars in dividends this year, one trillionth of the annual cash flow. The value of the security is derived from the dividend, and might be priced very highly in the market — perhaps at around 150 Canadian dollars — given that country’s strong prospects for growth. Trills issued by the United States Treasury would pay about $14 in dividends this year and might fetch $1,400 a trill or more.
The Standard & Poor’s 500-stock index now has a dividend yield of 2.3 percent. The dividend yield on trills might be much lower, reflecting the substantially higher long-term growth rate of G.D.P. relative to S.& P. dividends — in real terms, 3.1 percent versus 1.1 percent a year, respectively, since 1957. The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.
There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields, which may have to be raised to attract more investment. Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.
The United States government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government’s dividend burden would automatically decline in tough times, when G.D.P. declined. The final statement of the Group of 20 economic meeting in Pittsburgh in September pledged to "establish a pattern of growth across countries that is more sustainable and balanced, and reduce development imbalances." These imbalances — exemplified by the massive Chinese holdings of United States government debt — might not be so worrisome if the investments were financed better.
In fact, issuing shares in G.D.P. might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its G.D.P., creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances.
We already have international equity markets that allow international investments in private firms within countries. But these do not represent the entire economy. Corporate stocks represent implicit claims on after-tax corporate profits, which typically amount to no more than 10 percent of G.D.P. Moreover, after-tax corporate profits are a much more slippery concept than G.D.P., affected as they are by many domestic policies, including taxes, government involvement in labor disputes and even government bailouts — as we now know very well.
Someday, China might issue shares in its G.D.P., too, and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China’s standard of living.
Proposals for securities like trills have been aired many times over the years. I argued for them in "Macro Markets," my 1993 book. The Nobel laureate Robert Merton has had similar proposals. Other ideas for G.D.P.-linked securities have been advanced by John Williamson at the Peterson Institute, by a group at the United Nations Development Program, by Kristin Forbes of the Council of Economic Advisers under George W. Bush, and by Eduardo Borensztein of the Inter-American Development Bank and Paulo Mauro of the International Monetary Fund. So far, these proposals have gone unheeded. But the current environment may be more suitable for them.
Ilargi: John Williams gets it all increasingly right, but he still overlooks the deflationary phase, even as we’re in it.
ShadowStats.com founder John Williams explains the risk of hyperinflation.
Do you believe everything the government tells you? Economist and statistician John Williams sure doesn't. Williams, who has consulted for individuals and Fortune 500 companies, now uncovers the truth behind the U.S. government's economic numbers on his Web site at ShadowStats.com. Williams says, over the last several decades, the feds have been infusing their data with optimistic biases to make the economy seem far rosier than it really is. His site reruns the numbers using the original methodology. What he found was not good.
Maymin: So we are technically bankrupt?
Williams: Yes, and when countries are in that state, what they usually do is rev up the printing presses and print the money they need to meet their obligations. And that creates inflation, hyperinflation, and makes the currency worthless.
Obama says America will go bankrupt if Congress doesn't pass the health care bill.
Well, it's going to go bankrupt if they do pass the health care bill, too, but at least he's thinking about it. He talks about it publicly, which is one thing prior administrations refused to do. Give him credit for that. But what he's setting up with this health care system will just accelerate the process.
Where are we right now?
In terms of the GDP, we are about halfway to depression level. If you look at retail sales, industrial production, we are already well into depressionary. If you look at things such as the housing industry, the new orders for durable goods we are in Great Depression territory. If we have hyperinflation, which I see coming not too far down the road, that would be so disruptive to our system that it would result in the cessation of many levels of normal economic commerce, and that would throw us into a great depression, and one worse than was seen in the 1930s.
What kind of hyperinflation are we talking about?
I am talking something like you saw with the Weimar Republic of the 1930s. There the currency became worthless enough that people used it actually as toilet paper or wallpaper. You could go to a fine restaurant and have an expensive dinner and order an expensive bottle of wine. The next morning that empty bottle of wine is worth more as scrap glass than it had been the night before filled with expensive wine.
We just saw an extreme example in Zimbabwe. ... Probably the most extreme hyperinflation that anyone has ever seen. At the same time, you still had a functioning, albeit troubled, Zimbabwe economy. How could that be? They had a workable backup system of a black market in U.S. dollars. We don't have a backup system of anything. Our system, with its heavy dependence on electronic currency, in a hyperinflation would not do well. It would probably cease to function very quickly. You could have disruptions in supply chains to food stores. The economy would devolve into something like a barter system until they came up with a replacement global currency.
What can we do to avoid hyperinflation? What if we just shut down the Fed or something like that?
