Monday, April 4, 2011

April 4 2011: Credit Bubbles Always End The Same Way

Detroit Publishing Co. Sitting Room 1905
"Parlor, Kaaterskill Hotel, Catskill Mountains, New York"

Ilargi: I read there’s a call for a referendum on the next bailout in Ireland (this would be no. 5). Good, great, make sure it takes place, guys, and then vote it down massively. After that, have a referendum on whether you still want to be in the Eurozone, but don’t wait till autumn to do it either, or someone (Greece, Portugal) will be ahead of you, and the first one who threatens to go will get by far the sweetest deal.

Not doing all this will force you to keep on bailing out a bunch of French, German, British, US and Dutch bank(er)s, with nothing in the end to show for it but pockets emptier than you ever in your wildest dreams imagined pockets could be. I know I've written a few years ago that Angela Merkel would not let the EU blow up, and I still think she’ll stick to that. But then, negotiations for a Spain bail-out can't be far off, and even Merkel might be overwhelmed. She may think that dropping a few small fish in order to keep a big one aboard is the way to go, but then again, debts are just so vast, the ultimate outcome is hard to predict even for her.

Pondering all that, how do you feel about that US dollar collapse? US hyperinflation, anyone? If I were to go for a metaphor, I'd say: this is not the Olympics. If anything, and I don't mean to insult anyone here, it's the Special Olympics; there are no healthy economies left, certainly not in the west. John Lennon said a long time ago: "One thing you can't hide, is when you're crippled inside". That is true for all of our western economies; it's just a question of who goes down first. And we at The Automatic Earth have long said, and are saying it now, that the US will not be that first one.

Which means the US dollar will not be the first currency to fall. Look at CDS spreads on the US vs various EU countries, and you know how the market feels about this. US: very low risk, various EU nations: elevated risk. It may not be rational given overall US national debt, but then, we never said markets are rational.

Not everyone really does understand this, though. About a month ago, an article by Egon von Greyerz of Matterhorn Asset Management was featured prominently on sites such as Zero Hedge and Max Keiser. For what reason, I don't know, because the piece makes very little sense at best. Here's some snippets:
Egon von Greyerz: "A Hyperinflationary Deluge Is Imminent", And Why, Therefore, Bernanke's Motto Is "Après Nous Le Déluge"
[..] Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. [..] ... "she" has to please her master King Louis XV Obama and her devotion to the king goes above all reasonable common sense, or rationale.

Ilargi: Really? Bernanke now sees it as his task to keep Obama happy? He's "devoted" to him? Pray tell how this Republican was bought.

[..] The adjustment that the world will undergo in the next decade or longer, will be of such colossal magnitude that life will be very different for coming generations compared to the current social, financial and moral decadence. [..] ... the transition and adjustment will be extremely traumatic for most of us.

Ilargi: Couldn't agree more. However, I now know that Egon is working up here to a hyperinflation theory, with which I couldn't disagree more. Let's call it a blank.

We have reached a degree of decadence that in many aspects equals what happened in the Roman Empire before its fall.  The family is no longer the kernel of society. More than 50% of children in the Western world grow up in a one parent home, either being born by a single mother or with divorced parents. Children are neither taught ethical or moral values nor discipline. Many children consider attending school as optional and education standards are declining precipitously.  Most families do not have a meal around the dinner table even once a week. Sex and violence are common place on television and in real life.

Ilargi: Perhaps you have to read the entire piece for the context, but after doing so multiple times, I still can't figure why an article about hyperinflation mentions families having or not having dinner in this place or that, or why all great people I know who grew up in a single mother home get dissed here one by one, other than that the authors's moral convictions get the best of him. Convictions which have diddly squat to do with his very own chosen topic of hyperinflation. Unless it is a punishment from the heavens, or something. After I initially read this paragraph, I deleted the article, only to return to it at the insistence of others.

We have for years warned about hyperinflation leading to famine, misery and social unrest. Well, this is exactly what is happening in many parts of the world.

Ilargi: This is quite simply demonstrably false, or perhaps at best delusional wishful thinking. Still, Tyler Durden and Max Keiser posted this stuff as if it had actual value.

There is no hyperinflation in many parts of the world. It doesn't exist. Period. There is famine, misery and social unrest, though. Maybe I'd better not pronounce what I thought of Egon von Greyerz when I first read this; even I have limits in my civil manners. If you take this statement at face value, there's only one possible conclusion: von Greyerz proves himself awfully wrong, and tries to use that very fact to convince his readers that he's right. A proven George W. tactic; which often actually works.

There are more bits and pieces in von Greyerz' piece that you may want to read; just click the link above. He's trying to make a case for hyperinflation without actually managing to make that case, because he just can't make it. Instead, he slips into rambling and, to say it nicely, truth-bending. And it's not even so much that he's 100% off. It’s just that he, like many other pundits, has the order of events all mixed up.

Luckily, help is on its way, the cavalry comes charging in in the form of US hedge fund Comstock Partners:
There Still Is No Viable Solution To America's Debt Crisis
Our feeling, as long-time readers will not be surprised to hear, is that this enormous debt will not be inflationary but deflationary instead.  If this is the case, the stock market is headed much lower and the economy will either go into a double-dip or have such a sluggish recovery that it will feel like one. There are the two main reasons we are so convinced that we will not be able to inflate or grow our way out of this mess. 

First, the massive increase that QE1 and QE2 has generated in the monetary base has not been translated into anywhere near a commensurate rise in money supply (the so-called "money multiplier"). 

Second, the subdued rise in the money supply to date has not resulted in a big increase in GDP (the so-called "velocity of money")-.  

In addition, the loose fiscal policies cannot generate the borrowing and spending that is required to get the money supply up enough to drive the economy and inflation higher. The velocity of money is also influenced by interest rates. When rates are low, people hold more money in cash. On the other hand, when rates are rising, they put more money in interest paying investments.  The low rates, as we have now, results in a "liquidity trap", which is what Japan has also experienced over the past 21 years. 

Unless we escape this "trap" there will be massive deleveraging by the sector that drove us into this mess. Household debt rose from 50% of GDP in the 1960s, 70s and 80s and eventually doubled to close to 100% of GDP presently. This debt will either be defaulted on, or paid down until we get back to the norm of around 50% of GDP again.  This will bring household debt down below $10 trillion from $13.5 trillion now. 

Another reason that makes us so convinced that the "debt situation" will be resolved by deflation and not inflation is the political environment that is currently sweeping the nation. The Republicans and Tea Party congressmen and governors that were recently elected ran on a platform of cutting government expenditures, cutting back on entitlement expenditures, and doing whatever possible to pay down the debt. 

In fact, the bipartisan "Debt Commission" that was sponsored by President Obama, came up with a number of austerity measures that would cut the deficit substantially over time. The big problem, however, is that any austerity program implemented now will only exacerbate the ongoing deleveraging of this debt and throw the economy into recession. 

There are two more reasons that we believe the onerous debt incurred over the past 30 years will wind up with a painful deflationary bear market rather than inflation or hyper-inflation. First, the high cost of necessities such as food and energy is much more deflationary than inflationary. 

Since wages have been static for years, the high cost of these necessities acts to reduce real disposable income. This, in turn, reduces what the average consumer can purchase with his or her disposable income. More money spent on energy and food simply means less money to spend elsewhere. 

In order for easy fiscal and monetary policy to result in significant inflation there must be a transfer mechanism, and that mechanism is a rise in wages by an amount at least enough to enable consumers to pay the higher prices. That just doesn't look as if it is going to happen.

Ilargi: It's somewhat amusing to see how Comstock Partners make a solid case for deflation, and then end with this:
It is fortunate that these problems are better understood.  But, the public's view of the resolutions (grow the economy and/or inflate), will be much more difficult than they think as long as "velocity" remains low. Although we believe the eventual result will be deflationary, we still put only about a 65% probability on that outcome, a 30% probability of an inflationary outcome, and only about a 5% chance of being able to grow our way out of the problem.

Ilargi: Here's guessing they don't want to alienate any or all of their clients. Look dear people, we are convinced we're in a deflation, and we can make a solid argument for that, but we're only willing to admit to two-thirds of it. Just in case, you know?!

Floyd Norris in this weekend's New York Times ties together some of the loose threads that are all too often forgotten (please bear in mind that Norris uses a different definition of inflation than we do):
If Home Prices Counted in Inflation
Until 1983, the Consumer Price Index included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of "owners’ equivalent rent," which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, "measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes." The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.

Whatever the reasonableness of that approach, the practical effect of the change was to keep the housing bubble from affecting reported inflation rates in the years leading up to the peak in home prices.  

The accompanying charts represent an effort to put together an alternate index of inflation, one that includes home prices rather than the owner’s equivalent rate. The effort is far from precise, in large part because the old index was based not just on purchase prices but also on changing mortgage interest rates and on changing property taxes, while this one is based solely on an index of home prices. But it nonetheless gives an approximation of what inflation would have looked like had home prices remained in the index.

The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.

The Fed did raise rates in 2004, although perhaps more slowly than seems appropriate in hindsight. The increases then stunned Wall Street, which might not have happened had investors been watching an inflation rate that included home prices.

In the last few months, the two markets have again diverged, but in the opposite way. From October 2010 through January, home prices as measured by an index kept by Federal Housing Finance Agency fell at an annual rate of 12.4 percent, while the government’s calculation of owners’ equivalent rent shows it rising at an annual rate of 1.5 percent. Home prices have not yet been reported for February, but the upward trend in rental prices continued.

Inflation rates may have been understated for years when home prices were rising much more rapidly than rental rates. At the time, the discrepancy might have seemed to be an indication of rising speculation and prompted Fed concern. Now, it is possible that inflation will be overstated precisely because speculative excesses are being purged from the housing market.

Ilargi: As we have been arguing for a long time now, the real inflationary period is already behind us, and Norris -partially- explains how and why. That is to say, the inflation created by banks adding to the money and credit supply by lending insane amounts of money through insane methods (liar's loans etc.) to, frankly, pretty insane people. Which has also had quite a substantial upward effect on the velocity of money (think using your home as an ATM).

And now it's all over. At the height of the peak, over 7 million existing homes annualized were sold in the US, for a total of some 8 million, if you include new homes (which are typically about 10% of sales). Annualized sales today (February numbers) are down by over two-thirds. In other words, on a yearly basis, 5 million fewer homes are sold.

At a median price of $200,000, that means close to $1 trillion less per year injected into the economy than in the housing market heydays through banks' keyboard strokes, the main way to increase the money/credit supply from pick-a-date, 1995, through 2008. (I know it’s a bit black and white broad strokes, not all mortgages were 100%, but then, some were 125%. Make it $800 billion per year if that makes you feel better).

Moreover, US home prices have dropped about 35% (it depends who you read and believe), and numbers of underwater "homeowners" keep on rising. How is that inflationary, you ask? It is not, of course, it’s purely deflationary.

That 35% represents about $7.5 trillion. This is not money, but credit, that has vanished, gone POOF. And much more than that still has gone POOF in toxic paper held by financial institutions, pension funds etc. The fact that they refuse to own up to their losses, and that the government sanctions this refusal, doesn't change the fact that these are real losses.

The true perversion in this is, of course, that what has been lost as credit by real people, not banks, must be paid back with real money. After all, those who incurred the losses cannot forever keep on borrowing to pay them off. And that, too, is obviously deflationary. Just keep your ears tuned for the POOF sound.

Yes, Bernanke and Geithner may have been busy issuing new credit (calling it printing money is not factually correct). However, expecting inflation, even hyperinflation, to result from that new credit is a very wild stretch. Hardly any of it reaches the real economy (look at the reserves the main banks have at the Fed). Home sales have plummeted, so credit creation through mortgage loans has all but disappeared.

On top of that, unemployment numbers are terrible, and people without jobs don't (can't) cause inflation. Yes, the markets were up on Friday because the unemployment rate sank to 8.8%, but what they missed is that this number depends on the fact that the labor participation rate is at a 27-year low. The government doesn't count those who don't actively look for a month of more. And we all know by now what the U3 vs U6 discrepancies do to these stats. No matter how you wish to fill in the blanks, you can't get inflation with (near-) record levels of unemployment.

And that's not the whole story either. Motoko Rich has a very interesting perspective for the New York Times: Many Low-Wage Jobs Seen as Failing to Meet Basic Needs. On the one hand, jobs vanish (did I hear POOF?). On the other, jobs are created that pay much less money and come with zero benefits. For the economy, that's demand destruction at the very least, and that in turn doesn't rhyme with inflation. Lower wages never do.

You can get price rises here and there, but that's not inflation. As long as the number 1 purchase item in America, houses, sees (rapidly) falling prices, inflation is a mirage.

The US economy has $1 trillion less per year in credit growth through mortgage loans. Home values themselves are down by some $7.5 trillion over 5 years. Losses for financial institutions on mortgage-backed securities and other derivatives are surely a multiple of that, but even if we would put them at an equal value to home price losses, we'd have a $20 trillion overall loss to the system in the past few years.

In order to create inflation, let alone hyperinflation, Bernanke and Geithner would therefore have to A) issue those $20 trillion in new credit (they don't "print" anything at all), B) issue who knows how much more in additional new credit in order to truly increase the money/credit supply, and C) make sure it enters the real economy.

Now, you could make an argument that A is happening (though it's doubtful), but it is obvious that neither B nor C are. There is some credit seeping through to the real economy, but it's not nearly $20 trillion, let alone even more than that. Most of what the Fed has issued in credit to primary dealers and other financial institutions, domestic and/or abroad, is sitting in bank vaults, likely with the same Fed. The rest is used to drive up commodity prices, gold, grain and all that, but the FASB-157 mark-to-whatever-suits-you accounting non-standard won't last forever, and when it's called, commodities will collapse alongside stocks and whatever's left of housing, your pension fund, local government and anything else invested in "the markets".

Yes, sure, the Fed and Treasury may well try there and then to make up for it all by issuing more credit, but they'll fail miserably even if they do try. Credit bubbles always end the same way, and no, it's not different this time. It never is. Credit bubbles always end in POOF.

I’d like to talk about the brilliant Steve Keen's report on Australian housing, and about Doug Short's assertions that the stock markets are overvalued by between 40% and 79%, as well as this from Smithers and Co:
US CAPE and q chart
Both q and CAPE include data for the year ending 31st December, 2010. At that date the S&P 500 was at 1257.6 and US non-financials were overvalued by 70% according to q and quoted shares, including financials, were overvalued by 63% according to CAPE. (It should be noted that we use geometric rather than arithmetic means in our calculations.)

Ilargi: But that will have to wait to a later date. It's late here in Lancaster, England, where Stoneleigh and I have landed earlier today in one of the latter stages of our European tour, and this has been an exhausting trip. All the articles mentioned can be found below, though.

Still, overvalued markets are a mighty good topic; we're swimming in them. Just waiting to hear: POOF.

And once again: yes, we will very likely see hyperinflation, but we will certainly not see it tomorrow morning. There is no way we can avoid a period of sustained and hard hitting deleveraging debt-deflation. As I said above: all credit bubbles end the same way, and this time it's no different. Moreover, deflation will hit us so hard, any thoughts of hyperinflation that exist now will come to be seen as hugely mis-placed and mis-timed. Hyperinflation, if and when it does occur, will hit a world unrecognizably altered by debt deflation. Which always and of necessity wipes out credit in the wink of an eye. POOF.

There Still Is No Viable Solution To America's Debt Crisis
by Comstock Partners

The massive U.S. debt problem that we have been discussing so often for many years has now become widely known both to investors and the general public.  It has been a major topic of discussion in the media as well as a key issue in last November's elections. 

To take just one recent example, Gregg Fleming, the head of Morgan Stanley, Smith Barney, stated on CNBC that the total debt (including government, individual, corporate, and financial institutions) in the U.S. has increased by over $40 trillion since 1984 ($11 tn to $52.4 tn).  He stated that, in his opinion, the unusually sluggish recovery we are now experiencing is a result of the deleveraging of this debt.  Furthermore, he did not even mention the "impossible to keep" promises that have been made by our federal government for entitlements, and by state and local governments' for health care and pensions.  If these were included it would increase this country's total obligations to over $150 trillion. 

What Mr. Fleming implied, but didn't say is that the private side of this debt has to be liquidated or defaulted on before a sustained organic recovery is possible.  It is fortunate that the topic of excess debt has come to the forefront and that the situation has come to the attention of the general public.  What is lacking, however, is any agreement on what to do, as there is no satisfactory solution in sight.  So far, massive stimulation through fiscal and monetary policy has substituted in part for the lack of consumer spending, but this cannot continue for long without putting the federal government's financial status at risk. 

Yet if government spending is substantially cut back while the economy is still so fragile another serious recession can ensue.  This dilemma has created serious divisions between the two major political parties and the public in general.     

Although many people believe that we will be able grow our way out of this enormous debt problem, a number of the more savvy pundits understand how much money we are throwing at the problem, and are convinced that this will lead to a significant inflation, if not hyper-inflation.  Economists and strategists that believe we will grow our way out of this debt problem naturally are very bullish on the U.S. stock market. 

In addition, the majority of the inflationists also believe that the aggressively easy monetary and fiscal policies will drive the stock market much higher, although not by enough to offset a resulting weaker dollar.  This is probably why the sentiment figures are now showing mostly bulls, while margin debt is back to the prior highs of 2007-2008.  Most of our readers understand that these "bullish" sentiment readings are a contrary indicator and therefore  very negative for the stock market.

Our feeling, as long-time readers will not be surprised to hear, is that this enormous debt will not be inflationary but deflationary instead.  If this is the case, the stock market is headed much lower and the economy will either go into a double-dip or have such a sluggish recovery that it will feel like one.  There are the two main reasons we are so convinced that we will not be able to inflate or grow our way out of this mess.  First, the massive increase that QE1 and QE2 has generated in the monetary base has not been translated into anywhere near a commensurate rise in money supply (the so-called "money multiplier").  Second, the subdued rise in the money supply to date has not resulted in a big increase in GDP (the so-called "velocity of money")-.  

In addition, the loose fiscal policies cannot generate the borrowing and spending that is required to get the money supply up enough to drive the economy and inflation higher. The velocity of money is also influenced by interest rates.  When rates are low, people hold more money in cash.  On the other hand, when rates are rising, they put more money in interest paying investments.  The low rates, as we have now, results in a "liquidity trap", which is what Japan has also experienced over the past 21 years. 

Unless we escape this "trap" there will be massive deleveraging by the sector that drove us into this mess.  Household debt rose from 50% of GDP in the 1960s, 70s and 80s and eventually doubled to close to 100% of GDP presently.  This debt will either be defaulted on, or paid down until we get back to the norm of around 50% of GDP again.  This will bring household debt down below $10 trillion from $13.5 trillion now. 

Another reason that makes us so convinced that the "debt situation" will be resolved by deflation and not inflation is the political environment that is currently sweeping the nation.  The Republicans and Tea Party congressmen and governors that were recently elected ran on a platform of cutting government expenditures, cutting back on entitlement expenditures, and doing whatever possible to pay down the debt.  In fact, the bipartisan "Debt Commission" that was sponsored by President Obama, came up with a number of austerity measures that would cut the deficit substantially over time.  The big problem, however, is that any austerity program implemented now will only exacerbate the ongoing deleveraging of this debt and throw the economy into recession. 