We can't. The actions have already been taken to put us in it. It's beyond control. The government does put out financial statements usually in December using generally accepted accounting principles, where unfunded liabilities like Medicare and Social Security are included in the same way as corporations account for their employee pension liabilities. And in 2008, for example, the one-year deficit was $5.1 trillion dollars. And that's instead of the $450 billion, plus or minus, that was officially reported.
These numbers are beyond containment. Even the 2008 numbers, you can take 100 percent of people's income and corporate profit and you'd still be in deficit. There's no way you can raise enough money in taxes.
What about spending?
If you eliminated all federal expenditures except for Medicare and Social Security, you'd still be in deficit. You have to slash Social Security and Medicare. But I don't see any political will to rein in the costs the way they have to be reined in. There's just no way it can be contained. The total federal debt and net present value of the unfunded liabilities right now totals about $75 trillion. That's five times the level of GDP.
What can we, the people, do to stop the government from, you know, taking all our money?
We should have acted 20 years ago. There's not much you can do at this point to prevent the eventual debasement of the dollar. This involves both sides of the political spectrum. It's not limited to the Republicans or the Democrats. They've both been very active in setting this up.
What can individuals do?
The only thing individuals can do now is look to protect themselves. I wish I could see a way, but shy of severe slashing of the social programs that is so politically reprehensible and would create such problems and social unrest, I don't see that as a practical solution.
If you're a young 20- or 25-year-old guy or gal, would you move to another country? What would you do?
We still have a great country. We're going through a period of economic pain. It's happened before. This is the kind of thing that's taken us decades to get into and it will take us decades to get out. Although the hyperinflation is going to be limited largely to the U.S., the economic downturn will affect things globally. I can't tell you how things will go with a hyperinflationary Great Depression, which is where I see things going.
It's the type of thing that will tend to lead to significant political change. People tend to vote their pocketbooks. You could have the rise of a third party. You could even have rioting in the streets. I'm not formally predicting that — anyone can run these different scenarios. For the individual, what you need to do, from an investment standpoint, look to preserve your wealth and assets. Don't worry about the day-to-day fluctuations in the markets. What I'm talking about here is over the long haul...
[Gold is] going to be highly volatile, as will the dollar, over the near term, but longer term, physical gold I would look at as a primary hedge for preserving the purchasing power of your wealth and assets. Maybe some physical silver. Get some assets outside the U.S. dollar. I might even look to move some assets physically outside the United States. The key here is to look at a longer range survival package, battening down the hatches, and preserving your wealth and assets during a very difficult time. Once you're through that, you'll have some extraordinary investment opportunities, and I can't tell you what it's going to be like on the other side of this crisis.
Dr. Phil Maymin is an Assistant Professor of Finance and Risk Engineering at NYU-Polytechnic Institute. The views represented are his own.
The Long Decline of the American Economy
by John Kozy
The official position on the cause of the current financial downturn is that it was caused by the reckless practices of financial institutions and the failure of regulatory bodies, and it is likely that these were the proximate causes, but they were not the ultimate cause. Americans, unfortunately, are rarely willing to search for ultimate causes or do anything about them when they are found.
In the 1980s, I was living in a suburb of Washington, DC. One evening, a friend and I were walking the streets of Georgetown when we met a group of Japanese taking pictures of a building they had just purchased. They asked us to take some photographs of them in front of it, which we did. A few blocks further along, we observed a group of teenagers drumming on plastic household buckets. The kids were very good drummers, but I pointed out to my friend that after WW2, the youths of the Caribbean altered abandoned oil drums into musical instruments of various ranges and created a new and unique musical genre—steel drums. Later over dinner, my friend and I discussed what appeared to be a serious decline in America's economic fortunes and culture.
We were not alone in noting this decline. There was much talk and writing at the time about how the Japanese seemed to be on the verge of buying America and how the quality of products and services delivered by American companies had been outstripped by foreign competitors, especially the Japanese. TQM (Total Quality Management) programs, made up of approaches to management that originated in Japanese industry in the 1950s, were highly touted. Having observed Japan’s success employing quality control techniques, western companies started to take their own quality initiatives. TQM, developed as a catchall phrase for the broad spectrum of quality-focused strategies and programs. The most well-known proponents of TQM are Deming, Juran, Ishikawa, Feigenbaum, and the ISO (International Standards Organization).
The success of these programs has been slim. Numerous studies have shown that implementing a quality standard rarely improves a company's performance, and my own personal experience validates that. I was involved in ISO standard implementations in three companies. It was obvious to me that none would work, and the first company went bust within three years of acquiring certification, the second company also no longer exists, having had its assets sold off in a bankruptcy proceeding, and the third is currently in the process of being sold. During this last implementation, I asked to be relieved of my work on it because the project was so shoddy, I didn't want to be associated with it.