There are two more reasons that we believe the onerous debt incurred over the past 30 years will wind up with a painful deflationary bear market rather than inflation or hyper-inflation. First, the high cost of necessities such as food and energy is much more deflationary than inflationary. Since wages have been static for years, the high cost of these necessities acts to reduce real disposable income. This, in turn, reduces what the average consumer can purchase with his or her disposable income. More money spent on energy and food simply means less money to spend elsewhere. 

In order for easy fiscal and monetary policy to result in significant inflation there must be a transfer mechanism, and that mechanism is a rise in wages by an amount at least enough to enable consumers to pay the higher prices.  That just doesn't look as if it is going to happen.     

The last reason is the slack in the economy.  The capacity utilization is just 76.3% as of the end of February, and with that much overcapacity it is hard to generate large price increases.  It is hard to have much inflation when there is that much slack in both the economy and the labor market. 

We also point out that Japan has run an easy monetary policy and large fiscal deficits for 21 years.  These were virtually the same type of policies that the inflationists here claim will cause severe inflation in the U.S.   Yet this never came about since Japan was affected by the same "liquidity trap" that we are in presently and will probably remain in for many more years to come.

To summarize, the debt situation has become well known and understood throughout the nation.  Many can now articulate the problems that go along with our government's borrowing over 40 cents for every dollar we spend.  They can explain that "no household can get away with borrowing 40 cents out of each dollar spent, so why should our government be able to do it without repercussions?"  They also now understand that our total debt and "impossible to keep" promises to our population are out of control and are presently over 10 times our GDP. 

It is fortunate that these problems are better understood.  But, the public's view of the resolutions (grow the economy and/or inflate), will be much more difficult than they think as long as "velocity" remains low.  Although we believe the eventual result will be deflationary, we still put only about a 65% probability on that outcome, a 30% probability of an inflationary outcome, and only about a 5% chance of being able to grow our way out of the problem. 

If Home Prices Counted in Inflation
by Floyd Norris - New York Times

A few years ago, the Federal Reserve remained complacent about inflation even as a housing bubble inflated. The Fed did not take the kind of action that would have seemed reasonable if it had been alarmed by rising prices.

Now the inflation rate is starting to turn up, and there are warnings that the Fed may need to tighten monetary policy even if the stumbling economic recovery does not accelerate. But home prices, which had seemed to be stabilizing a year ago, are falling again.

Until 1983, the Consumer Price Index included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of "owners’ equivalent rent," which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, "measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes." The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.

Whatever the reasonableness of that approach, the practical effect of the change was to keep the housing bubble from affecting reported inflation rates in the years leading up to the peak in home prices. It is at least possible that the Federal Reserve would have acted differently had the change never been made.

The accompanying charts represent an effort to put together an alternate index of inflation, one that includes home prices rather than the owner’s equivalent rate. The effort is far from precise, in large part because the old index was based not just on purchase prices but also on changing mortgage interest rates and on changing property taxes, while this one is based solely on an index of home prices. But it nonetheless gives an approximation of what inflation would have looked like had home prices remained in the index.

The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.

The Fed did raise rates in 2004, although perhaps more slowly than seems appropriate in hindsight. The increases then stunned Wall Street, which might not have happened had investors been watching an inflation rate that included home prices.

In the last few months, the two markets have again diverged, but in the opposite way. From October 2010 through January, home prices as measured by an index kept by Federal Housing Finance Agency fell at an annual rate of 12.4 percent, while the government’s calculation of owners’ equivalent rent shows it rising at an annual rate of 1.5 percent. Home prices have not yet been reported for February, but the upward trend in rental prices continued.

Inflation rates may have been understated for years when home prices were rising much more rapidly than rental rates. At the time, the discrepancy might have seemed to be an indication of rising speculation and prompted Fed concern. Now, it is possible that inflation will be overstated precisely because speculative excesses are being purged from the housing market.

Ilargi: As long as you have enough people too discouraged to look for a job, you can claim that your unemployment rate goes down. Once these people too start believing the positive stories, and begin looking again, the rate will one again rise. Lovely. Just lovely.

Jobless rate down to 8.8% as unemployment hits a two-year low, but labor participation still down
The nation's unemployment rate dropped in March to its lowest level in two years, brightening the economic outlook as major companies plan to add more jobs. More hiring cut the unemployment rate to 8.8% as employers added 216,000 jobs last month, the Labor Department said. Factories, retailers, the education and health care sectors, and professional and financial services all expanded their payrolls. Those gains offset layoffs by local governments, construction and telecommunications.

The private sector added more than 200,000 jobs for a second straight month, the first time that's happened since 2006 - more than a year before the recession started. "It's certainly indicative of continuing improvement in the labor market, with two months in a row of really solid private payrolls," said Stephen Stanley, chief economist at Pierpont Securities. "It's not a blowout number, but all in all, it's a good report." The improved outlook propelled the Dow to a 2011 high in early trading. Stocks then pared their gains as oil prices climbed to 30-month highs. The Dow closed up 57 points, or 0.46%, to 12,376.72.

The new figures could mark a turning point in job creation. America's largest companies plan to step up hiring in the next six months, a March survey of CEOs found. Google, Siemens and Ford, among others, have said they plan to add workers. Economists expect the stronger hiring to endure throughout the year, producing a net gain of about 2.5 million jobs for 2011. Even so, that would make up for only a small portion of the 7.5 million jobs wiped out during the recession. The economy must average up to 300,000 new jobs a month to significantly lower unemployment.

The unemployment rate has fallen a full percentage point since November, the sharpest four-month drop since 1983. Stepped-up hiring is the main reason. Still, the job gains haven't led many people who stopped looking for work during the recession to start again. The number of people who are either working or seeking a job remains surprisingly low for this stage of the recovery. Fewer than two-thirds of American adults are either working or looking for work - the lowest participation rate in 25 years.

Just 64.2% of adults have a job or are looking for one - the lowest participation rate since 1984. The number has been shrinking for four years. It suggests many people remain discouraged about their job prospects even as hiring is picking up. People without jobs who aren't looking for one aren't counted as unemployed. Once they start looking again, they're classified as unemployed, and the unemployment rate can go back up. That can happen even if the economy is adding jobs.

"It is always possible that as the job market improves, people will start looking again and the unemployment rate could go up," said economist Bill Cheney of John Hancock Financial Services. "But the normal pattern is once it starts coming down as rapidly as it has over the last few months, it keeps on going down."

Many Low-Wage Jobs Seen as Failing to Meet Basic Needs
by Motoko Rich - New York Times

Hard as it can be to land a job these days, getting one may not be nearly enough for basic economic security.

The Labor Department will release its monthly snapshot of the job market on Friday, and economists expect it to show that the nation’s employers added about 190,000 jobs in March. With an unemployment rate that has been stubbornly stuck near 9 percent, those workers could be considered lucky. But many of the jobs being added in retail, hospitality and home health care, to name a few categories, are unlikely to pay enough for workers to cover the cost of fundamentals like housing, utilities, food, health care, transportation and, in the case of working parents, child care.

A separate report being released Friday tries to go beyond traditional measurements like the poverty line and minimum wage to show what people need to earn to achieve a basic standard of living. The study, commissioned by Wider Opportunities for Women, a nonprofit group, builds on an analysis the group and some state and local partners have been conducting since 1995 on how much income it takes to meet basic needs without relying on public subsidies. The new study aims to set thresholds for economic stability rather than mere survival, and takes into account saving for retirement and emergencies.

"We wanted to recognize that there was a cumulative impact that would affect one’s lifelong economic security," said Joan A. Kuriansky, executive director of Wider Opportunities, whose report is called "The Basic Economic Security Tables for the United States." "And we’ve all seen how often we have emergencies that we are unprepared for," she said, especially during the recession. Layoffs or other health crises "can definitely begin to draw us into poverty."

According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour. A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

That compares with the national poverty level of $22,050 for a family of four. The most recent data from the Census Bureau found that 14.3 percent of Americans were living below the poverty line in 2009. Wider Opportunities and its consulting partners saw a need for an index that would indicate how much families need to earn if, for example, they want to save for their children’s college education or for a down payment on a home.

"It’s an index that asks how can a family have a little grasp at the middle class," said Michael Sherraden, director of the Center for Social Development at Washington University in St. Louis, who consulted on the project and helped develop projections for how much income families need to devote to savings. "If we’re interested in families being able to be stable and not have their lives disrupted and have a little protection and backup and be able to educate their children, then this is the way we have to think."

The numbers will not come as a surprise to working families who are struggling. Tara, a medical biller who declined to give her last name, said that she earns $15 an hour, while her husband, who works in building maintenance, makes $11.50 an hour. The couple, who live in Jamaica, Queens, have three sons, aged 9, 8 and 6. "We tried to cut back on a lot of things," she said. But the couple has been unable to make ends meet on their wages, and visit the River Fund food pantry in Richmond Hill every Saturday. With no money for savings, "I’m hoping that I will hit the lotto soon," she said.

To develop its income assessments, the report’s authors examined government and other publicly available data to determine basic costs of living. For housing, which along with utilities is usually a family’s largest expense, the authors came up with "a decent standard of shelter which is accessible to those with limited income" by averaging data from the Department of Housing and Urban Development that identified a monthly cost equivalent for rent at the fortieth percentile among all rents paid in each metropolitan area across the country.

They chose a "low cost" food plan from the nutritional guidelines of the Department of Agriculture, and calculated commuting costs "assuming the ownership of a small sedan." For health care, they calculated expenses for workers both with and without employer-based benefits. Ms. Kuriansky said that the income projections do not take into account frills like gifts or meals out. "It’s a very bare-bones budget," she said.

Obviously, the income needs change drastically depending on where a family lives. Ms. Kuriansky said the group was working on developing data for states and metropolitan areas.The report compares its standards against national median incomes derived from the census, and finds that both single parents and workers who have only a high school diploma or only some college earn median wages that fall well below the amount needed to ensure economic security.

Workers who only finished high school have fared badly in the recession and the nascent recovery. According to an analysis of Labor Department data by Cliff Waldman, the economist at the Manufacturers Alliance, a trade group, the gap in unemployment rates more than doubled between those with just a high school diploma and those with at least a four-year college degree from the start of 2008 through February.

For some of the least educated, Mr. Waldman fears that even low wages are out of reach. "Given the needs of a more cognitive and more versatile labor force," he said, "I’m afraid that those that don’t have the education are going to be part of a structural unemployment story."

Even for those who do get jobs, it may be hard to live without public services, say nonprofit groups that assist low-income workers. "Politicians are so worried about fraud and abuse," said Carol Goertzel, president of PathWays PA, a nonprofit that serves families in the Philadelphia region. "But they are not seeing the picture of families who are working but simply not making enough money to support their families, and need public support."

In New York, Áine Duggan, vice president for research, policy and education at the Food Bank for New York City, estimates that about a third of the group’s clients are working but not earning enough to cover basic needs, much less saving for retirement or an emergency. She said that among households with children and annual incomes of less than $25,000, 83 percent of them would not be able to afford food within three months of losing the family income. That is up from 68 percent in 2008 at the height of the recession.

As the nation’s employers add jobs, it is not yet clear how many of them are low wage jobs, especially those that do not come with benefits, like health care. Manufacturing, for example, has been relatively strong and tends to pay higher wages. Over the last year, wages adjusted for inflation have been essentially flat. "If we were creating more low-paid jobs," said John Ryding, chief economist at RDQ Economics, "we would expect more of a decline in real wages."

Of the 1%, by the 1%, for the 1%
by Joseph E. Stiglitz - Vanity Fair

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

The Fat And The Furious: The top 1 percent may have the best houses, educations, and lifestyles, but "their fate is bound up with how the other 99 percent live."

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided.

While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called "marginal-productivity theory." In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses.

In some cases, companies were so embarrassed about calling such rewards "performance bonuses" that they felt compelled to change the name to "retention bonuses" (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires "collective action"—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many "good" middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end.

Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth.

During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. "I certainly hope so," he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.

By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the "all-volunteer" army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that. Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window.

There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the "core" labor rights, which include the right to collective bargaining. Imagine what the world might look like if the rules were designed instead to encourage competition among countries for workers. Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

Or, more accurately, they think they don’t. Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling.

With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from "food insecurity")—given all this, there is ample evidence that something has blocked the vaunted "trickling down" from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called "self-interest properly understood." The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest "properly understood" is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

The US recovery is little more than an economic 'sugar-rush'
by Liam Halligan - Telegraph

Guess what! America is on the mend. That’s right, the world’s biggest economy is now forging ahead, escaping its sub-prime malaise.Strengthening jobs data last week show the US has reached a "turning point". On Wall Street, the Dow Jones share index just hit its highest level since June 2008.

As America cranks up, forecasts of higher energy use in the West are boosting oil prices. Brent crude extended gains to over $119 a barrel on Friday, a 32-month high. In London, the FTSE-100 joined the party, closing above 6,000 points for the first time since early March.

Equity markets are interpreting a slew of recent US data as "evidence" the global economy is on the road to a full recovery. Private employers hired 230,000 people in the States last month, building on the 240,000 new jobs created the month before. Forget America’s "jobless recovery". Unemployment is now at a two-year low of 8.8pc, down from 8.9pc in February and 10.2pc in early 2010.

Survey results suggest industrial activity is leading the charge. The ISM manufacturing index has bounced back from last summer’s slump and is now at levels not seen since 2004. The index measuring hiring at US manufacturing firms is at its highest level in three decades. American businesses finally seem to be "committing to the cycle" - indicating they intend to keep investing and employing. That’s why economists now predict the US will this year outpace the 2.9pc GDP expansion it registered in 2010. Consensus forecasts for 2011 growth have moved sharply upwards - from 2.6pc in December, to 3.1pc in February and 3.3pc today.

The latest "flow of funds" data from the Federal Reserve shows that "deleveraging is over". In other words, banks are now lending again. During the final three months of 2010, while consumer credit fell by a net $20bn, this was more than offset by a $99bn rise in net corporate borrowing. For Wall Street’s commission-based optimists, many of them with a mountain of stocks to sell, and their own home loans and credit card bills to service, such credit growth is Exhibit A when it comes to making the case that America is now out of the economic woods.

If only it were so. The trouble with this latest US recovery is that it amounts to little more than an economic "sugar-rush". The recent growth-burst is built on monetary and fiscal policies which are wildly expansionary, wholly unsustainable and will surely soon come to an end. When the sugar-rush is over, and it won’t be long, the US will end up with a serious economic headache. Investors should keep that in mind.

As somebody with extensive personal and professional ties to the US, I’m fully aware of the dangers of under-estimating the grit and determination of the American people. It is undeniable, though, that the latest wave of euphoria to have spread across corporate America, and into the echo chamber that is Wall Street, is ultimately based on quantitative easing and a series of unaffordable tax cuts.

It seems likely the Fed will fully implement QE2 – the latest $600bn bout of money-printing - following the $1,700bn programme already completed. This is in spite of protests from countries as diverse as Thailand, Australia, South Africa and China, all of them complaining that America’s unprecedented monetary expansion is causing dangerous bubbles in markets going way beyond US equities.

In the immediate aftermath of "sub-prime", QE helped a wide variety of financial institutions to avoid facing up to their losses, covertly recapitalizing Western banks that were, to all intents and purposes, insolvent. For a while, the rest of the world put up with it.

Now America is being blamed, rightly, for artificially depressing the dollar, so unfairly boosting US exports at the expense of those from elsewhere. At the same time, a lower greenback cuts the real value of the huge debts that America owes overseas creditors - not least the Chinese.

That’s why the Fed must surely call it a day when the current round of QE is due to expire at the end of June. Yes - American price pressures are ticking-up, with long-term inflation expectations as measured by the University of Michigan’s respected consumer survey rising from 2.8pc in December to 3.2pc in March. But mere domestic inflation won’t stop the Fed’s political masters from ordering more money-printing.

The only currency the White House understands is power politics - and Beijing is turning the thumb screws. Xia Bin, a long-standing adviser to China’s Central Bank, recently referred to the unbridled printing of dollars as "the biggest risk" to the global economy. "As long as the world exercises no restraint in issuing dollars," he wrote, "then the occurrence of another crisis is inevitable".

Were it to happen, another round of money-printing - QE3 - would cause a major diplomatic protest led by countries America cannot afford to upset. The US government also knows, although it denies it, that the more money it prints, the more speculative pressures push up global food prices. While the causes behind current Middle Eastern unrest are complex, it was surging food price that provided the spark.

The danger now is that when QE2 ends in less than 12 weeks’ time, global markets will be rocked by a surge in Treasury yields. Since mid-2009, QE has been used to buy up, along with dodgy mortgage-backed securities, swathes of US government debt. This is how the Obama administration – and the British Government too - has been able to keep spending. Once the Fed exits the Treasury market, though, not only will the fiscal pump-priming stop, but US debt-service costs could balloon.

America is now shouldering declared federal liabilities of $9,100bn - making it, by a long way, the world’s largest debtor. On top of that, US government debt is set to rise a jaw-dropping 42pc by 2015, according to official estimates. Already, $414bn of US taxpayers’ money was spent on sovereign interest payments during the last fiscal year - around 4.5 times the Department of Education budget. And that was with yields kept historically and artificially low by QE.

Global investors are increasingly wondering what happens when the money printing stops and those debt service costs rise. More and more interest is being shown in the fact that America’s total sovereign liabilities, including off-balance sheet items such as Medicare and Medicaid, amount to $75,000bn – no less than five times’ annual GDP.

It is against this backdrop that the Obama administration and Republicans in the House of Representatives are now arguing over miniscule $30bn spending "cuts" – a row so vociferous that it could see the US government "shut down" at the end of this week, leaving government contracts unserviced and state employees unpaid. This would do serious damage to America’s image as a credible borrower, focusing more attention on its fiscal weakness and its financial vulnerability when the money printing stops.

So beware of the siren voices claiming that shares on Wall Street will keep rising. Beware of anyone who is so deluded that they point to surging oil prices as "evidence" that the US - the world’s biggest oil importer by far, of course - is "fit and healthy" and "ready to rock". Yet that was the cry among many Wall Street denizens last week. "Oil is rising – we are saved!" I paraphrase, but not a lot.

US CAPE and q chart
by Smithers and Co.

US q
With the publication of the Flow of Funds data up to 31st December, 2010 (on 10th March, 2011) we have updated our calculations for q and CAPE. There has been a rise of 4.6% in the net worth, at "replacement cost" over the quarter. The main contribution has been a rise in the market value of real estate.

Both q and CAPE include data for the year ending 31st December, 2010. At that date the S&P 500 was at 1257.6 and US non-financials were overvalued by 70% according to q and quoted shares, including financials, were overvalued by 63% according to CAPE. (It should be noted that we use geometric rather than arithmetic means in our calculations.)

As at 10th March, 2011 with the S&P 500 at 1295.11 the overvaluation by the relevant measures was 75% for non-financials and 68% for quoted shares.

Although the overvaluation of the stock market is well short of the extremes reached at the year ends of 1929 and 1999, it has reached the other previous peaks of 1906, 1936 and 1968.

Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 – 2002 by Stephen Wright, published in the Review of Income and Wealth (2004) and for 1952 to 2010 from the Flow of Funds Accounts of the United States ("Z1") published by the Federal Reserve. Data for our calculations of CAPE are taken from the data published on Robert Shiller’s website.

The Stock Market Is Overvalued By Anywhere Between 40% and 79%
by Doug Short

Here is an combined perspective on the three market valuation indicators I routinely follow and most recently updated on Friday:
  • The relationship of the S&P Composite to a regression trendline (more)
  • The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
  • The Q Ratio — the total price of the market divided by its replacement cost (more)

This post is essentially an overview and summary by way of chart overlays of the three. To facilitate comparisons, I've adjusted the Q Ratio and P/E10 to their arithmetic mean, which I represent as zero. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I'm using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the index is overvalued by 65%, 45% or 40%, depending on which of the three metrics you choose.

I've plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the two line charts — both being simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.

The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the "average"). The geometric mean weights the central tendency of a series of numbers, thus calling attention to outliers. In my view, the first chart does a satisfactory job of illustrating these three approaches to market valuation, but I've included the geometric variant as an interesting alternative view for P/E and Q.

As I've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for years. But they can play a role in framing longer-term expectations of investment returns. At present they suggest a cautious long-term outlook and guarded expections.

Why is the Fed Bailing Out Qaddafi?
by Matt Taibbi - Rolling Stone

Barack Obama recently issued an executive order imposing a wave of sanctions against Libya, not only freezing Libyan assets, but barring Americans from having business dealings with Libyan banks.

So raise your hand if you knew that the United States has been extending billions of dollars in aid to Qaddafi and to the Central Bank of Libya, through a Libyan-owned subsidiary bank operating out of Bahrain. And raise your hand if you knew that, just a week or so after Obama’s executive order, the U.S. Treasury Department quietly issued an order exempting this and other Libyan-owned banks to continue operating without sanction.

I came across the curious case of the Arab Banking Corporation, better known as ABC, while researching a story about the results of the audit of the Federal Reserve. That story, which will be coming out in Rolling Stone in two weeks, will examine in detail some of the many lunacies uncovered by Senate investigators amid the recently-released list of bailout and emergency aid recipients – a list that includes many extremely shocking names, from foreign industrial competitors to hedge funds in tax-haven nations to various Wall Street figures of note (and some of their relatives). You will want to see this amazing list when it comes out, so please make sure to check the newsstands in two weeks’ time.

This list became public as a result of an amendment added to the Dodd-Frank financial reform bill that was sponsored by Senator Bernie Sanders of Vermont. The amendment forced the Federal Reserve to open its books for the first time and make public the names of those individuals and corporations who received emergency loans and bailout monies during the roughly two year period between the crash of 2008 and the passage of the Dodd-Frank bill.

As Bernie’s staff was going through this list, it found, among other things, some $26 billion in extremely cheap loans (as low as one quarter of one percent!) extended to this ABC bank over a period of years, beginning in December of 2007 and continuing through as recently as February of 2010. The senator sent a letter to Ben Bernanke over the winter demanding more information about this loan (among others) but the response he got was completely unhelpful.

When I first started working on this story, one of Sanders’s aides was careful to point out the ABC loans. Later, I took a closer look at the company and found that it was 59% owned by the Central Bank of Libya, which I found very odd, even by the generally insane standards of the bailout era. Why, I wondered, would the Federal Reserve be giving Muammar Qaddafi $26 billion in near-zero interest loans? Exactly how does that address America’s financial problems? What bailout plan could that possibly be part of?

It gets weirder from there. Sanders’s office subsequently found out that ABC is not only exempt from Obama’s sanctions, it has two functioning branches here in New York City. In a letter he sent yesterday evening to Ben Bernanke, Treasury Secretary Timothy Geithner, and Office of the Comptroller of the Currency chief John Walsh (the banking regulator with purview over the New York branches), Sanders put it this way:
Why would the U.S. government allow a bank that is predominantly owned by the Central Bank of Libya – an institution on which the U.S. has imposed strict economic sanctions – to operate two banking branches within our own borders?

Neither the Fed nor Treasury so far has offered explanations for these loans; the Treasury has so far only explained why ABC was not subject to sanctions and pointed to the March 4th order when I contacted them. The ABC loans are just one example of the Fed’s bailout madness. Again, there are 21,000 transactions on the Fed’s list of released names, and "every one of these... is outrageous," as one Sanders aide put it. You will be shocked, for sure, to find out who else is on that list. We’ll have a lot more on those other loans in the next issue of Rolling Stone.

The Fed’s Crisis Lending: A Billion Here, a Thousand There
by Binyamin Appelbaum - New York Times

The Federal Reserve lent billions of dollars to the nation’s largest banks during the financial crisis in the fall of 2008. It also lent $400,000 to the Eudora Bank, a community lender with a single location in the center of Eudora, Ark. Day after day in late October and early November, near the high-water mark of the Fed’s efforts to rescue Wall Street, the central bank also made dozens of similarly modest loans to small banks in communities across the country.

Some banks, like Howard Bank, a suburban lender with four offices outside Baltimore, borrowed as little as $1,000 — a fire drill in case things got worse. Other borrowers already were facing dire problems. Several have since failed, including La Jolla Bank in Southern California, which took $6 million.

The Fed released a complete list Thursday of banks that borrowed during the crisis from its discount window, its oldest and broadest emergency lending program. The central bank already released similar information for its other lending programs. As with those other programs, the discount window mostly served the giant banks like Bank of America, Citigroup and Washington Mutual, whose struggles to survive the consequences of reckless lending and investment have defined the narrative of the crisis.

But the discount window was unique because it was open to smaller banks, too. The other emergency programs were created during the crisis to support the trading and investment activities that are concentrated in New York. The discount window, which predates the crisis by almost a century, was created to help commercial banks weather cash squeezes.

The long list of banks that lined up at the window, which the Fed provided in the form of a daily loan register, shows a crisis stretching far beyond Wall Street. On Wednesday, Oct. 29, 2008, for example, the Fed lent money to 60 different banks, in amounts ranging from $1,000 to $26.5 billion. At least 10 of those banks have since failed.

Borrowing from the discount window is considered a sign of weakness, and banks historically have avoided it if they can. From 2003 through 2006, the Fed lent an average of less than $50 million each week. By the summer of 2007, however, the central bank was increasingly concerned that a growing number of banks needed help but were unwilling to borrow. In August, the Fed slashed the cost of borrowing from the discount window by half a percentage point. Then it arranged for four of the nation’s largest banks, Bank of America, Citigroup, JPMorgan Chase and Wachovia, to take what were described as symbolic loans of $500 million.

By the peak of the crisis in late October and early November 2008, the volume of outstanding discount window loans reached above $100 billion. The Fed has long treated its interactions with banks as confidential but a series of federal courts ruled that it had to provide information on its emergency lending programs in response to Freedom of Information Act requests filed more than two years ago by Bloomberg News and the Fox Business Network.

The Fed provided the data to reporters Thursday in the form of several hundred electronic images of the original documents, loaded on a compact disc, distributed by hand at 10 a.m. in the cramped security checkpoint outside its headquarters building. By contrast, the Fed released data on its other emergency lending programs in December by creating a public, searchable Web site.

Bankers have expressed concerns about the release of the data, saying that the prospect of publicity will deter future borrowing. "I think it will make it harder for people to use the discount window in the future," Jamie Dimon, chief executive of JPMorgan Chase, said Wednesday.

Missing elements of Irish bank deal suggest Eurozone itself is under severe stress
by Faisal Islam - Channel4News

The numbers were already big and got bigger. People inured to millions, billions and trillions can be nonetheless horrified by a nation that needs to shove nearly half its GDP into the banks. But the Irish bank stress tests are important for what was missing.

The suggested hit to the people that provided the kerosene for AI, AIB, and BoI to fire into the Irish property sector did not happen. The senior bondholders were spared. Yes Michael Noonan, Ireland’s new finance minister, muttered something about sharing the burden with “subordinated bondholders”. Well that’s already happened after some coercive tenders under the previous government. A new effort “will generate low billions” said one bond trader I spoke to, who added “senior bonds are up big tonight, the holders are happy”.

Another absent friend was some sort of medium term help from the Frankfurt-based European Central Bank. That had been suggested as part of a deal between the ECB and Ireland to spare the senior bondholders and keep investor faith in eurozone periphery markets. It would have helped Ireland’s new banking system transition away from the life support of the ECB’s €150 billion short term liquidity assistance. But no, didn’t happen. That’s significant if you believe Reuters well-sourced account that “Euro zone official sources told Reuters on Thursday that due to internal disagreements within the ECB’s Governing Council, plans to announce a new liquidity facility for Irish banks had been scrapped.”

The ECB General Council features representatives from all Eurozone countries aswell as executive members. The ECB is a fiercely independent institution but there is something big occurring in the background as regards Ireland and the other bailouts.

I just got quite an interesting internal account of what happened between Irish leader Enda Kenny and President Sarkozy/ Chancellor Merkel at the Euro Summit two weeks ago. Finance ministers decided that Michael Noonan’s attempt to renegotiate the bailout deal (lower interest rates) was a matter for heads of state so kicked upstairs to the European Summit.

Enda Kenny turned up and “he was very cocky. He sat down and told everybody ‘this package isn’t working, we are a new government, it has to change’. Both the content and the attitude was a stark contrast to the much more humble approach of [Georges] Papandreou, [the Greek PM]. It had a terrible impact. Merkel and Sarkozy were very upset. They said: “We went to our parliaments and got billions and billions at huge political cost – forget it”

If there was one saving grace for Ireland it is that in Brussels and Frankfurt there is a recognition that the real economy is showing underlying competitiveness and growth potential. There’s been a reduction in real wages and salaries, and increase in productivity, and exports have gone up. So the ECB and Commission are “more positive on Ireland than Portugal, where there is no growth, or Greece where tax revenues are much below forecast”.

“Merkel is under terrible pressure at home. I was surprised she was much softer than I thought she would be given that she cannot give in to the Irish”.

A leading EU finance ministry reiterated the point: “Ireland and Greece are not comparable. They are a different set of problems. Ireland is a surplus country, with no competitiveness problems, but a fiscal problem”.

There is a consistent reference in the main Euroland powers to Ireland “not putting anything on the table”. For France that is clearly some rethink on the 12.5% corporation tax. his may be unthinkable for Ireland, but then it needs to come up with something else fairly quickly. I fear the lack of explicit ECB support is connected to this rancour. Could it mean even more tax rises and spending cuts for the hard-pressed Irish?

More generally, the two main tectonic plates in the Eurozone, between Austere Donor nations fearing a “Transfer Union” (Germany, Finland etc) and the Profligate Recipients nations becoming angry at austerity, are at a significant stress point. Throw into the middle of that the notion that the ECB might raise interest rates next week at a time when Portugal, Ireland, Spain, and Greece are dying and Germany is booming away, and you have a recipe for a backlash. The Irish economist David McWilliams talked about a referendum on the EU/IMF bailout deal today. Meanwhile in Finland an election might see the election of an anti-bailout populist campaigning against giving money to Greece.

It’s not just the Irish banks facing the stress test. right now it’s the whole political economy of the eurozone.

ECB changes tack on Irish support, eases collateral
by Marc Jones and John O'Donnell - Reuters

The European Central Bank threw a lifeline to Irish banks on Thursday by suspending collateral requirements for loans to them, but it stepped back from a more ambitious plan to create a new funding facility for the banks. As Ireland released results of stress tests of the health of its banks, revealing a 24 billion euro capital shortfall among them, the ECB said it would no longer insist on minimum credit ratings for Irish sovereign debt, or for debt guaranteed by the Irish government, when accepting it as collateral in money market operations.

That will help Irish banks, which are major holders of their country's debt, continue to borrow in ECB operations if Ireland's bonds are downgraded further. Last year the ECB took a similar step to aid Greek banks. Ireland's banks are heavily dependent on ECB funding, in the form of short-term loans of up to three months, because other euro zone banks refuse to lend to them in open markets. On top of the 85 billion euros which they borrowed from the ECB in February, Irish banks took a record 70 billion euros in emergency funding from the Irish central bank.

But while the ECB suspended collateral requirements, it did not proceed with broader plans to establish a new facility that would provide medium-term funding to Irish banks and potentially banks from other weak euro zone states in future. This facility, by providing loans with longer tenors than ECB money market loans, might be cheaper for the banks. It would also relieve the Irish central bank of a burden by taking the place of its emergency aid. The idea for the facility had been broadly welcomed by financial markets, where it was seen as an important tool in the euro zone's fight against the debt crises in weaker economies.

A euro zone central bank source had told Reuters last week that the ECB was close to finalizing plans for the facility. But official euro zone sources said on Thursday that the ECB would not announce the plans because of internal disagreements within the central bank's Governing Council. "There will not be a formal structure through which medium-term funding will flow either from the central bank or from one of the European funds that are now being put in place," Ireland's Finance Minister Michael Noonan said. "But there is assurance from the European Central Bank that there will be a medium-term flow of money which underpins the restructuring and will continue into future years," he added.

The news that the ECB would not announce the new facility hit the euro slightly on Thursday, though full financial market reaction will not be clear until European markets reopen on Friday. Ireland's central bank Governor, Patrick Honohan, suggested there was little hope of the new ECB facility being created in the near term. "I don't see any prospect of anything imminent on the cards," he told a news conference.

Two sources with knowledge of the ECB's discussions said there had been substantial internal opposition to the plans for the new facility by some of the bank's policymakers. "They underestimated the resistance to the idea in the Governing Council. There has been a push back...There will be another week or two of uncertainty," one of the sources said. "This is a political negotiation with high stakes. It's a hard one for them (the ECB) to swallow," he added.

The ECB would have to clear a number of legal hurdles before putting such a facility in place. There is a risk that it could be challenged in court for being at odds with the European Treaty that covers the operation of the euro zone. Since Ireland's banks are now almost completely state-owned, the facility could potentially be seen as breaking restrictions on the financing of governments.

Dutch central bank governor Nout Wellink on Thursday indicated he wanted the Irish government and perhaps other euro zone governments to do more to solve the banking problem, not the ECB. The Irish banking sector "has become a very big black hole", he told Dutch public broadcaster NOS. "We (Europe) will take care of the bridging facility but the Irish will have to solve it. They will have to slim down banks, slim down very strongly. They will have to close down some banks. They will have to merge some banks."

He added, "We (the ECB) are not there to finance a budget deficit nor plug holes of banks which are not solvent. Governments need to do that. Our boundaries have more or less been reached."

Ireland: a dead cert for default
by Larry Elliott - Guardian

Saddling the Irish public with even more unpayable debts from the banks is grotesquely unfair and economically stupid

The sad saga of the Irish banks goes on. The government has fessed up that four of the country's troubled lenders would need a further €24bn to withstand a worse-than-expected performance by the economy, and even that colossal sum is likely to prove an underestimate.

Four big conclusions stem from the announcement. The first is that Ireland looks a dead cert for a default at some point in the next couple of years. By nationalising the losses accumulated by the banks as a result of their ludicrous lending during the property boom, the Irish government is saddling the Irish people with a burden of unpayable debts. This is not just grotesquely unfair but also economically stupid, since it has resulted in the Irish government imposing austerity package after austerity package in a uphill battle to put its fiscal house in order.

That, in turn, has hobbled the Irish economy, making it harder for the country to generate the growth without which the financial mess can never really be cleaned up. So, while a so-called haircut for private-sector holders of Irish bank debt would be unpopular in the rest of the European Union, the only alternative is for Ireland's depression – which has already lasted for three years – to extend way into the future.

The second conclusion is Ireland's quite impressive effort to dig itself out of the pit is being jeopardised by the failure, even now, to come clean about how bad things are. Ireland has a strong export sector and this has performed well over the past couple of years, helping to compensate for the collapse in the domestic economy. Given a clean start, Ireland has the potential to exploit the recovery in global demand seen since the depths of the recession two years ago. But this process will be slower and weaker if the banking crisis continues to be a drag on the economy.

The third conclusion applies as much to the other struggling eurozone economies as it does to Ireland, and that is the price of rebalancing the economy within a monetary union is high. Ireland has made itself more competitive by pushing up unemployment, slashing public spending and cutting wages. Without the ability to devalue its currency it has used the only other weapon available to price its goods into world markets: deflation. Other weak eurozone countries have less vibrant export sectors than Ireland, so face an even tougher task in making themselves competitive.

This leads on to the fourth conclusion: the eurozone crisis is far from over. Portugal looks likely to be the next in line for a bailout, since it has admitted it failed to meet its deficit reduction targets. After Portugal, the focus will switch to Spain – a country too big to fail and too big to rescue. What does all this mean? It means the question of default will not go away, whatever EU policymakers might wish. And, at that point, if not before, there will be speculation about whether monetary union can survive this crisis in its current form.

Irish property is going for a song as investors pay price of building boom
by Henry McDonald - Observer

At the height of the Celtic Tiger, Irish investors snapped up property at home and abroad. Now they are desperate to sell and Russian buyers are ready to pounce

Located in Dublin's main tourist drag, Temple Bar, it would have fetched up to €250,000 at the height of the "Celtic Tiger" boom. But a studio flat in one of the busiest and best-known parts of the city is now on the market for just €80,000 – a staggering fall in value that encapsulates the dramatic collapse of Ireland's property market. As the republic's taxpayers try to make sense of the eye-watering costs of bailing out their country's banks, with billions more being pumped into the ailing financial institutions last week, the "fire sale" of a luxury apartment on the left bank of the Liffey for such a low price indicates the decline in fortunes of an economy that invested too much too quickly in the building boom.

Temple Bar is best known to British tourists as the location of lively, late-night venues – many staging traditional Irish music sessions, busy and often over-priced restaurants, buskers, street artists and an alternative culture scene. During the boom years it reflected the two sides of modern Ireland: creative but sometimes brash; youthful but at times menacing with stag and hen parties from abroad mingling in the streets with beggars and heroin addicts.

The vacant €80,000 Temple Bar flat will go on sale at an auction later this month organised by property agency Allsop in what has become a buyers' market. Other apartments in Dublin 1, the prime central location of the capital, are also up for grabs for between €100,000 to €180,000, all of them described in the auction's promotion material as "investment" flats and properties.
Buying to invest was one of the main reasons why the Irish economy and the nation's finances are now in such a parlous state. Last Thursday, Ireland's new Fine Gael–Labour coalition government published the results of stress tests on the republic's big banks. The results made grim reading for ministers and the taxpaying public. As a result of the Irish banks' ongoing losses, the state will have to put in an extra €24bn to recapitalise them; its capacity to do so is due in the main to the largesse of the European Central Bank and the International Monetary Fund.

Overall, the final bill for saving these banks from collapse will be around €70bn. To put that into context, this means the expected final cost of re-financing the banks is more than double the entire tax take (including personal taxation, capital tax and VAT) across Ireland in 2010. The figure is also six times the amount the republic spent last year on its health service and eight times more than was allocated to primary, secondary and tertiary education. Patrick Honohan, the chairman of Ireland's central bank, was clearly not exaggerating last week when he described the total injection of state cash as "one of the costliest banking crises in history".

A key factor in creating that crisis was the excessive and aggressive lending by banks to developers during the boom. Property makes up about 60% of the toxic loans in Ireland's debt-ridden banks. Ordinary Irish citizens, too, played their part in the collective mania to make money fast by investing in bricks and mortar, and not only at home. It is estimated that as a result of years of economic expansion,, at least one in 10 Irish citizens now owns at least one property abroad. Many of these investors remortgaged, sometimes more than once at home, to obtain holiday apartments, villas and even farmland in locations as far flung as Bulgaria and South America.