Today TQM talk has almost entirely disappeared from popular literature. It has disappeared along with factories and jobs. TQM citations in the business literature began a continuous long-term decline in 1992. There has also been a marked decline in TQM consulting firms. "Commitment to TQM appears to have been only skin deep." Various reasons are cited for this failure, because anyone familiar with the standards recognizes that the best practices advocated themselves are not faulty.
The reasons cited mainly have to do with American managerial attitudes. The implementations were 'top-down,' imposed from above rather than 'bottom-up' so rank and file employees never had a stake in them, managements created no follow-up programs to measure effectiveness, etc. And all of these reasons are also proximate causes for their failure.
But quality in TQM is often defined as the totality of features and characteristics of a product or service that bear on its ability to satisfy the expectations of consumers. In other words, quality is "giving the customer what he wants." In pre-implementation training, consultants often used McDonalds as an example. Every McDonalds' hamburger, no matter where made or bought is identical. When this example was presented to rank and file employees, they scoffed.
They often asked, "What do we need all these new policies and procedures for? We're already producing junk." It was not that the policy was being imposed 'top-down' that alienated the rank and file employees, it was the program's goal. The employees recognized that merely producing junk more consistent would not stem the economy's decline, since junk never competes well with quality. What really caused the economy's decline was the business model adopted by American companies, touted by America's orthodox economists, and aided and abetted by the government.
Recently, TechRepublic summarized a piece published by Forrester:Most . . . managers are stumped when it comes to capturing the right . . . metrics and then effectively conveying their relevance to management. Decision makers tend to focus on the one metric they understand: The cost . . . and how to reduce it. This Forrester White Paper reveals the five essential metrics for effective . . . managing. . . .
- investment alignment to business strategy,
- business value of . . . investments,
- . . . budget balance,
- service level excellence,
- and operational excellence.
These five metrics should form the core of a . . . performance scorecard.
But this advice is pie in the sky. Decision makers focus on the only metric they care about—the cost and how to reduce it, not the only one they understand. Ideally, companies exist to provide products and services to people. If the products and services are good, the companies prosper; if they aren't, the companies fail. That's risky, so American companies inverted this model. They fed the public the notion, which has rarely been questioned, that a company's responsibility is solely the financial welfare of its stockholders. Products and services are no longer the goal of business; they are merely means to profit. That reducing quality leads to greater profits quickly became evident.
One fewer olive in each jar, one flimsy part in a complex device, one inefficient procedure in a manufacturing process, built-in obsolescence, built-in short product life-cycles, engineered high failure rates. The American quality standard became, "Junk"!
To ensure that American consumers would buy this junk, a number of other policies were advanced—declining employee wages so that consumers could not afford to buy more expensive imported produces, unenforcement of immigration laws and the introduction of special visas such as H1B1s so that the workforce would expand putting even further downward pressure on wages, restrictions on the ability of American workers to organize, and finally the offshoring of production. None of these policies could have succeeded without the complicit cooperation of America's orthodox economists and government.
But logically, this business model could not be sustained. As the incomes of workers drop, so does their consuming ability. To mask this result, easy consumer credit at high interest was introduced, but that would eventually bring about consumer defaults. So even the bankruptcy law was changed to make it more difficult for debtors to be relieved of their debts. GNP was calculated so that all of this consumer debt was counted as productive spending which masked the economy's decline. Sooner or later, the current economic collapse was inevitable. The nation's negative balance of payments became huge as did its deficit. Foreign nations have far more American dollars to spend than does the vast portion of Americans themselves. This business model has bankrupted the nation.
So now American companies are hoping to sell their foreign-manufactured junk in foreign countries. But this hope involves two problematical scenarios. It can only succeed if foreign countries also adopt this junky model, and only so long as the countries where the junk is being made don't realize that they can manufacture and market the junk without the help of American companies. The likelihood of either of these is slim.
First, most of the developed nations in Europe have strong labor movements which not only can and often have shut down all economic activity in their nations. So many of the policies described above which have enabled the American model to succeed domestically are not likely to be adopted elsewhere. Second, China, at least, has already discovered that it can market its products in developing countries itself.
So when the American power elite speak of a rebounding economy, they are whistling Dixie in the Yukon. There is no economy left to rebound. It has been dismantled and exported. The ultimate cause of America's collapse is the entrenched, rigid, faulty ideologies that our nation's leaders have adopted. These ideologies placed America on the road to ruin. Foreign policies, especially wars paid for by borrowing, have increased the speed of travel on this road. And as incomes decrease, so do our freedoms. Future historians will someday ask, who lost America? The answer will be the American business community, its economists, and its politicians who have adopted rigid ideologies. That answer will serve as America's epitaph.