Earlier this year, one Irish investor walked into the Dublin-based foreign property company Extrasales Consulting hoping to sell an landholding investment he had bought during the Celtic Tiger years in Paraguay. "He had 288 acres of Paraguayan land that he had originally bought for $900,000 [about £560,000]," recalled Extrasales's director, Ger Nunan. "The land is now worth around $450,000 but he was still desperate to sell." Nunan's company is located in one of Dublin's grand Georgian houses on the south side of the city centre. Today it specialises almost exclusively in helping Irish investors offload their foreign assets. As they face negative equity, going into mortgage arrears and the possible repossession of their houses and businesses in Ireland, there has been a rush to sell off overseas land and homes.

A true picture of the Irish over-reach when it comes to property investments can be seen in holiday destinations along Bulgaria's Black Sea coast or the Turkish Aegean, as well as in traditional tourist areas such as southern Spain. During the good times, Celtic Tiger man and woman colonised the Mediterranean, east and west, rapidly and enthusiastically. "In the Sunny Beach resort in Bulgaria there are reckoned to be about 10,000 Irish-owned properties, while in places in Turkey like Mahmutlar the locals call it 'Irish town'," said Nunan's colleague, Colin Horan. "Nowadays, we see owners with properties there coming in desperate to sell."

Like the luxury Temple Bar flat going for a song, Irish foreign properties are going up for sale in holiday destinations from the Costa del Sol to the Florida coastline. And the buyers' market for Irish-owned homes has found a new investor – the Russians. "Cash is king in the downturn," said Nunan. "The Irish owners need cash to pay off their debts at home and the Russians want to take cash out of their own country to buy abroad." Since the downturn, Extrasales has been receiving up to 10 calls a day from Irish people desperate to sell to save their homes and businesses. In response, the company has tapped into the growing Russian middle class, which trusts neither their government or their own banks.

"We have set up 26 agents in six cities across Russia who are selling Irish foreign properties to Russian buyers," Nunan said. "Our average Russian client is not taking out a 40% to 50% mortgage like Irish investors did in Spain. They buy outright, often with cash. They are buying for life – for them it's a lifelong investment. It's not what we all did during the Celtic Tiger years."

Portugal Stages Surprise Bond Auction; Ireland, Portugal Hit With New Downgrades
by Julia Werdigier - New York Times

Portugal, which is struggling with its debt, successfully sold bonds on Friday in an auction some analysts said was a sign that the country was trying to avoid any bailout before a new government was elected in June.

The government sold 1.65 billion euros ($2.3 billion) of short-term government debt, more than it had planned, after abruptly announcing the sale Thursday night. Lisbon said it was meeting "specific demand" for the debt without giving more details. The yield was 5.79 percent, 2.5 percentage points more than it paid at auctions of similar bonds last year. Yet shortly after the auction was completed, Fitch, the ratings agency, cut Portugal’s credit rating by three notches, saying it was concerned that the country would not receive timely external support before the elections on June 5.

Some investors said that demand for the bonds could have come from China, which previously said it would support European economies troubled by large debt burdens, and Brazil, whose president was recently cited in a newspaper report as saying the country might buy Portuguese debt. Portugal needs 9 billion euros in the short term to pay for two bond redemptions in April and June if it wants to avoid a bailout by the European Union and the International Monetary Fund. Prime Minister José Sócrates resigned on March 23 after failing to push his latest austerity plan through Parliament. President Aníbal Cavaco Silva on Thursday set June 5 as the date for new elections.

The bond sale on Friday, which raised more than the 1.5 billion euros planned, bought Portugal some breathing room to sort out its finances and avoid becoming the third country in the euro zone to seek a bailout, after Greece and Ireland. "It might be that what they’re trying to do is issue just enough short-term debt to get through to the elections and then the next government can ask for help," said Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London.

Mr. Fransolet also said it was not surprising that Portugal preferred to raise the needed funds on the market rather than through a bailout. "There are other costs associated with going to the E.U. and the I.M.F., including political costs," he said. Carlos Costa Pina, the Portuguese secretary of state for Treasury and finance, said recently that Portugal would be able to meet its debt commitments for this year, including the redemptions of long-term debt in April and June.

Fears that Europe’s debt crisis was worsening again grew Thursday when Portugal disclosed a budget deficit that was higher than expected and it was revealed that four of Ireland’s most prominent financial institutions required a further capital injection of 24 billion euros to cover bad loans. Ireland yielded to the European Central Bank on Friday when it agreed to protect bondholders even as the costs for bailing out its banks rose. The country had disagreed with the central bank on the issue, arguing that senior bond holders in the banks would have to share the losses to reduce the costs of the bailout.

Standard & Poor’s, the debt rating agency, cut Ireland’s sovereign debt rating one notch to BBB+ from A but revised its outlook to stable. The cut left Ireland with a low investment grade. Fitch on Friday cut Portugal’s long-term foreign and local currency ratings to BBB–, one notch above junk level, from A–.

Portugal had its sovereign credit rating lowered to BBB– by Standard & Poor’s on Tuesday on concerns that the country might have to default on some of its debt. Officials in Lisbon said Thursday that the country’s budget deficit last year was 8.6 percent of its gross domestic product, well above the goal of 7.3 percent. The government of Mr. Sócrates had already started to increase taxes and cut spending to try to reduce the budget deficit to 4.6 percent of G.D.P. this year. Portugal had a record deficit of 9.3 percent in 2009.

Historic houses for sale at bargain prices by desperate town halls
by Heidi Blake - Telegraph

With its imposing clock tower, turrets and wrought iron gates, this grand Georgian hospital building looks far beyond the budget of the average house-hunter.

But it is among hundreds of historic buildings being sold off for bargain prices by councils desperate to raise extra funds to counter government cuts. The Grade-II listed building of the old St Giles Hospital in Camberwell, south London, is set to be auctioned off at a rock-bottom price after being deemed too costly to maintain by Southwark Council.

Conisbrough Priory near Doncaster, two Georgian terraces in Greenwich, south London, and the public swimming baths in Rotherham are among the other buildings on sale. Investment experts said the "Big Council Sell Off" was an ideal opportunity for shrewd buyers to snap up a historic building at a bargain price. Docaster Council put Conisbrough Priory up for auction at a guide price of £275,000, while the Rotherham swimming baths went up for £150,000.

Lluesty Hospital in North Wales sold at auction for "£275,000 in February. The classical building, which is set around a court yard and complete with a parapet, was bought by property developers who plan to build 70 houses in its 7.4 acre grounds. One auction house based in Yorkshire and London said 14 councils had listed 100 of their properties for its most recent sale.

Even central Government is trying to reduce its estate, with sales totalling £115 million in the past nine months - including historic buildings such as the former Land Registry headquarters in Lincoln's Inn Fields, London. Property experts warned that some of the public buildings could be too large and dilapidated for an amateur developer, but others were considered more manageable.

Southwark Council sold off a split-level three bedroom flat in East Dulwich, south London, for £240,000 in February. The average price for a house in the area is £366,000. For those looking to invest in a holiday property, a cottage next to the Tate in the seaside town of St Ives, Cornwall, is on sale for £150,000. Investment analysts at the trade publication Stock Market Review encouraged property-hunters to keep tabs on the list of buildings up for sale each month.

"People who want to renovate a former public building into a modern residential home may scoop a bargain if what they want does not sell well in the auction room," a post on the website read. "The councils are using auction houses so it is best to keep up to date with brochures from local auctioneers, this will list what lots they have to offer in any forthcoming auction."

But campaigners have warned that the sale of hundreds of historic buildings to developers is putting Britain’s architectural heritage at risk. The Society for the Protection of Ancient Buildings (SPAB) also raised the prospect that buildings which are not sold could end up being abandoned and boarded up to reduce running costs. SPAB secretary Philip Venning said: "The situation could well become something of a gamble for hundreds of historic buildings. "While there may be some positive outcomes, SPAB is deeply concerned that great swathes of the nation's built heritage will face an uncertain future under new ownership - or will simply be mothballed."

Ian Lush, chief executive of the Architectural Heritage Fund, said: "The transfer of assets is both a threat and an opportunity. "It is a threat because the number of historic buildings which are being declared redundant by public sector owners - and this is not just local authorities, but also includes the Ministry of Defence, fire services, health trusts and so on - exceeds the number of community groups and commercial developers able to take them on."

An unfair tale of New York
by Gillian Tett- Financial Times

The other day, I attended a dinner at New York’s Plaza hotel organised by a group called the "Citizens Budget Commission". To the irreverent British observer the name sounds improbably earnest: something that wouldn’t have been out of place in a Monty Python sketch.

However, New Yorkers (to their credit) take citizens’ commissions seriously. At the Plaza dinner was a host of luminaries, such as Ben Bernanke (the solemn, bearded Federal Reserve chairman) and Michael Bloomberg (New York mayor), who earnestly discussed the tidal wave of debt that is now engulfing America, not just at the federal level but at state and municipal level too.

The person who had arguably the most interesting tale to tell, however, was Felix Rohatyn, an 82-year-old New Yorker. These days, Rohatyn spends his time advising Lazards bank. But 35 years ago, he spearheaded a group of New Yorkers who were charged with "saving" the city from default. As we sat in the Plaza ballroom, I asked Rohatyn to explain how he and his team – many of whom were also at the dinner – had pulled off that trick.

His story is both inspiring and alarming for today. Back in 1975, Rohatyn explained (and you can read it in his recent book, Dealings), everyone knew that New York was in a parlous state: crime was rife, the infrastructure was crumbling and the city was drowning in debt. Indeed, when Rohatyn was asked to step in, his first reaction was despair – the unions and politicians were at such loggerheads it was impossible to create a credible austerity plan.

For months the city staggered from near-default to near-default. But then, just when it seemed that disaster was inevitable, the crisis finally concentrated minds: the political parties agreed on an austerity plan, the federal government stepped in and credibility was restored. New York was "saved".

So far, so encouraging. After all, if you look at the fiscal debates occurring in America today, it is easy to feel despair as well. Debt is spiralling and (once again) it seems almost impossible to get politicians at the federal or municipal level to agree on a rational budget plan: so much so, there is a chance that for lack of any budget the federal government might shut down. And in places such as Wisconsin or Ohio there is deep political strife.

But Rohatyn’s tale might imply that there is no need to fret. If history repeats itself now, as in 1975, this may just be the darkest hour before dawn: crisis will eventually concentrate minds – albeit at the eleventh hour.

Sadly, there is a catch: in reality, Rohatyn and his former comrades are not actually sure that 1975 history will repeat itself in 2011. The reason? "There is so much anger today," Rohatyn says. "Before, [in 1975] people made angry speeches, but we still got round the table to negotiate. Back in our day we tried to put a tax on everyone, and made sure that everyone paid, fairly, to get a deal. But I just don’t think you can do that now. There is too much bitterness."

Some Americans may disagree. After all, Andrew Cuomo, governor of the state of New York, for example, managed to cut a budget deal this week, which did impose some austerity. Nevertheless, I think Rohatyn makes an important point: the level of anger and fracture in American society today is indeed striking. Never mind all the shouting you hear on US chat shows, what is notable is the scale of vitriol and tribalism that permeates so much of the casual, behind-the-scenes political debate.
. . .
Why? The rising levels of economic inequality may explain some of this; so might the structure of political life or the short-term cycle of the media. But I suspect there is another, more subtle issue at work, too: namely that American society has relatively few cultural practices or institutions that can share pain in a way that is perceived to be "fair". In a country built by pioneers, where resources seemed abundant and growth eternal, no one has worried about how to divide up the pie – after all, everyone assumed that pie would swell. Now, however, Americans can sense that the game has changed; a fight for limited resources is under way. Hence the anger and paralysis that are infecting politics from Wisconsin to Washington.

The good news is that many Americans are appalled by the trend. Many desperately want to find some rational middle ground. But if Rohatyn is right, this could be elusive. Particularly if that economic pie continues to stagnate in an oh-so-unfamiliar way.

We've Become a Nation of Takers, Not Makers
by Stephen Moore - Wall Street Journal

More Americans work for the government than in manufacturing, farming, fishing, forestry, mining and utilities combined.

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's.

Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things. The leaders in government hiring are Wyoming and New Mexico, which have hired more than six government workers for every manufacturing worker.

Now it is certainly true that many states have not typically been home to traditional manufacturing operations. Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That's less than half of the state's 1.48 million government employees.

Don't expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren't willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.

The employment trends described here are explained in part by hugely beneficial productivity improvements in such traditional industries as farming, manufacturing, financial services and telecommunications. These produce far more output per worker than in the past. The typical farmer, for example, is today at least three times more productive than in 1950.

Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn't pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.

The same is true of almost all other government services. Mass transit spends more and more every year and yet a much smaller share of Americans use trains and buses today than in past decades. One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we've gotten.

Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

President Obama says we have to retool our economy to "win the future." The only way to do that is to grow the economy that makes things, not the sector that takes things.

Chinese Banks’ Illusory Earnings
by Patrick Chovanec - An American Perspective From China

Over the past couple of days, China’s “big four” state banks have reported impressive profit gains for 2010.  Bank of China [3988.HK]  posted a 29% increase in net earnings over 2009, China Construction Bank (CCB) [939:HK] saw a 26% boost, ICBC’s [1398:HK] profits came in 28% higher, while the newly-listed Agricultural Bank of China (AgBank) [1288:HK] reported an eye-catching 46%  rise in profits.  The Hong Kong market, which had been fairly sour on Chinese bank stocks earlier this year, apparently liked what it sees.  Since last Monday’s opening (March 21), ICBC’s stock price has risen by 8.6%, Bank of China’s rose by 6.1%, AgBank’s rose by 7.0%, and CCB’s — despite falling short of even rosier analyst expectations — rose by 4.1%.  All four stocks are significantly above the recent lows they hit in February.


So are these profit figures to be believed?  Did Chinese banks really have such a stellar year in 2010?  The short answer to both questions is NO.

Banks basically have two costs of doing business.  The first is the cost of obtaining funds — usually the interest rate they pay to depositors.  The second is the losses they sometimes sustain when their loans don’t get paid back.  That second cost is very important, because if it’s not taken into account, banks would have every reason just to go out and make the riskiest loans possible to earn the highest return — the highest spread — over their cost of funds.  They’d see extremely high profits for a while, until a big chunk of those loans failed and the losses piled up, swamping the earlier gains.

The cost of failed loans is actually part of the cost of making those loans in the first place.  There’s no way to avoid some lending failures, and there’s nothing wrong with making a risky loan if you charge a high enough interest rate to compensate for that risk, and still come out ahead in the end.  To determine whether it really is coming out ahead or behind on the risks it’s taking, a bank tries to estimate what percentage of borrowers are likely to default (and what percentage it’s likely to recover if they do default), and charge that estimate as a loss at the time it first makes a loan.  It’s called a provision for bad debt.  If the estimate is reasonably accurate, the resulting figures will give you a pretty good idea how profitable that bank’s lending business really is.  If the loss estimates are too high or too low, you can get a very distorted picture of how the bank is truly performing. 

The same is true for regular businesses, for that matter.  The easiest way for a company to boost short-term revenues and profits is to start offering shaky customers easy terms of credit, no money down, no questions asked — and not take a higher charge against those sales to reflect the fact that a lot of those customers aren’t going to pay when the bill finally comes due.  The profits are illusory, and investors who look to them are deceived.

This year, regulators required Chinese banks to maintain a reserve of 2.5% against the value of their total loan portfolios as provision for bad debt.  This has been portrayed as a “rigorous” standard, compared to their miniscule rates of recognized non-performing loans (NPLs) left over after Chinese banks spent more than a decade cleaning up their books, with the government’s help.  Over the past two years, though, Chinese banks have engaged in a government-inspired stimulus lending binge that expanded their lending books by 58%.  So much money was lent so quickly that Chinese bank regulators spent the better part of 2010 just figuring out where it all went.  A 2.5% charge may sound impressive, compared to the tiny number of older loans that Chinese banks haven’t been able to work out, but during the last, similar round of ”policy” lending that took place in the 1990s, about 35% (thirty-five, there’s no decimal point there) of all the loans that were made went bad, with around a 20% post-default recovery rate. 

There are many areas of recent lending — mortgages, real estate development loans, emergency working capital loans to keep failing exporters from going under, business loans diverted to stock and real estate speculation, business loans collateralized by land at inflated valuations — that give cause for concern.  But it is loans made to Local Government Financing Vehicles (LGFVs), special companies set up to fund ambitious and often redundant infrastructure projects, that have attracted the greatest attention.  At first, China’s banking regulators brushed aside concerns — these were, after all, government-sponsored projects — but later came to view these loans with growing alarm.  A comprehensive study leaked last summer from the China Banking Regulatory Commission (CBRC) suggested that only 27% of these loans could be repaid through cash flows; 23% were a total, irretrievable loss, and about 50% would have to be repaid “through other means,” presumably by calling on local government guarantees (which those governments lack the wherewithal to stand behind) or by seizing the undeveloped land pledged as collateral (appraised, all too often, at ridiculously inflated prices).

So let’s run some back-of-the-envelope numbers, based on what we know.  A couple days ago, the Chairman of ICBC announced that LGFV loans accounted for 10% of his bank’s total loan book.  He made this announcement in order to reassure everyone that ICBC and the other banks have the situation completely under control:

“It is important that people pay attention to this problem and we should be alert to the risks,” Mr Jiang said. “[But] I don’t believe this problem poses a systemic risk to the Chinese banking system.”

ICBC reported a pre-tax profit of RMB 215 billion ($32.6 billion) in 2010, including a RMB 28 billion ($4.2 billion) charge for expected loan losses.  That charge brought ICBC’s cumulative bad debt provision — its reserve against future NPLs — to RMB 167 billion ($25.3 billion), just under 2.5% of the value of its entire loan book, which stood at RMB 6.8 trillion (a little over $1 trillion) at the end of 2010. 

ICBC’s chairman says that it made RMB 640 billion ($97.0 billion) in post-crisis LGFV loans, over the past two years.  If we go by the estimates compiled by the CBRC, roughly 23% of these loans are just out-and-out non-recoverable, which in ICBC’s case equates to RMB 147 billion ($22.3 billion).  Another 50% can be repaid only through alternative means (by seizing collateral, for example) and must be seen as questionable.  That equates to another RMB 320 billion ($48.5 billion).  Over that same two-year period, ICBC made provision for RMB 51 billion ($7.7 billion) in loan losses (RMB 23 billion in 2009 and RMB 28 billion in 2010). 

If we look only at the LFGV loan category, and generously assume that all of the new bad debt provisions applied to LGFV loans, the results are striking.  Even if only the LGFV losses that are virtually dead certain are counted (Scenario A-1 below), ICBC is understating its likely losses by RMB 96 billion ($14.5 billion).  Its cumulative bad debt allowance should be RMB 263 billion ($39.8 billion), 58% higher than reported.  If that correction was applied in 2010, the bank’s pre-tax profit would shrink to RMB 119 billion ($18.0 billion), down 29% from RMB 167 billion in 2009.

Let’s assume, in addition, an effective recovery rate of only 50% on the dubious repayments “through other means” (Scenario A-2).  That would require a boost in ICBC’s bad debt reserves to RMB 423 billion ($64.1 billion), 2.5 times the reported figure.  Taking this additional charge would create a pre-tax loss of RMB 41 billion ($6.2 billion) for 2010, and wipe out about 1/3 of the bank’s equity capital cushion.

Due to several highly profitable years, ICBC reported equity capital (assets net liabilities) of RMB 822 billion ($125 billion) at the end of 2010.  If all of the bank’s  “lost cause” and “repay by other means” LGFV loans (a total of RMB 467 billion, or $70.8 billion) were charged as a provisional loss (Scenario A-3, which might reasonable if you’re going to be forced to seize relatively illiquid collateral to try to make good on the loan), it would change ICBC’s RMB 215 billion ($32.6 billion) pre-tax profit for 2010 into RMB 201 billion ($30.4 billion) pre-tax loss and wipe out over half of the bank’s equity capital.

ICBC’s management might reply that their LGFV loan portfolio is stronger than average, since one of China’s largest banks might be able to cherry-pick only the best local government projects to lend to.  Perhaps — although so much money was flowing out the door I doubt they, or anyone else, had time to make certain.  Keep in mind, though, that this is just one category of lending that is generating worry.  We’re assuming a 100% performance rate for all the other scary kinds of lending I mentioned earlier — an assumption that is as unrealistic as it is generous.

So let’s assume that this round of expansive policy lending fares much better than the last one, and just 10% of the RMB 2.2 trillion in net new lending that ICBC made over the past two years goes bad (Scenario B-1).  That’s RMB 222 billion ($33.6 billion) in loan losses, more than four times the loss provisions ICBC actually made during that period.  The RMB 171 billion ($25.9 billion) additional charge would reduce ICBC’s 2010 pre-tax profit by a factor of almost five to RMB 44 billion ($6.7 billion), erasing about 1/5 of its reported equity capital. 

If you raise the projected NPL rate to 20% (Scenario B-2, a very reasonable estimate given both history and the more recent LGFV estimates coming from regulators), the bank registers a RMB 178 billion ($27.0 billion) pre-tax loss for 2010, destroying almost half of its capital cushion.  Apply the 35% rate from last time around — hopefully not the case, but not out of the question either – and ICBC begins flirting with the prospect of insolvency (Scenario B-3).


(click the above chart to expand and view it in original, more readable size)

A reporter yesterday asked me why, knowing what they know about LGFVs and other troubled lending areas, the regulators don’t just require China’s banks to recognize loan loss provisions higher than 2.5%.  I could only think of that exchange between Tom Cruise and Jack Nicholson in A Few Good Men:  “I want the truth!”  “You can’t handle the truth!”  Maybe China’s banking regulators prefer to shield investors and other market participants from the harsh truth while they figure out how to solve the problem.  However, the truth — whether investors can handle it or not — is pretty easy to calculate based on readily available information.  It’s entirely possible that the scenarios I’ve outlined are too pessimistic — but it’s not obvious that they are.  The various assumptions I’ve used are reasonable enough that I think you’d have to make a case for why they are wrong.

Optimists will counter that, even if ICBC and the other banks suffer destabilizing losses, the “big four” are all state-owned, and the Chinese government would almost certainly step in and bail them out.  That may well be true.  But there’s a big difference between making that kind of “failing but too big to actually fail” argument and accepting the claims — put forward in their latest financial statements — that China’s banks are sitting pretty and awash in profits.

This Time Had Better Be Different: House Prices and the Banks Part 1
by Steve Keen - Debtdeflation

Before the US house price bubble burst, its banks and regulators claimed (a) that there wasn’t a bubble and (b) that, if house prices did fall, it wouldn’t affect the solvency of the banks.

The same claims are now being made about Australian house prices and Australian banks. On the former point, Glenn Stevens recently remarked that:

"There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years."

“That is higher than it used to be but it is actually not exceptional by global standards.
(SMH March 16th 2011)

On the latter, APRA conducted a “stress test” study of Australian banks in 2010, with the stresses including a 30% fall in house prices over 3 years:

Table 1: APRA Stress Test Table, APRA Insight 2010/2, p. 9


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APRA’s conclusion was:

The main results of the stress-test for the 20 ADIs, taken as a group, are as follows:

  • none of the ADIs would have failed under the downturn macroeconomic scenario;
  • none of the ADIs would have breached the four per cent minimum Tier 1 capital requirement of the Basel II Framework; and
  • the weighted average reduction in Tier 1 capital ratios from the beginning to the end of the three-year stress period was 3.1 percentage points. (APRA Insight 2010/2, p. 10)

The main results of the stress-test for the 20 ADIs, taken as a group, are as follows:

Glenn Stevens’ claim that the house price to income ratio was “about four and a half” was almost certainly relying on research by Rismark. Rismark MD Chris Joye recently asserted that the house price ratio in Australia was 4.6, and though he conceded this was somewhat high, he argued that it was justified by changes to economic fundamentals. He ridiculed the claim, made by The Economist on the basis of a comparison of house prices to rents, that Australia’s house prices are 56% overvalued:

The Economist does not question whether the old housing ratios might be nonsensical to today’s home owners as a result of:

  • Fundamental changes in the structure of the economy wrought by the fact that interest rates over the past 15 years have, on average, been 43 per cent lower than interest rates in the 15 years that preceded that period;
  • The fact that average inflation since the middle of the 1990s has been 55 per cent lower than inflation in the 15 years prior; or
  • The fact that the rise of two-income households and the female participation rate in concert with a near halving in the nominal cost of debt might have triggered a once-off upward increase in household purchasing power, and hence housing valuations… (Chris Joye, A property bubble long shot, Business Spectator March 25 2011)

Figure 1: Rismark’s Dwelling Price to Income Ratio Chart


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In other words, this time is different.

They would say that, wouldn’t they?
he “this time is different” argument asserts that lower interest rates, lower inflation and higher income per household (and more income earners per household) means that though the house prices to income ratio might higher than before, it’s nothing to worry about.

Tell that to a would-be first home buyer who’s contemplating taking out a mortgage. In 1992, the average mortgage for a First Home Buyer was $ 71,500. It is now $274,000.

Figure 2: Average First Home Mortgage and Mortgage Interest Rate


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The “no bubble” argument asserts that this has been counterbalanced by the fall in interest rates—which were 12% then and are 7.8% now. So the average first home buyer’s mortgage is 3.8 times higher than it was two decades ago, while interest rates are 2/3rds what they were then. Does one—along with changes in income and demographics—counterbalance the other?

Not on your life: the increase in debt and debt servicing has far outstripped all the factors that Joye and Bloxham rely upon to argue that Australia’s house prices are not in a bubble.

I want to make this case slowly, so that you can see each step in the argument, so let’s first look at the weekly interest and loan repayments on a typical 25-year First Home housing loan. Back in 1992, the weekly interest bill was $165; now it is $420—2.5 times as high. Repayments were $174; now they are $490—2.8 times as high.

Figure 3: Interest up 2.5 times, repayments up 2.8 times


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So have incomes risen sufficiently to mean that this almost threefold increase in debt servicing costs over 20 years is no big deal?

Not if you’re a wage earner! Average before tax wages have risen from $505 a week in 1992 to $996 a week at the end of 2011—so they have almost doubled. Using an average tax rate of 28%, that gives the average wage earner $777 after tax a week today, versus $394 back in 1992.

Figure 4: Average wages have risen by 97% since 1992


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While wages have risen, the 2.8 times increase in loan repayments means that mortgage payments on an average first home loan have gone from taking 40 percent of after-tax income of the average worker in the 1990s to 64 percent now—after reaching a peak of 74 percent in late 2008 before the RBA slashed interest rates (the ratio fell to 53 percent, and it would have fallen further had the First Home Vendors Boost not caused house prices to skyrocket again).

In the early 1990s, a young wage earner could aspire to financing a house purchase using his or her income alone. Now, that’s out of the question.


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He’s a (young) Working Class Man Renter…
This is what the “no bubble” proponents don’t get: high house prices have become a class and age issue. If you’re a young “working class man” on the average wage, you can no longer afford to enter the housing market in Australia—since the average first home loan would consume over 60 percent of your after-tax wage.

Even if you’re a “young working class couple”, the cost of servicing a mortgage from wage income alone is prohibitive. In the 1990s, a couple (where both earned the average wage) had about 80% of their income free for other costs after paying the average First Home mortgage. The rapid escalation in house prices after Howard doubled the First Home Owners Grant in 2001 drove this down to under 65 percent—and most wage-earning couples simply don’t have that much headroom in their budgets. They can’t pay the rates, the food bill, the petrol, and the education fees, with less than three quarters of their after-tax income.

Figure 5: Max Headroom–disposable income after paying the mortgage plummets as prices rise


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Faced with this level of potential debt-servicing costs, young would-be house-buyers are giving up on the dream of home ownership—and its attendant nightmare of debt peonage. They’re also signing up in droves to call for a political campaign against house prices by GetUp: see the Anti-FHOG, Anti-Negative Gearing, and Buyers Strike campaign suggestions (and read David Llewellyn-Smith’s excellent piece on it in the Fairfax press too).

A “Buyers’ Strike”, whether organized or not, is what will end the Ponzi Scheme of debt-inflated house prices, because like all Ponzi Schemes it only continues to work so long as new entrants outweigh those trying to cash out.

Those who are trying to cash out—existing house owners who are selling as speculators, or selling to realize a paper capital gain and upgrade to a more expensive house, or selling an investment property to fund their retirement—are now selling into a dwindling market.

The first effect of this imbalance between demand and supply is an increase in the time to sell, and in the number of unsold properties on the market. The second effect is a moderate fall in prices, once sellers who have to sell realize that they have to take a haircut. The third effect in Australia may well be an increase in sales by property speculators, if they see their capital gains diminishing the longer they hold on to their “investments”.

The Scheme could be kept alive by a reduction in interest rates to entice new buyers into the market—Australia’s floating rate mortgages make it much easier for the Central Bank to manipulate mortgage rates here than in the USA—but even there, there’s a limit. To get mortgage payments back to 20% or less of the after-tax income of a couple earning the average wage— without mortgage levels falling, and hence house prices falling—the mortgage interest rate would need to fall to 3%. This would require the RBA to drop its cash rate to zero from its current level of 4.75 percent.

Even if it does do that, it will take a very long time to do so—remember that Australia’s Central Bank was still raising interest rates well into the GFC (it increased the cash rate to 7.25% in March 2008, and only starting cutting it in September when the crisis was already a year old). Mortgages and house prices will have plenty of time to fall before that happens.

Figure 6: Australia’s Central Bank rate is almost 5% higher than the USA’s


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This raises two questions: how much could house prices fall, and what could be the impact of a fall on the financiers of this Ponzi Scheme: the banks?

I’ll consider the second question in a post next week; for now let’s do something the “no bubble” crowd regularly refuse to do, and consider long-term data on house prices and incomes.

Fighting Magoo-nomics with long-term data
I sometimes feel like I’m fighting Mr Magoo when I debate the non-bubble set: they choose a short-term data set and then tell me that what I’m predicting can’t happen because it has never happened before. Yet there is long-term data to show that it has happened before. They either ignore it, or find reasons to dismiss it because it doesn’t meet their quality standards.

This is self-serving. Older data will almost always not meet modern standards, simply because it is old and, in most cases, statistical practices have improved over time (one obvious exception to this is government reporting of unemployment and inflation, where standard have been dropped for political expediency—see Roy Morgan’s figures on the actual unemployment rate in Australia, and John Williams’ “Shadowstats” information on actual unemployment and inflation in the USA). But the data exists, and unless it is out by a huge margin, the information it contains is worth considering.

Joye’s points above about interest and inflation are a case in point here: “interest rates over the past 15 years have, on average, been 43 per cent lower than interest rates in the 15 years that preceded that period… average inflation since the middle of the 1990s has been 55 per cent lower than inflation in the 15 years prior”. That’s all true—but if you look back further in time, interest rates and inflation were lower in the 1960s than they are today. In the 1970s, though interest rates were higher than today, they were lower than the rate of inflation, so that the real interest rate was negative.


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If Joye and Bloxham’s “structural changes mean this time is different” case was valid, then mortgages and house prices should have been higher relative to incomes in the 1960s than today (let along the 1970s!) because interest rates and inflation were much lower then than now.

And were they? Here we have to do some detective work, to combine the very brief ABS time series on house prices (which starts in 2002) with longer term house price estimates for Sydney and Melbourne put together by Nigel Stapledon of UNSW (which starts in 1880 and ends in 2005). Though put together with very different methodologies, the overlap is good for the 3 years they share in common—especially for Melbourne.

Figure 7: Two methods for estimating house prices with comparable results

It’s also possible to derive an implied ABS median house price for Sydney and Melbourne by combining the ABS’s median house price index data—which goes back to 1986—with its price data from 2002 on. Stapledon’s data also fits this series very well—again, especially for Melbourne.

Figure 8: They’re also consistent over the last 25 years when combined with ABS Index data

Given this close correspondence, I’m willing to use Stapledon’s data as a reasonable guide to what median house prices were before the ABS began collecting house price index data.

Figure 9: Estimated median prices for Sydney and Melbourne using Stapledon’s data till 1986 and ABS afterwards

Now we can combine this data with ABS and RBA data on disposable incomes, population and the number of dwellings to see how the ratio of house prices to disposable income has fared over time.

Figure 10: A tripling of house prices compared to incomes over the last 50 years

There are various problems with this comparison:

  • It compares median house prices to average incomes, and therefore understates the median to median (or average to average) comparison by about 25 percent;
  • The ABS Index only covers free-standing houses, thus overstating (probably also by about 25 percent) the median price level by omitting cheaper apartments;
  • It doesn’t account for differences in average disposable incomes by city, thus overstating the ratio for Sydney and Melbourne, but understating it for the other cities.

But overall it’s a reasonable guide to something we desperately need more information on, and the over-time comparisons are valid. An average-income household could have purchased the median house in Sydney with less than 2 years of disposable income in 1960; it now takes over 6 years—and at the peak, it took 8 years.

What’s more, the servicing cost of this debt was lower in the 1960s than it has been for the last decade, because mortgage rates were 30% lower back then.

So much for Stevens’ claim that “the price to income for Australia … is about four and half and it has not moved much either way for ten years”. The myopic focus of “no bubble” commentators on the last 10 years of data ignores a bubble that, since 1985, has doubled the relative cost of buying a house. Since the early 1960s, when the oldest Baby Boomers were buying their first properties, it has tripled the cost.

To restore the house price to income ratio that applied in 1985, before this bubble really took off, house prices would have to fall by 50 percent compared to incomes.

The final refuge of bubble deniers is a claim that I’ve heard much less of in recent years—after the US Bubble clearly burst in 2006—but which is still worth addressing: that house prices always rise faster than consumer prices over the long term. The best empirical retort to this is the price index compiled for Amsterdam’s most expensive canal from 1628—just before the Tulip Craze began—till 1973. There were lengthy periods where prices generally went down in real terms, and equally lengthy periods where they went up. It was possible to be born when a long term slump began, and die at a mature age believing that house prices always fall; and ditto for believing, from your own experience, that they always rise. But over the very long term, there is no trend.

Figure 11: Amsterdam prices; booms and bust over 350 years, but no trend

Driving Miss Bubble
There were two main drivers of this bubble: a financial sector that makes money by creating debt, and a government sector that has (to some extent unwittingly) used asset price manipulation as a cheap means to stimulate the economy.

The impact of the government is obvious when you overlay the First Home Owners Grant over the house price to income data.

Figure 12: The FHOG lifts prices and stokes the debt-driven economy

Statistically, its impact sticks out like a sore thumb as well. Between 1951 and when the FHOG was first introduced (in 1983), the average quarterly change in real house prices was 0.07 percent—or effectively zero. After it, the average quarterly change was just shy of 1%. When the Scheme was in operation (it was not in operation during the 1990s), the rise was 2% per quarter; on the two occasions when the Grant was doubled, real house prices rose by 3 percent per quarter.

On all but one occasion, the Grant was used as a macroeconomic tool—a cheap way of boosting the economy during a downturn, whether actual or feared (the one other time—when Howard revived it in 2000—it was as a “temporary” support to the building industry when the GST was introduced; that temporary support has now lasted almost 12 years).

The Grant works because the relatively small government grant is levered not once, but at least twice. Firstly the First Home Buyer’s borrowing capacity is boosted by the lender’s Loan to Valuation Ratio—so $7,000 to the borrowers becomes something north of $50,000 for the vendors with today’s sky-high LVRs. Then the vendors use the additional cash they received as increased deposits for their next purchase.

The banks are happy to fund this process, because they make money by creating debt, and are therefore always looking for avenues by which it can be created. When borrowing is based upon expected future income, or even aimed at funding consumption today, creating additional debt is hard. But if borrowers can be persuaded that there’s money to be made by borrowing money and speculating on asset prices, there is—for a while—an easy means to create more debt.

Ever since 1990, that’s been the secret to both the house bubble and the profitability of Australian banks. They’ve made their money by financing Australia’s property bubble; they started to do so the moment the previous speculative bubble—the one that gave us Alan Bond and Christopher Skase—died out; and, though the spin is that the USA had irresponsible lending while Australia’s lenders were prudent, mortgage debt grew three times more rapidly in Australia than in the USA, and reached a peak 18 percent higher than the USA’s.

Figure 13: Australian banks have been responsible lenders? Compared to whom?

The growth of this debt is what really drove house prices higher, and now that our mortgage debt to GDP ratio is starting to turn, so too are our house prices—just as in the USA.

Figure 14: Rising debt drove the US bubble up, and slowing debt caused it to burst

The only thing that delayed this process in Australia was the last gasp of the First Home Vendors Scheme under Rudd, which turned a nascent decline in Australia’s mortgage debt to GDP ratio into a final fling of the debt bubble. Had the trend continued, the mortgage debt to GDP ratio would have fallen about 2 percent. Instead it rose over 6 percent, injecting about $100 billion of additional debt-financed spending into the Australian economy. It was a major factor in Australia’s apparently good performance during the financial crisis, but as one my bloggers remarked, it worked by “kicking the can down the road”.

Figure 15: The same dynamic is playing out in Australia, though delayed by the FHVB

We all know what happened to the US finance sector after the US house price bubble burst. In the next post I’ll consider what could happen to Australian banks as our bubble ends.

Fed-up judges crack down disorder in the courts
by Christine Stapleton and Kimberly Miller - Palm Beach Post

Angry and exasperated by faulty foreclosure documents, judges throughout Florida are hitting back by increasingly dismissing cases and boldly accusing lawyers of "fraud upon the court."

A Palm Beach Post review of cases in state and appellate courts found judges are routinely dismissing cases for questionable paperwork. Although in most cases the bank is allowed to refile the case with the appropriate documents, in a growing number of cases judges are awarding homeowners their homes free and clear after finding fraud upon the court.

Still, critics say judges are not doing enough. "The judges are the gatekeepers to jurisprudence, to the Florida Constitution, to access to the courts and to due process," said attorney Chip Parker, a Jacksonville foreclosure defense attorney who was recently investigated by the Florida Bar for his critical comments about so-called "rocket dockets" during an interview with CNN. "It's discouraging when it appears as if there is an exception being made for foreclosure cases."

In February, Miami-Dade County Circuit Judge Maxine Cohen Lando took one of the largest foreclosure law firms in the state to task in a public hearing meant to send a message. She called Marc A. Ben-Ezra, founding partner of Ben-Ezra & Katz P.A., before her to explain discrepancies in a case handled by an attorney in his Fort Lauderdale-based firm. "This case should have never been filed," said Lando, who referred to the firm's work on the case as "shoddy" and "grossly incompetent." She called Ben-Ezra a "robot" who filed whatever the banks sent him, and held him in contempt of court. She then gave the homeowner the home - free and clear - and barred the lender from refiling the foreclosure.

Attorney Maria Mussari, who represents the homeowner, said she wasn't surprised. "She has become a voice for other judges," Mussari said. "If judges crack down on following the rules, we'll still have foreclosures, but maybe the banks will pay attention and do it right." Mussari said it's taken a while for the courts to wake up to the foreclosure disorder because homeowners were largely unrepresented and judges overwhelmed. "It's not that they don't care," she said. "They have thousands of cases on their docket and it's the same thing over and over again."

Ongoing scrutiny by the FBI, the Florida attorney general, the Florida Bar, the media and defense attorneys has uncovered countless examples of forged signatures, post-dated documents, robo-signing and lost paperwork. As a result, defense attorneys are filing more motions challenging the documents. That means judges must spend more time reviewing documents and holding hearings. The situation was complicated last week when attorney David J. Stern, who operated the largest so-called foreclosure mill in Florida, sent letters to the chief judges of Florida's 20 circuit courts announcing that he intended to violate court rules and dump 100,000 foreclosure cases without a judge's order.

"We no longer have the financial or personnel resources to continue to file Motions to Withdraw in tens of thousands of cases that we still remain as counsel of record," Stern wrote, suggesting that the judges treat the pending cases "as you deem appropriate." Last year, Florida lawmakers gave the courts $6 million to hire senior judges and case managers to reduce the foreclosure backlog. Since the money was awarded July 1, judges have cleared nearly 140,000 cases. As of the end of February, 322,724 foreclosures were still in the system.

But clearing backlogs isn't what judges should be focused on, said University of Miami Law Professor A. Michael Froomkin . "Substantive justice still needs to be done, and that's very hard sometimes," Froomkin said. "When I read stories about judges looking at things more carefully and holding attorneys accountable, to me, the system is doing what it needs to do." A closer inspection of cases by judges would slow down the foreclosure train, but the result may be preferable to mere expediency. "Justice," Froomkin said. "The outcome, I hope, is justice."

Alan White, a law professor at Valparaiso University in Indiana, who has studied the foreclosure issue nationwide, said judges had few reasons to doubt banks in the beginning of the foreclosure avalanche. "They had a lot of credibility," White said. "Now, when a bank says it owns a mortgage, judges are skeptical."

White said a smattering of "maverick" judges began poking holes in foreclosures years ago before the media and lawmakers seized on problems in the fall. The judicial momentum has built since then. "The combined impact will clearly be to change practices and to reduce the amount of corner-cutting the banks and their lawyers are engaged in," White said. "It could mean foreclosures get slower. It could also encourage banks to pursue alternatives to foreclosure."

The professors agree it's difficult for judges to pick out problems in foreclosure cases that are undefended. Homeowner advocate is not their role. "They don't fix things," Froomkin said. "They decide cases."

Judges question the process… and they let the foreclosure attorneys have it.

From a Feb. 11 hearing in Miami-Dade regarding a Homestead foreclosure. The hearing ended with Judge Maxine Cohen Lando finding attorney Marc A. Ben-Ezra in contempt.
Lando: 'I don’t care what the banks — your clients — are telling you. Your job is to give your clients legal advice and you’re not doing it. You are acting as a robot for a plaintiff who is not even giving you the information you need to file a proper foreclosure.’ Lando: 'This level of practice is shoddy. It is grossly negligent. It is worthy of a judge looking at, and saying, what is going on here? How dare you file something like this.’

From a May 6 hearing in Miami-Dade. The hearing ended with Judge Jennifer Bailey awarding the home to the owner and barring the lender from attempting to foreclose again on the condo. Bailey: 'And see, the really interesting thing to me as a judge is in no other species or kind of law would that be remotely acceptable, or, frankly, anything short of malpractice. But somehow in Foreclosure World everybody thinks that that’s just fine, that you all can know absolutely nothing about your files and walk in here and ask judges for things left and right without even knowing what’s going on.’

From an April 7 hearing in Pinellas County. Judge Anthony Rondolino set aside his prior ruling awarding summary judgment to the bank. Rondolino: 'I don’t have any confidence that any of the documents the court’s receiving on these mass foreclosures are valid.’

From Afar, a Vivid Picture of Japan Crisis
by William J. Broad - New York Times

For the clearest picture of what is happening at Japan’s Fukushima Daiichi nuclear power plant, talk to scientists thousands of miles away. Thanks to the unfamiliar but sophisticated art of atomic forensics, experts around the world have been able to document the situation vividly. Over decades, they have become very good at illuminating the hidden workings of nuclear power plants from afar, turning scraps of information into detailed analyses.

For example, an analysis by a French energy company revealed far more about the condition of the plant’s reactors than the Japanese have ever described: water levels at the reactor cores dropping by as much as three-quarters, and temperatures in those cores soaring to nearly 5,000 degrees Fahrenheit, hot enough to burn and melt the zirconium casings that protect the fuel rods.

Scientists in Europe and America also know from observing the explosions of hydrogen gas at the plant that the nuclear fuel rods had heated to very dangerous levels, and from radioactive plumes how far the rods had disintegrated.

At the same time, the evaluations also show that the reactors at Fukushima Daiichi escaped the deadliest outcomes — a complete meltdown of the plant. Most of these computer-based forensics systems were developed after the 1979 partial meltdown at Three Mile Island, when regulators found they were essentially blind to what was happening in the reactor. Since then, to satisfy regulators, companies that run nuclear power plants use snippets of information coming out of a plant to develop simulations of what is happening inside and to perform a variety of risk evaluations.

Indeed, the detailed assessments of the Japanese reactors that Energy Secretary Steven Chu gave on Friday — when he told reporters that about 70 percent of the core of one reactor had been damaged, and that another reactor had undergone a 33 percent meltdown — came from forensic modeling.

The bits of information that drive these analyses range from the simple to the complex. They can include everything from the length of time a reactor core lacked cooling water to the subtleties of the gases and radioactive particles being emitted from the plant. Engineers feed the data points into computer simulations that churn out detailed portraits of the imperceptible, including many specifics on the melting of the hot fuel cores.

Governments and companies now possess dozens of these independently developed computer programs, known in industry jargon as "safety codes." Many of these institutions — including ones in Japan — are relying on forensic modeling to analyze the disaster at Fukushima Daiichi to plan for a range of activities, from evacuations to forecasting the likely outcome. "The codes got better and better" after the accident at Three Mile Island revealed the poor state of reactor assessment, said Michael W. Golay, a professor of nuclear science and engineering at the Massachusetts Institute of Technology.

These portraits of the Japanese disaster tend to be proprietary and confidential, and in some cases secret. One reason the assessments are enormously sensitive for industry and government is the relative lack of precedent: The atomic age has seen the construction of nearly 600 civilian power plants, but according to the World Nuclear Association, only three have undergone serious accidents in which their fuel cores melted down.

Now, as a result of the crisis in Japan, the atomic simulations suggest that the number of serious accidents has suddenly doubled, with three of the reactors at the Fukushima Daiichi complex in some stage of meltdown. Even so, the public authorities have sought to avoid grim technical details that might trigger alarm or even panic. "They don’t want to go there," said Robert Alvarez, a nuclear expert who, from 1993 to 1999, was a policy adviser to the secretary of energy. "The spin is all about reassurance."

If events in Japan unfold as they did at Three Mile Island in Pennsylvania, the forensic modeling could go on for some time. It took more than three years before engineers lowered a camera to visually inspect the damaged core of the Pennsylvania reactor, and another year to map the extent of the destruction. The core turned out to be about half melted.

By definition, a meltdown is the severe overheating of the core of a nuclear reactor that results in either the partial or full liquefaction of its uranium fuel and supporting metal lattice, at times with the atmospheric release of deadly radiation. Partial meltdowns usually strike a core’s middle regions instead of the edge, where temperatures are typically lower.

The main meltdowns of the past at civilian plants were Three Mile Island in 1979, the St.-Laurent reactor in France in 1980, and Chernobyl in Ukraine in 1986. One of the first safety codes to emerge after Three Mile Island was the Modular Accident Analysis Program. Running on a modest computer, it simulates reactor crises based on such information as the duration of a power blackout and the presence of invisible wisps of radioactive materials.

Robert E. Henry, a developer of the code at Fauske & Associates, an engineering company near Chicago, said that a first sign of major trouble at any reactor was the release of hydrogen — a highly flammable gas that has fueled several large explosions at Fukushima Daiichi. The gas, he said in an interview, indicated that cooling water had fallen low, exposing the hot fuel rods.

The next alarms, Dr. Henry said, centered on various types of radioactivity that signal increasingly high core temperatures and melting. First, he said, "as the core gets hotter and hotter," easily evaporated products of atomic fission — like iodine 131 and cesium 137 — fly out. If temperatures rise higher, threatening to melt the core entirely, he added, less volatile products such as strontium 90 and plutonium 239 join the rising plume. The lofting of the latter particles in large quantities points to "substantial fuel melting," Dr. Henry said. He added that he and his colleagues modeled the Japanese accident in its first days and discerned partial — not full — core melting.

Micro-Simulation Technology, a software company in Montville, N.J., used its own computer code to model the Japanese accident. It found core temperatures in the reactors soaring as high as 2,250 degrees Celsius, or more than 4,000 degrees Fahrenheit — hot enough to liquefy many reactor metals.

"Some portion of the core melted," said Li-chi Cliff Po, the company’s president. He called his methods simpler than most industry simulations, adding that the Japanese disaster was relatively easy to model because the observable facts of the first hours and days were so unremittingly bleak — "no water in, no injection" to cool the hot cores. "I don’t think there’s any mystery or foul play," Dr. Po said of the disaster’s scale. "It’s just so bad."

The big players in reactor modeling are federal laboratories and large nuclear companies such as General Electric, Westinghouse and Areva, a French group that supplied reactor fuel to the Japanese complex. The Sandia National Laboratories in Albuquerque wrote one of the most respected codes. It models whole plants and serves as a main tool of the Nuclear Regulatory Commission, the Washington agency that oversees the nation’s reactors.

Areva and French agencies use a reactor code-named Cathare, a complicated acronym that also refers to a kind of goat’s milk cheese. On March 21, Stanford University presented an invitation-only panel discussion on the Japanese crisis that featured Alan Hansen, an executive vice president of Areva NC, a unit of the company focused on the nuclear fuel cycle. "Clearly," he told the audience, "we’re witnessing one of the greatest disasters in modern time."

Dr. Hansen, a nuclear engineer, presented a slide show that he said the company’s German unit had prepared. That division, he added, "has been analyzing this accident in great detail." The presentation gave a blow-by-blow of the accident’s early hours and days. It said drops in cooling water exposed up to three-quarters of the reactor cores, and that peak temperatures hit 2,700 degrees Celsius, or more than 4,800 degrees Fahrenheit. That’s hot enough to melt steel and zirconium — the main ingredient in the metallic outer shell of a fuel rod, known as the cladding.

"Zirconium in the cladding starts to burn," said the slide presentation. At the peak temperature, it continued, the core experienced "melting of uranium-zirconium eutectics," a reactor alloy. A slide with a cutaway illustration of a reactor featured a glowing hot mass of melted fuel rods in the middle of the core and noted "release of fission products" during meltdown. The products are radioactive fragments of split atoms that can result in cancer and other serious illnesses.

Stanford, where Dr. Hansen is a visiting scholar, posted the slides online after the March presentation. At that time, each of the roughly 30 slides was marked with the Areva symbol or name, and each also gave the name of their author, Matthias Braun. The posted document was later changed to remove all references to Areva, and Dr. Braun and Areva did not reply to questions about what simulation code or codes the company may have used to arrive at its analysis of the Fukushima disaster.

"We cannot comment on that," Jarret Adams, a spokesman for Areva, said of the slide presentation. The reason, he added, was "because it was not an officially released document." A European atomic official monitoring the Fukushima crisis expressed sympathy for Japan’s need to rely on forensics to grasp the full dimensions of the unfolding disaster. "Clearly, there’s no access to the core," the official said. "The Japanese are honestly blind."

Fukushima Reactor 4 Video from Concrete Pump Boom
Released by TEPCO April 1, recorded March 24

Japan nuclear struggle focuses on cracked reactor pit
by Kiyoshi Takenaka and Chisa Fujioka - Reuters

Japanese officials grappling on Sunday to end the world's worst nuclear crisis since Chernobyl were focusing on a crack in a concrete pit that was leaking radiation into the ocean from a crippled reactor.

Tokyo Electric Power Co (TEPCO) said it had found a crack in the pit at its No.2 reactor in Fukushima, generating readings 1,000 millisieverts of radiation per hour in the air inside the pit. "With radiation levels rising in the seawater near the plant, we have been trying to confirm the reason why, and in that context, this could be one source," said Hidehiko Nishiyama, deputy head of the Nuclear and Industrial Safety Agency (NISA), said on Saturday. He cautioned, however: "We can't really say for certain until we've studied the results."

Leakage did not stop even after concrete was poured into the pit, and Tokyo Electric is now planning to use water-absorbent polymer to prevent contaminated water from leaking out into the sea.
Officials from the utility said checks of the other five reactors found no cracks. Nishiyama said that to cool the damaged reactor, NISA was looking at alternatives to pumping in water, including an improvised air conditioning system, spraying the reactor fuel rods with vaporized water or using the plant's cleaning system.

PM Under Pressure
As the disaster that has left more than 27,000 dead or missing dragged into a fourth week, Prime Minister Naoto Kan toured devastated coastal towns in northern Japan on Saturday, offering refugees government support for rebuilding homes and livelihoods. "It will be kind of a long battle, but the government will be working hard together with you until the end," Kyodo news agency quoted him as telling people in a shelter in Rikuzentakata, a fishing port flattened by the tsunami which struck on March 11 after a massive earthquake.

Unpopular and under pressure to quit or call a snap poll before the disaster, Kan has been criticized for his management of the humanitarian and nuclear crisis. Some tsunami survivors said he came to visit them too late. Kan also entered the 20-km (12-mile) evacuation zone and visited J-village just inside the zone, a sports facility serving as the headquarters for emergency teams trying to cool the six-reactor Fukushima Daiichi plant.

Operators of the plant are no closer to regaining control of damaged reactors, as fuel rods remain overheated and high levels of radiation are flowing into the sea. Japan is facing a damages bill which may top $300 billion -- the world's biggest from a natural disaster. The International Monetary Fund (IMF) said on Friday the Japanese economy would take a short-term hit and it could not rule out further intervention for the yen.

The consequences for the world's third largest economy have already seen manufacturing slump to a two-year low. Power outages and quake damage have hit supply chains and production.
Hundreds of thousands remain homeless, sheltering in evacuation centers, as the death toll from the disaster rises. Thousands of Japanese and U.S. soldiers on Saturday conducted a search for bodies using dozens of ships and helicopters to sweep across land still under water along the northeast coast. The teams hope when a large spring tide recedes it will make it easier to spot bodies.

Radiation 4,000 times the legal limit has been detected in seawater near the Daiichi plant and a floating tanker was to be towed to Fukushima to store contaminated seawater. But until the plant's internal cooling system is reconnected radiation will flow from the plant.

Concrete fails to plug leak at Fukushima nuclear plant
by Julie Makinen - LA Times

The operator of the stricken Fukushima Daiichi nuclear plant said Saturday that highly radioactive water was leaking from a pit near a reactor into the ocean, which may partially explain the high levels of radioactivity that have been found in seawater off the coast.

Tokyo Electric Power Co. said it had detected an 8-inch crack in the concrete pit holding power cables near reactor No. 2 and was working to seal the fracture. Tepco said the water was coming directly from the reactor and the radiation level was 1,000 millisieverts an hour. The annual limit of radiation exposure allowed for Fukushima workers is 250 millisieverts.

Workers pumped concrete into the shaft Saturday, but by the end of the day, the flow of water into the ocean had not diminished. Engineers speculated that the water was preventing the concrete from setting, allowing it to all be washed away.

Tepco officials said that on Sunday morning they would explore using a polymer -- a type of quick-setting plastic -- in an attempt to plug the leak.

After spraying thousands of tons of water on the reactors at Fukushima over the last three weeks to keep the facility from overheating and releasing dangerous amounts of radiation over a wide area, the utility is faced with the problem of great volumes of contaminated water.

With storage tanks at the facility nearing capacity, Tepco is contemplating storing the water in a giant artificial floating island offshore, Kyodo news reported. Tepco, which has been monitoring radiation levels in seawater just offshore from the plant, said it would begin sampling about nine miles off the coast.

Workers have also been spraying the grounds of the plant with a polymer in an attempt to prevent any radioactive isotopes that have been deposited there from escaping from the vicinity of the plant. The polymer acts like a kind of super-glue, binding any contaminants to the soil so they cannot be blown away.

As 25,000 Japanese and U.S. forces continued an intensive search for corpses along the tsunami-battered coastline of northern Japan, the official death toll climbed to 11,938 and the number of missing fell to 15,748, the National Police Agency said.

The number of people still taking refuge in emergency shelters has declined to about 165,000 from more than 200,000 in the days immediately after the massive earthquake and tsunami March 11. But concerns are growing about the health of elderly evacuees at the shelters, some of which still lack enough kerosene to run heaters round-the-clock. Many areas of northern Japan are still experiencing subfreezing temperatures.

An NHK broadcast Saturday detailed the deaths of some elderly evacuees and cataloged harsh conditions facing aged survivors of the disaster, including crowded quarters, interruptions in the normal regimens of medicine and a discontinuation of services such as physical therapy.

In a bit of good news, NHK reported that coast guard officers had found a dog on the roof of a house floating in waters off Miyagi prefecture. The dog, which apparently had been stranded for three weeks, was emaciated and gobbled down sausages and cookies after being saved.

Regulator Says Radioactive Water Leaking Into Ocean From Japanese Nuclear Plant
by Hiroko Tabuchi and Ken Belson - New York Times

Highly radioactive water is leaking directly into the sea from a damaged pit near a crippled reactor at the Fukushima Daiichi nuclear power plant, safety officials said Saturday, the latest setback in the increasingly messy bid to regain control of the reactors.

Although higher levels of radiation have been detected in the ocean waters near the plant, the breach discovered Saturday is the first identified direct leak of such high levels of radiation into the sea. The leak, found at a maintenance pit near the plant’s No. 2 reactor, is a fresh reminder of the dangerous consequences of the strategy to cool the reactors and spent fuel storage pools by pumping hundreds of tons of water a day into them. While much of that water has evaporated, a significant portion has also turned into runoff.

Three workers at the plant, operated by Tokyo Electric Power Company, have been injured by stepping into pools of contaminated water inside one reactor complex, while above-normal levels of radiation have been detected in seawater near the plant. Workers are racing to drain the pools, though they have struggled to figure out how to store the irradiated water. On Saturday, contaminated water was transferred into a barge to free up space in other tanks on land. A second barge also arrived.

Some experts in the nuclear industry are now starting to question the so-called "feed-and-bleed" strategy of pumping the reactors with water, because so much contaminated water is injuring workers and escaping into the ocean. While the company said it has not identified the original source of contaminated water, experts say it could be from excess runoff from the spent fuel pools or a broken pipe or valve connected to the reactor.

The leaks could also be evidence that the reactor pressure vessel, which holds the nuclear fuel rods, is unable to hold all of the water being poured into it, said Satoshi Sato, a consultant to the nuclear energy industry and a former engineer with General Electric. "The more water they add, they more problems they are generating," Mr. Sato said. "It’s just a matter of time before the leaks into the ocean grow."

Tetsuo Iguchi, a professor in the department of quantum engineering at Nagoya University, said that the leak discovered Saturday raised fears that the contaminated water may be seeping out through many more undiscovered sources. He said unless workers could quickly stop the leaking, Tokyo Electric could be forced to re-evaluate the feed-and-bleed strategy. "It is crucial to keep cooling the fuel rods, but on the other hand, these leaks are dangerous," Mr. Iguchi said. "They can’t let the plant keep leaking high amounts of radiation for much longer," he said.

Plant workers discovered a crack about eight inches wide in the maintenance pit, which lies between the No. 2 Reactor and the sea and holds cables used to power seawater pumps, Japan’s nuclear regulator said. The air directly above the water leaking into the sea had a radiation reading of more than 1,000 millisieverts an hour, said Hidehiko Nishiyama, deputy director-general of the Nuclear and Industrial Safety Agency. Earlier Saturday, Mr. Nishiyama had said that above-normal levels of radioactive materials were detected about 25 miles south of the Fukushima plant, much further than had previously been reported.

The pit was filled with four to eight inches of contaminated water, said the operator of the plant, Tokyo Electric. Highly radioactive water has also been discovered in the reactor’s turbine building in the past week. Workers will try to patch up the crack with concrete, the company said.

Saturday’s announcement of a leak came a day after the U.S. Energy Secretary Steven Chu said Reactor No. 2 at the Fukushima plant had suffered a 33 percent meltdown. He cautioned that the figures were "more of a calculation." Mr. Chu also said that roughly 70 percent of the core of Reactor No. 1 had suffered severe damage.

The crisis at the nuclear plant has overshadowed the recovery effort under way in Japan since the 9.0 magnitude quake and tsunami hit the northeastern coast on March 11. The country’s National Police Agency said the official death toll from the disaster had surpassed 11,800, while more than 15,500 were listed as missing.

Earlier Saturday, Prime Minister Naoto Kan made his first visit to the region since last month’s disaster, where he promised to do everything possible to help. His tour came a day after asking Japan to start focusing on the long hard task of rebuilding the tsunami-shattered prefectures. "We’ll be together with you to the very end," Mr. Kan said during a stop in Rikuzentakata, a town of about 20,000 people that was destroyed on March 11. "Everybody, try your best."

Dressed in a blue work jacket, Kan also visited with refugees stranded in an elementary school and then visited a sports complex about 20 miles south of the disabled nuclear plant. The training facility has been turned into a staging area for firefighters, Self-Defense Forces and workers from Tokyo Electric.

Arnie Gundersen on Fukushima
by Fairewinds Associates

Untitled from Fairewinds Associates on Vimeo.

World's largest concrete pump heading for Japan
by Rob Pavey - Augusta Chronicle

The world's largest concrete pump, deployed at the construction site of the U.S. government's $4.86 billion mixed oxide fuel plant at Savannah River Site, is being moved to Japan in a series of emergency measures to help stabilize the Fukushima reactors. "The bottom line is, the Japanese need this particular unit worse than we do, so we're giving it up," said Jerry Ashmore, whose company, Augusta-based Ashmore Concrete Contractors, Inc., is the concrete supplier for the MOX facility.

The 190,000-pound pump, made by German-based Putzmeister has a 70-meter boom and can be controlled remotely, making it suitable for use in the unpredictable and highly radioactive environment of the doomed nuclear reactors in Japan, he said. "There are only three of these pumps in the world, of which two are suited for this work, so we have to get it there as soon as we can," Ashmore said in an interview Thursday. "Time is very much a factor."

The pump was moved Wednesday from the construction site in Aiken County to a facility in Hanahan, S.C., for minor modifications, and will be trucked to Atlanta's Hartsfield-Jackson International Airport, where it will be picked up by the world's largest cargo plane, the Russian-made Antonov 225, which will fly it to Tokyo. The move to Atlanta, he added, will require expedited special permits from Georgia's Department of Transportation, because of the weight of the equipment. If all goes well, the pump will be en route to Japan next week.

According to Putzmeister's Web site, four smaller pumps made by the company are already at work at Fukushima pumping water onto the overheated reactors. Initially, the pump from Savannah River Site, and another 70-meter Putzmeister now at a construction site in California, will be used to pump water -- and later will be used to move concrete. "Our understanding is, they are preparing to go to next phase and it will require a lot of concrete," Ashmore said, noting that the 70-meter pump can move 210 cubic yards of concrete per hour.

Putzmeister equipment was also used in the 1980s, when massive amounts of concrete were used to entomb the melted core of the reactor at Chernobyl. In addition to the equipment now at Fukushima and the two 70-meter pumps being moved from the U.S., a contractor in Vietnam has given up a 58-meter pump so it can be diverted to Japan, and two 62-meter pumps in Germany were loaded on Wednesday for transport to Tokyo.

Ashmore said officials have already notified Shaw AREVA MOX Services, which is building the MOX plant for the U.S. Department of Energy's National Nuclear Security Administration, that the pump was being moved and will not be returned because it will become contaminated by radiation. "It will be too hot to come back," Ashmore said.

The MOX complex, scheduled to open in 2016, is designed to dispose of 32 metric tons of plutonium from dismantled nuclear bombs by blending small amounts of the material with uranium to make nuclear fuel for commercial power reactors. Its design calls for 170,000 cubic yards of concrete strengthened with 35,000 tons of reinforcing steel bars.

The absence of the pump will not affect the U.S. project's construction schedule, Ashmore said, noting that there are several slightly smaller units still at the MOX site and being used by the civil contractor, Alberici Constructors. There is also the third existing 70-meter Putzmeister that is in the U.S., but not in a state where it could easily be retrofitted for shipment to Japan. "We may try to buy that one later if we need to," he said.

Japan Frantically Tries To Trace Radioactive Water In Pacific Ocean
by Mari Yamaguchi and Yuri Kageyama  - Huffington Post

Workers used a milky bathwater dye Monday as they frantically tried to trace the path of radioactive water seeping into the ocean from Japan's tsunami-damaged nuclear plant. The crack in a maintenance pit discovered over the weekend was the latest confirmation that radioactivity continues to spill into the environment. The leak is a symptom of the primary difficulty at the Fukushima Dai-ichi complex: Radioactive water is pooling around the plant and preventing workers from powering up cooling systems needed to stabilize dangerously vulnerable fuel rods.

The plant operators also deliberately dumped 10,000 tons of tainted water – measuring about 500 times above the legal limit for radiactivity – into the ocean Monday to make space at a storage site for water that is even more highly radiactive. Engineers have turned to a host of improvised and sometimes bizarre methods to tame the nuclear plant after it was crippled in Japan's magnitude 9.0 quake and tsunami on March 11.

Efforts over the weekend to clog the leak with a special polymer, sawdust and even shredded newspapers failed to halt the flow at a cracked concrete maintenance pit near the shoreline. The water in that leak contains radioactive iodine at rates 10,000 times the legal limit. Suspecting they might be targeting the wrong channel to the pit, workers tried to confirm the leak's pathway by dumping several pounds (kilograms) of salts used to give bathwater a milky hue into the system, plant operator Tokyo Electric Power Co. said Monday. "There could be other possible passages that the water may be traveling. We must watch carefully and contain it as quickly as possible," said Hidehiko Nishiyama, a spokesman for the Nuclear Safety and Industrial Agency.

Radioactive water has pooled throughout the plant because the operator has been forced to rely on makeshift ways of pumping water into the reactors – and allowing it to gush out wherever it can – to bring down temperatures and pressure in the cores. Government officials conceded Sunday that it will likely be several months before the cooling systems are completely restored. And even after that happens, there will be years of work ahead to clean up the area around the complex and figure out what to do with it.

The makeshift system makes it difficult to contain the radiation leaks, but it is aimed a preventing fuel rods from going into a full meltdown that would release even more radiactivity into the environment. "We must keep putting water into the reactors to cool to prevent further fuel damage, even though we know that there is a side effect, which is the leakage," Nishiyama said. "We want to get rid of the stagnant water and decontaminate the place so that we can return to our primary task to restore the sustainable cooling capacity as quickly as possible."

To that end, the plant's operator, Tokyo Electric Power Co., said it jettisoned the 10,000 tons of water Monday, clearing space in a waste-storage facility. The government decided to allow the step as "an unavoidable emergency measure," Chief Cabinet Secretary Yukio Edano said. An additional 1,500 tons will be dumped from a trench under the plant's units 5 and 6. That water is threatening to interfere with the workings at those units, whose reactors are under control. Radioactivity is quickly diluted in the ocean, and Edano said the dump should not affect the safety of seafood in the area.

The crisis has unfolded as Japan deals with the aftermath of twin natural disasters that decimated large swaths of its northeastern coast. Up to 25,000 people are believed to have died in the disaster, and tens of thousands lost their homes. Thousands more were forced to flee a 12-mile (20-kilometer) radius around the plant because of the radiation. The 8-inch-long (20-centimeter-long) crack was discovered in the maintenance pit over the weekend. It is sending radioactive water into area that is normally blocked off by a seawall, but a crack was also discovered in that outer barrier Monday.

Though it later authorized the dumping of slightly radioactive water, the government said Monday it was growing concerned about the sheer volume of contaminated materials spilling into the Pacific. It is not clear how much water has leaked from the pit so far. "Even if they say the contamination will be diluted in the ocean, the longer this continues, the more radioactive particles will be released and the greater the impact on the ocean," Edano said. "We are strongly urging TEPCO that they have to take immediate action to deal with this."

The crisis has sparked protests in Japan and raised questions around the world about the safety of nuclear power. The head of the International Atomic Energy Agency told delegates at a nuclear safety conference Monday that the industry cannot afford to ignore these concerns. "We cannot take a 'business as usual' approach," Yukiya Amano said. The operator said Monday it is ordering fencing that is typically used to contain oil spills. The screens are not designed to trap radioactivity but might curtail the flow of water and thus reduce the spread of contamination, said TEPCO manager Teruaki Kobayashi. It was not clear when they would arrive.

All of the plant's reactors were designed by General Electric, and the company's CEO met Sunday with TEPCO's chairman. Jeffrey Immelt told reporters Monday that more than 1,000 engineers from GE and its partner Hitachi are helping to analyze the problems at the plant. Immelt also offered assistance in dealing with the electricity shortage brought on by damage to Dai-ichi and other power plants. Japan is expecting a shortfall of at least 10 million kilowatts come summer. Gas turbines are on their way from the U.S. with both long- and short-term capabilities, Immelt said.


Draft said...

I think you're still right about deflation vs. inflation, but do you both still think Stoneleigh's forecast about the timing and contours are accurate?

I ask because I've been wondering whether this round of deflation will not be like 2008 where we get a sharp crash, but rather we get a slow slide through 2011 and 2012. (By my calculations and Stoneleigh's forecast of 6 months to 2 years about 1.5 years ago, this round of deflation should begin sometime this summer in earnest.)

jal said...

@ Ilargi:
You forgot to mentioned that companies are siting on HUGE amount of cash, so says mainstream media. Therefore, those companies will not be renewing their credits but rather they will be paying off their loans and lines of credit. Which again would mean deflationary pressures.


NZSanctuary said...

. . . or why all great people I know who grew up in a single mother home get dished here one by one, other than that the authors's moral convictions get the best of him. Convictions which have diddly squad to do with his very own chosen topic of hyperinflation.

Not sure if these are typos, foibles of juggling multiple languages, or just humour . . . but do you mean "dissed" and "diddly-squat"?

Your view still remains the most comprehensive I have come across. The overall, connected picture of finance, herding behaviour, corruption, physical constraints, etc., that you and Stoneleigh paint is a rare find. Thanks for the great analysis once again.

Starcade, back on Leviathan said...

People don't get a lot of this...

Freely available (and defaultable) credit is the only reason you have the current level of population.

-- Medical Care
-- Food
-- Gasoline
-- the JIT delivery model
-- the comforts of life, per se...

and I could go on.

I've believed for a long time that the true conservatives want, desire, and need a die-off of significant proportions.

They're going to get it.

They're really going to get it.

I think we have at least gas riots coming to the States this summer, and probably food riots in the fall, if not before.

Brunswickian said...

El G, Thanks for the comments, things are getting so weird I'm starting to think John Keel was right all along and the malfunctioning supercomputer running our reality is losing it altogether.

See the latest Gerald Celente: never seen him so wound up. He reckons we're heading for major war. Will war economies function much differently, I wonder? Everything is so entwined these days.

lautturi said...

Nice Chris Hedges interview on youtube. Total of 27min.

cjinvt said...

@ jal (from last thread)
You really must read Kurt Vonnegut's "Galapagos" as you've essentially nailed the plot line!

Since I believe that the human evolutionary steps were "falling out of the trees" due to DNA mistakes, then I expect that Japan could produce the next evolutionary "advance".

(I'd still like to have a new and improved version of that old fur coat that we all use to groom.)

Brunswickian said...

Couldn't find any more detail on this:

Almost dismiising of any possible solution to the Fukushima Nuclear meltdown, an Independent Nuclear analysts says:

Radioactive water being released will make life absolutely unlivable for many countries
Mis placed complacency by International community and trusting Japan ability to deal with Fukushima
Fukushima is many many times more potent and dangerous than Chernobyl given it is 3 reactors and multiples of Chernobyl fuel. Results will be worse than Chernobyl.
We will be talking of Fukushima for the rest of the century

Concerned said...

The more I read, the more confused I become. Something like 3 trillion in liquidity created from thin air to act as a bulwark against the deflationary forces of 2007/8. I can't find anyone who can concretely explain the transmission mechanism whereby it gets out into the economy, but the commodities market sure looks like it's leaking from somewhere. Then there's this -one or the other- mentality that I can't quite fathom. Why not creeping inflation first, leading to reduced spending on 'luxuries', leading to more deflationary pressure, leading to QE3/4/5/etc and revolt in the currency market and bond market?

I don't have a dog in this fight so I don't have to come down squarely on either 'flation'. The facts of the world I'm living in look like both are going to play out in turn, and then simultaneously.

scandia said...

I have just watched a fabulous DVD set, The History of Scotland,Open University/BBC production, 10 episodes ( 600 min ) engagingly narrated by an archaeologist, Neil Oliver. A couple of episodes resonate with our current condition.
" The Clearances " of the Highlands happened because the landowning lairds could make more money raising sheep on those ancient hills. Have " the lairds " changed over the centuries? Any 22nd century clearances going on?
In the negotiations of the Union Act between Scotland and England England agreed to a large lump sum payment to Scotland. ( many millions of pounds in to-day's money) And who got the money intended to improve the squalor conditions of the people? The lairds of course to make up for malinfestment in " Darien", an investment fantasia gone bust.
I drew most disturbing parallels between the underdog relation Scotland had with England and my Canadian experience in the shadow of the US empire. The Scots stand hesitant about the future having devolved from English goverance. We Canadians are left waving a flag and handing over our security to Homeland Inc....
The series adds some back story to the writings of Joe Bageant,fills in the who and why Scots emigrated in at least 3 waves of emigration when Scotland teetered on " failed state ".

scandia said...

@Ilargi, your comment, " ...and when it's called commodities will collapse alongside stocks and whatever's left of housing,your pension fund,local governance and anything invested " in markets " sent a chill up my spine! Whoopsie...
I had been sitting smug,feeling safer in cash. I had not given enough weight to my dependency on those still invested as in my local government. There are very close to home implications!

scandia said...

@Brunswickian, Thanks for the Celente link. I agree with him.
Canada is in Libya, leading the charge, and not a peep about it in our current federal election campaign!

Robert said...

Blogger Starcade, back on Leviathan said...

I think we have at least gas riots coming to the States this summer, and probably food riots in the fall, if not before.


Me, I think the American sheeple will run against a fence and smoother when the first piece of newspaper blows down the street in the wind.

Abuse after abuse and not a peep out of them. (except Chicago, peut etre)

Blogger Brunswickian said...Results will be worse than Chernobyl.
We will be talking of Fukushima for the rest of the century

I agree that the results may be nearly as bad as Chernobyl but not the rest.

There is constant information being published about continuous pollution of beaches along the Gulf and guards not letting people in the polluted areas.

Reaction? Hardly any, people have trouble focusing on anything for more than a few weeks. You and I may be talking about it for a long time but not the bulk of "the people". Perhaps that is what you meant.



Franny said...

Excellent analysis. But what does it mean for people who have actually paid their debts and lived within their means and saved some money? What happens to the dollar's purchasing power when you have massive deflation and a Fed which is determined to devalue the dollar by any means necessary? Keep your savings in metals?

p01 said...



Glennjeff said...

Japan's toast.

Loveandlight said...

things are getting so weird I'm starting to think John Keel was right all along and the malfunctioning supercomputer running our reality is losing it altogether.

I know, and I'm not just seeing it in the news I read, I'm seeing it in the real-world life I live where I am. Anybody else? (I guess I just want to feel like I'm not going cuckoo, though I guess I couldn't be entirely blamed if I indeed did so.)

Glennjeff said...

Oh dear grammatical error.

Japan is Toast

Moo Moo said...

Great article. I like Max and ZH, but they're wrong about hyperinflation, and inflation in general. I personally think Max is PM bug, trying to make money by scaring folks into thinking hyperinflation and/or inflation is coming.

Some say just look at the price of gas and food, as two examples - they would call that inflation via QE. I would tend to disagree as a Peak Oil person. When you have oil prices over $100/barrel -- this is the cause. This is what you get when all the cheap oil is gone, which it is.

Again, great article. Hope Max reads it.

T.M.O. said...


Good post.

You said, "…the FASB-157 mark-to-whatever-suits-you accounting non-standard won't last forever…"

What do you think would trigger a change in this policy?

A Walk in the Woods said...

Always remember that the FED is merely The Public Face (incarnation) of a trans-national private banking cartel run by a global Criminal Class (the top .01% of wealth). The U.S.A. is merely a host body to parasitize.

The QE of the FED buying the worthless debt(promises) of the U.S. Treasury will stop in the not too distant future.

There is no 'Full Faith and Credit of the U.S. Government' left. It's a totally hollowed out joke of an 'economy' and a totally hollowed out joke of a nation and a people who product almost nothing of worth except weapons and Genetically Modified Frankenfood and cheesy 'entertainment'.

It will be replaced with panicked global investors (everyone below the top .01% of wealth) buying the worthless debt(promises) of the Treasury.


'The Bernanke' sees this as the only move left in the perverse play book of global Financial Gangsterism.

If the World Sheeple (everyone below the top .01% of wealth) won't voluntarily buy more worthless U.S. debt(promises), the global Criminal Class will scare them into Treasuries by destroying the very fabric of global currency and trade.

Pretty straight forward.

We are at the rim of that event horizon.

The swapping of the FED as sink hole for Treasuries for the global investor class (everyone below the top .01% of wealth) for the sinkhole of worthless Treasuries is on the Special Menu.

Credit Bubbles may always end the same way, but the shear size and momentum of this Mother of All Credit Bubbles will be a Financial Extinction Event to rival the reality based Permian–Triassic.

As one currency after another collapses from unbearable debt (broken promises) the U.S. will be fashioned by the Criminal Class as a sort of financial 'Green Zone' in the devastated global investment landscape, temporally at least, and then devolve into a 'Green Ghetto' on it's way to the inevitable Gangrene Gulag.

The rest of the world will be outside the 'Green Gate' (flight to financial safety) and will have to fend for itself with no credit/capital or transport/trade systems intact and very little energy infrastructure left.

C'est la vie

jal said...

E&I have been saying to get out of debt and to buy USEFUL ASSETS.

That is a deflationary and a de-leveraging move move.

Banks, lenders, can only survive by leveraging, lending, printing money. I hope that everyone has, by now, realized that a bank does not survive on the difference, spread, between what is collects in interest on a loan and what they pay out as interest for the saving that they have on deposit.

That leveraging is being destroyed by borrowers defaulting.

You might not have the cash of Warren Buffet but you can still see the buying opportunities that the disaster has created in Japan.

When no one but you has cash then you can determine how much you will pay for something that someone else will need to sell.

For W. Buffet that is called Merge and Acquisition, (M&A).
For you, with only a little bit of cash, that is trading.

I'll let a real predator, (El.G. :-) ), tell us what he calls it

Guy said...

Glennjeff said "Japan is Toast"
Not if they put miso on toast. ;)

el gallinazo said...

When I read the article

World's largest concrete pump heading for Japan

and discovered that the manufacturer was Putzmeister of Germany, I checked to see if Ilargi had pulled the article from The Onion. I checked further on my trusty Mac dictionary and found:

putz |ˈpəts; ˈpoŏts| informal
1 a stupid or worthless person.
2 vulgar slang a penis.
verb [ intrans. ]
engage in inconsequential or unproductive activity : too much putzing around up there would ruin them.
ORIGIN 1960s: Yiddish, literally ‘penis.’

Meister of course means "master" as in say master carpenter. So as the Julie Andrews song goes, put them together and what do you get?

There have been all to many Putzmeisters involved in this debacle.

rcg1950 said...

Ilargi -

Your intro today was very much welcomed. In what feels to be an increasingly insane world it is not hard to come to doubt one's own interpretation of events. That is particularly true for me in the economic sphere where I am less knowledgable than I would like, having taken an interest in these matters rather late in the game. (why bother when one feels relatively well off and secure) Between the main stream commentators saying everything is slowly getting better, and the 'main stream critics' screaming imminent collapse via inflation, it was more than a little reassuring to get once again your reasoned and evidence based arguments for the deflationary interpretation and explanation of what is happening in the world.

As for the 'world' it does seem crazier and more unstable than ever. The enormity of the ongoing tragedy happening in/to Japan, the boiling over of the Islamic world from Tunisia to Pakistan, the continuing meltdown in the European sovereign debt crisis, all while the troglodytes in the American Congress are salivating over the prospect of shutting down the Federal Government -- this all seems extraordinary to me. And yet, the market keeps going up. This level of denial on the part of an individual would surely qualify as a form of psychosis.

Shamba said...

I am sooo totally confused about what's happening with the radiation stories out there in the media. The MSM doesn't mention it AT ALL the past week; zero hedge reports on something about Fukishima at least a couple of times a day. Then I see what ZH reported repeated a dozen times at other news sites but two days after ZH reported it!

Gerald Celente sound more shrill and desperate than he ever has, and I think he alwasy sounds that way!

Can I just take a pill and ... oh, never mind I've done that and when I woke up the world was more confused than before I took the pill to sleep. So, I've given up on taking pills to zone out these days ... (this is a joke, I'm not taking any pills at all except my thyroid med.)

thanks for TAE, Ilargi, SToneleigh and ya'll,
peace, Shamba

Stoneleigh said...


Our next post will be on Fukushima. Stay tuned :)

Robert said...

Blogger Shamba said...

I am sooo totally confused about what's happening with the radiation stories out there in the media.


Welcome to the crowd Shamba.

Here is a summary of what is know about situation with nuclear reactors and storage pools in Japan:

It is periodically updated.

And here is the site of honest to goodness talk about current events at the nuclear site by someone who knows what he is talking about. It is updated most every day or more if something important happens later in the day:

Best of luck sorting all this out. :-)


Shamba said...


thank you !

Safe travels as always, shamba

Brunswickian said...

I hadn't noticed this comment until mentioned in


No one likes an alarmist without cause, however, in this case, there appears to be ample cause for alarm.

Study the close up views of the #3 reactor explosion and you will see that the blast was not the type of blast one would expect from a hydrogen explosion. The fireball seen in the corner of the plant may have been due to hydrogen but it was much too small to cause the main blast. Not only that, inspection reveals that this was a directional blast. Much as if a cannon had been fired straight up from inside the reactor building.

This is what one would expect if the reactor dome exploded with enough force to take out the removable concrete pads covering it.

Injecting sea water into the molten core causes an immediate explosion of steam. If the temperature of the reactor vessel had reached critical temperature, it would not have had the integrity required to withstand this dramatic increase in pressure.

If my assessment is correct, the dark colored cloud we witnessed, that was shot approximately 1,000 feet into the air, contained the remains of the MOX core and made this accident worse than Chernobyl.

I also suspect that the #1 and #2 reactor vessels have lost their integrity due to the same process.

The so called experts that have been downplaying the seriousness of this accident, have an agenda other than disseminating the truth. It is long past time for scientists, other than myself, to speak up and show
the discrepancies in the current story. It is also long past time for news reporters to do the basic research required, before publishing erroneous and misleading details in their stories.

Brunswickian said...

Scroll down to Thom Hartman video.

Chernobyl on the sea

New Mexico said...

Dear Ilargi,
You mention that FASB 157 "mark-to-whatever" cannot last. While I personally hope that is the case, I still think, why can't this "extend and pretend" game go on and on? What forces are acting or will act that will effect change?

This has been troubling me for a long time, but my research has provided me no answer. Perhaps you can share more insight. Thank you!

Ruben said...

Stoneleigh, if you are returning to Fukushima, would you consider some commentary about the George Monbiot/Helen Caldicott imbroglio? He has a column and two pages of references just added to his website. He now thinks radioactivity has very limited health risks.

g-minor said...

El Gal

Much as I like your explanation of Putzmeister, I'm sorry to have to say that, in German, putzen means to clean house, to tidy.


cjinvt said...

Thanks g-minor I wondered what putz was in German.

El Gal (or his dictionary) has mistaken Yiddish for German. Yiddish tends to take a "normal" German word and put a snarky twist on it.

My grandfather surprised me with a smiling picture of himself in Germany under a large sign that read "SCHMUCK."

"Schmuck" in German is just a "jeweler". But in Yiddish that would be a ...large putz.

NZSanctuary said...

Brunswickian said...
We will be talking of Fukushima for the rest of the century

As in: "Fukushima, the first multiple reactor meltdown"?

RBM said...


Living with uncertainty is fundamental to your progress and to your growth. It is the way of the future and you might as well get used to it. - Tom Campbell

The old Chinese curse of 'May you live in interesting times' has come true as that is part of humankind's evolutionary path.

See ya' down the road ... maybe:-)

Carioca said...

Live cam of eagle's nesting in Decorah, IA. Other cool links on this page.

Caution: Highly addictive, but wonderful content!

FB said...


Putz in German can mean a coating such as roughcast or plaster. So Putzmeister could be a person or machine proficient at applying such coatings. This is in fact the meaning behind the name of the German company which originally produced plastering machines.

However, as G-minor noted ;-), the more common sense is the verb putzen meaning to clean. A very common word is Putzfrau, a cleaning lady.

Spiegel had an article the other day on a Putzmeister truck being flown out to Tokyo, I believe from Frankfurt.


ogardener said...

Blogger Brunswickian said...

If my assessment is correct, the dark colored cloud we witnessed, that was shot approximately 1,000 feet into the air, contained the remains of the MOX core and made this accident worse than Chernobyl.

I found this Chernobyl documentary most informative.

TechGuy said...

Bernanke will not permit deflation to occur. The Fed will simple continue to buy US bond and Worthless MBS and other crap to prevent mark to market. Sure real estate will continue to take perhaps for decades, as nobody can afford them because of rising costs (food, energy, utilities, state and local taxes).

Since the market crisis of 2008, prices for non real estate assets have all risen and they will continue to rise as long as interest rates remain below real inflation. Hot money will continue to flow into commodities, and unemployment will continue to rise (stagflation).

I agree that the recent wave of hyperinflation articles are way off. Hyper-inflation will be years away not months. But to make a strong argument that we are in deflationary economy are equally wrong.

The Japan Crisis has a significant chance of speeding up inflation, as just about all productions contain something made from Japan. whether its semiconductors, plastic parts, auto parts, etc. This will likely create shortages by the summer as existing stockpiles of available parts dry up causing shortages from everything from cell phones, computers to heavy agraculture machinery. Japan electrical grid is in crisis and will likely take years for it to rebuild sufficient capacity to support its economy.

TechGuy said...

Jal wrote:
"You forgot to mentioned that companies are siting on HUGE amount of cash, so says mainstream media."

Thats misleading by the media. Why are companies increasing debt to fund pension plans if they are sitting on large sums of money? This has to do with getting investors interesting in buying stocks before all these money is used to buy back stock and issue dividends.

If they companies were sitting on boat loads of cash, it would be inflationary, as business go on buying spree to snap up competitors and stock buy backs. Banks would also see new money coming in from businesses, paying down debt and would start lending again. Very rarely do business pay down debt. Free cash flow is used to buy competitors, stock buybacks or uses in order to create short term shareholder value. The executives make money on stock options and higher wages (attributed to precieved growth). Rarely are Execs reward when paying down debt.

NightBlogger said...


Forget hyper-inflation, just deal with inflation. I find your deflationary mantra just that - a mantra, and a mantra you so desperately cling to like an intellectual security blanket. Take that thumb out of your mouth, please.

Your deflationary argument is based almost entirely on housing.

You petulantly refuse to acknowledge that inflation and deflation can both occur simultaneously, as it is now.

I'm convinced you'll still be hyping "deflation" even as you pay the cashier $7.99 for a loaf of bread.

And forget the dollar. All fiat currency will lose value as Ben continues QE indefinitely.

Steve From Virginia said...

Reactor 3 was probably a steam explosion with a large hydrogen component.

The steam explosion was likely caused by hot fuel coming into contact with water in the suppression pool @ the bottom of the reactor.

The hot fuel was likely a ... meltdown.

The rest of the world is in meltdown, it just isn't quite aware of it yet.

Little news from China, but they are in the midst of a tough, multi- week crackdown on so- called dissidents. Look for more action in China as that country is the hyperinflation epicenter, not the US.

The Fed is likely to stop the QE sooner than some people think if only to have something in the bag when the EU falls apart ... however, Congress might force its hands if the shutdown lasts more than a couple of days.

A 'Friday' shutdown means government functions until Tuesday following. A long shutdown means a default and deleveraging in earnest.

Keep in mind, credit is an asset bought with currency. When credit collapses the currency becomes valuable -- and very scarce -- by default.

More on this later as we all live in interesting times ...

agtefc said...

@ A Walk in the Woods...

Good Evening. Well Said. The most relevant context is paramount to understand our observations.


agtefc said...

@ Board...

Preaching to the choir but the message is well communicated.:)

"Paul Grignon's second presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is an entertaining way to get the message out. The Cowichan Citizens Coalition and its "Duncan Initiative" received high praise from those who previewed it. I recommend it as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system in Canada, the United States and in whole Europe."


NB: Thanks for the Chris Hedges vid link

NZSanctuary said...


Plant radiation monitor says levels immeasurable

NZSanctuary said...

So a nuclear bomb might have 100 kg of nuclear material in it.

Fukushima has 1760 tonnes, 10 times Chernobyl, or 17,000 bombs worth.

A Walk in the Woods said...

Hyper-inflation will Never occur until each country it is happening to is ISOLATED from global currency markets.

Note the word ISOLATED.

One of the ways for a country to be ISOLATED from global currency markets (and thus Hyper-inflation) is to default on it's debts and become an Outcast in world financial circles.

Not having access to credit/money because EVERYONE in the world thinks you won't/can't pay them back, thus your only choice is to print actual paper bills and flood your domestic landscape with the stuff.

Printing 'credit' does not count.

Credit is not 'money'.

Credit does not cause hyper-inflation.

Credit Can cause hyper-speculation, NOT the same thing as hyper-inflation.

So, a question,anyone reading TAE and hand wringing and fretting about hyper-inflation, explain to us how, let's say, the U.S. could become TOTALLY ISOLATED from world currency/credit markets?

I'd love to hear such a tale, please, illuminate us.

If you can't make a case for a country becoming TOTALLY ISOLATED from world currency/credit markets, there will NEVER be hyper-inflation. Never.

If the world currency exchanges completely and utterly collapsed, and world trade is joined at the hip to currency exchanges also collapsed, that could also produce wide spread global instances of hyper-inflation but how likely is that?

Please indecisive hyper-inflation fence sitters, more plausible scenarios as to how country's finances become TOTALLY ISOLATED from the world financial lending markets and less public fidgeting and mumbling and fumbling and bumbling with your prayer beads.

D said...

Detailed comments on Monbiot's analysis

A Walk in the Woods said...

On the way up, all that creamy luscious credit that spilled forth from the Banking Mafia's Horn of Plenty seemed like 'Money'.

You could buy stuff with it.

You could even speculate on 'investments' down at the dogtrack known as 'The Stock Market' with it.

Credit seemed to walk and talk and squawk like 'money' on the way up.

If Billy Crystal was addressing credit as a person during the ramp up glory days, he would have said to Credit, "You look marvelous!"

"It's better to look good than to be good!"

Credit took over 90%+ of the 'economic activity' of the nation.

Real money, savings, surplus funds in the bank, took the backseat.

The whole miracle go-go free market eCONomy of the 80's and 90's was not built on real capital, but on simulated capital.

As Max K says, you can't have Capitalism without Capital and savings is the real basis of capital.

Like Frank Zappa's quip, "is that a real poncho or is that a Sears poncho?"

Duhmerica's economy is a Sear's poncho.

No one is 'printing' money in Duhmerica. Not the FED, not the Treasury, not no body.

They are printing Credit.

Not the same stuff.

On 'the Way Down' the economic slippery slope, credit (being Debt in it's Essence) acts like a One Night Stand.

It disappears faster than a cheap hooker from a flea bag motel.

That's were Duhmerica stands, by the side of the interstate among the vast wasteland of abandoned strip malls.

Stoneleigh has used the analogy of credit as the lubrication that keeps the economy moving and when it goes, the economic engine seizes up.

But Fukishima is an alt analogy.

Credit is evaporating like sea water from Fukishima's burnt out reactor cores.

When the cooling water evaporates, the whole thing meltsdown into a toxic puddle of dangerous, useless waste.

Behold the Future.

rcg1950 said...

@steve from virginia

"Keep in mind, credit is an asset bought with currency. When credit collapses the currency becomes valuable -- and very scarce -- by default."

Took me a while to process this. The light bulb went off when I switched over to thinking of 'currency' in the literal sense of 'staying current' ie. in the present. No future, no credit, cash only, right now please.

Thanks for this wonderfully compact description of credit and money.

I. M. Nobody said...

Cash is King and Golem XIV reveals who has it and where it goes.

Money Laundering and the moral world of bankers

In the four years between 2004 and 2007, one of America's largest banks, Wachovia, now owned by Wells Fargo, laundered $378.4 billion of Mexican Drug money.

Just to give you an idea of the scale of Wachovia's criminality, $387 billion is 4147 tons of $100 bills - in four years. Wachovia executives say they didn't spot it. I can see that. A few thousand tons of 100 dollar bills is the sort of thing that probably can slip behind a filing cabinet.
The fact of the matter is that dictators and military juntas will pay top dollar to a willing bank. And dollars they have in abundance. The narcotics business is the largest cash business in the world. No one buys their heroin or coke with a debit card. It's cash, which trickles and flows until someone has so much of it they just have to get it in to a bank. And if there is one thing all banks love, especially since this banking debacle began, it's cash. And all the banks need, in order to get their share, is to have in their employ bankers of a certain moral degeneracy and politicians ready to protect them.

A Walk in the Woods said...

Bankers need to be 'rendered'.

But where?

By whom?

We could have a lottery to see who gets the honor of giving bankers a 'tune up" as they use to say in police force slang.

Bankers are not the Capo di tutti of the global Criminal Class (top .01% of assets)

Bankers are hired hands. The financial equivalent of Rent Boys to the real Masters of the Universe.

Loyd Blankfein and Jaime Dimon and their banking ilk are Girly Men, organ grinder monkeys to the truly insane oligarchs of the globe.

Bankers aren't all that smart as a group even. It's usually a small fraction of the employees doing all the criminal heavy lifting. All the rest of the gang are stuffed shirts and mere furniture in the scheme of things.

The inner core of truly criminal 'made men' in banks could easily be stuffed into a decent size woodchipper in an afternoon.

That's one way to 'render' the facts of the situation.

soundOfSilence said...

Fukushima Reactor 2 Core Has Melted Through Reactor

The thing that I just don't get is the continued (I don't know... disbelief?) that this very possibly is what has happened. It gets "x degrees" hot for "y amount of time" what the he** is it they think is going to happen?

But then this same disbelief in "what's happening" could be applied to the economy.

You just want to throw your hand up and say "whatever..."

jal said...

Changes are happening.
There are so many pieces being moved that it is almost impossible to see the outcome.

Only the insiders know what the Federal Reserve, Timmy, Ben and others are doing.
It takes years, from the time that a policy decision is taken until it gets enacted and until the effects are visible. Even if the policy decision is announced most bloggers will have forgotten that it had been announced.

Even if decision makers did not lay out what they would do to achieve their objectives, its worth while to try to determine if they are starting to achieve their objectives.

Let’s look at one policy decision.

Way back when, it was announced that the USA wanted to double its exports and wanted to reduce its dependency on foreign oil imports.

Today, we are sitting at oil at $108 and a $US that has depreciated in relationship to other currencies. As an example the $Cn is now sitting at $1.04.

Soon ... the buying patterns of US consumers will change and cause a ripple in the imports and exports of all goods. (Yes, its starting to hurt.)

What about the exports?
What surplus is the US exporting?

In the short term, the US is selling armaments and is known as the preferred mercenaries to the highest bidder.
In the long term, this is not sustainable because there will be a shortage of “buyers that can pay the fees.” There will be too much destructions of critical finite resources.
Eventually, there will no longer be any ploughs that can be turned to shields.

There is one thing that bloggers can see and they agree ... CHANGES TO THE POLITICAL, FINANCIAL AND ECONOMIC LANDSCAPES ARE HAPPENING.

Being aware and accepting that changes are happening is the first step in preparing yourself.

Ilargi said...

New post up.

The Last Financial Samurai and its Merciless Sword