Thursday, July 28, 2011

July 28 2011: Real Black. Real Swan.

Detroit Publishing Co. Surf bathing 1905
"Splashing around in the ocean -- the latest fad. Coney Island, New York"

Ilargi: Perhaps the best way to distinguish a black swan event from a run of the mill incident is to ask yourself if your favorite fiction writer could have invented the scenario involved, and remained believable. If the answer is yes, obviously it's not a black swan.

The recent accident -and its consequences- at the Vasilikos power station on the Mediterranean island(-state) of Cyprus, forever torn between its Greek and it Turkish parts, would certainly seem to meet this definition of a black swan event.

Vasilikos is the newest power station on Cyprus, which joined the EU in 2004 and adopted the Euro in 2008. The station is primarily powered by steam generated by heavy fuel oil, with some gas turbines. Though operating, it was still partly under construction when the accident happened.

At 05:50 EEST (02:50 UTC), on July 11, 2011, there was a huge explosion at the nearby Evangelos Florakis Naval Base. Wikipedia describes just how black this swan is:
In open storage on the base were 98 containers of explosives that had been seized by the United States Navy in 2009 after it intercepted a Cypriot-flagged, Russian owned vessel, the MV Monchegorsk, travelling from Iran to Syria in the Red Sea. According to leaked US cables through WikiLeaks, released in 2011, the US through Hillary Clinton exerted pressure on Cyprus to confiscate the shipment.

The ship was escorted to a Cypriot port and the Cyprus Navy was given responsibility for the explosives, which it moved to the Evangelos Florakis a month later.[9] At the time of the incident in 2011, the explosives had apparently been left in the open for over two years.

The Cypriot government had declined offers from Germany, the United Kingdom and the United States to remove or dispose of the material, having feared an adverse reaction from Syria. The government had instead requested that the UN effect the removal, but claimed that its request had been rejected.

Tell me, which writer can make that up and live? Iranian munitions destined for Syria on board a Russian vessel under a Cypriot flag, confiscated under American pressure and dragged al the way from the Red Sea to Cyprus. And that are then stored in the open for two years in sometimes high temperatures (40C, or 104F, right now), because nobody wants to touch them. And then proceed to blow up the country's main power station.

The explosion killed 13 people and wounded over 60. The official cause given is self-detonation of the munitions, according to Wikipedia. Hard to gauge how reliable that is.

While large parts of the over 800,000 strong Cypriot population, as well as its business community and -particularly important- tourism industry, are now subject to (rolling) blackouts, the Vasilikos damage may, according to estimates, take two years and €2.4 billion to repair. The €2.4 billion constitutes about 14% of Cyprus €17 billion ($23.8 billion) annual GDP.

Cyprus was already under financial scrutiny, for a number of reasons. First, Its banking system is "roughly nine times GDP". Second, that system is relatively heavily (33% of GDP) invested in Greek sovereign debt, and has also lent out a lot of money to Greek businesses and individuals. And third, a lot of the foreign deposits flowing in are from Russia, which uses the island as a gateway to Europe.

Just yesterday, under intense pressure from the people, who want anyone even remotely responsible for the explosion out, the Cypriot government, led by the Communist party, and already unpopular before the incident because of -what else?- austerity measures, resigned.

This happened not along after Moody's downgraded Cyprus bonds, which were already under pressure due to the Greek debt holdings, and are now vying for par with Irish and Portuguese bonds. And rising.

After Ireland, Greece (2x) and Portugal, Cyprus is therefore set to become the fourth EU member to need a bail-out. It's small one, for sure, but it might still whip up resistance against the EU/ECB/IMF troika policies well beyond its size.

And it took a black swan to push it over the edge, one in which energy and finance combine in a realistic way, none of that silly 'peak oil leads to peak debt' stuff, and one that paints in glaring detail where the vulnerabilities of our societies may lie. That is to say, where we least expect them.

MEANWHILE, Stateside:

At 6.00 PM EDT there is a vote on the Republican debt ceiling plan. It will lose, either in the House or subsequently in the Senate. There will then be about 100 hours left before the August 2 deadline, which may or may not be an actual deadline. An agreement, of course, will be reached at the eleventh hour. After which, much media posturing will take place, and if Europe is awake it can use the opportunity to further sink the euro and take a nice lead in the currency race to the bottom. Mind you, if someone figures out a good reason why August 2 should not be seen as crunch time, Washington can play this game for as long as it pleases. That is, unless the rating agencies tell it to stop. Looking at who's candidate to really be in control here, it might as well be Moody's. What's the difference? Still, even that wouldn't make it a black swan. No grace whatsoever.

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If US Defaults, Stocks Fall 30%, GDP 5%: Credit Suisse
by Patrick Allen - CNBC

In the very unlikely event that the United States defaults on its debt obligations, the country's economy would contract by 5 percent and stocks would fall by nearly a third, according to Credit Suisse.

While Andrew Garthwaite and the global strategy team at the Swiss bank see a 50-50 chance of a ratings downgrade of U.S. debt by the major ratings agencies, they remain confident such an outcome would not lead to disaster. "We think there is a 50 percent chance of a ratings downgrade on U.S. sovereign debt.

This could happen even if the debt ceiling is raised," Garthwaite, the head of global strategy at Credit Suisse, said in research note. "We doubt it will have much effect," he continued. "Japan has a 1.1 percent yield and an AA- rating, many U.S. Treasury funds do not have credit-rating limitations and national bank regulators would probably keep risk weightings for U.S. sovereign debt at zero."

If no budget deal is struck, but the U.S. does not default, Garthwaite predicts a bad time for stocks and the economy. "As our economists point out, each month of no rise in the ceiling could easily take 0.5-1 percent off GDP. In this case, equity markets would drop by 10-15 percent, prompting Congress to find a solution, and bond yields would fall to 2.75 percent." If that proved to be the case, investors would in Garthwaite’s opinion need to get into defensive stocks and out of the dollar.

However, the worst case scenario is clearly an outright U.S. default. That is where things could get nasty, according to the Credit Suisse team. "This is very unlikely, but if it occurs, GDP could fall 5 percent plus, and equities by 30 percent," Garthwaite said.

In the event of such a disastrous outcome, Garthwaite predicts the only place to hide would be in cash-rich stocks. "Worries about the U.S. public finances will likely bring investors to focus on ultra-safe equities: companies with [credit default swap] spreads below that of G7 sovereigns, yet offering dividend yields above government bond yields: Centrica, Sanofi, Novartis, Compass, Pfizer, Merck." With fiscal tightening in the cards no matter what the outcome of talks in Washington, Garthwaite is worried about the effect on growth, but not that worried.

"Our main concern is that, on IMF estimates, fiscal tightening in the U.S. will be equivalent to nearly 2.5 percent of GDP next year." Garthwaite’s economics team predicts that most of that tightening estimated by the International Monetary Fund will not actually take place, and predicts only half a percent of GDP growth being lost as result.

Bank chiefs send US debt default warning
by Tom Braithwaite, Michael Mackenzie and Robin Harding - FT

Wall Street’s leading chief executives intervened in the US debt debate on Thursday, writing to President Barack Obama and Congress to warn of "very grave" consequences of a default and urging them to cut a deal "this week".

Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase were among 14 chief executives of banks and insurers who signed the letter, along with Rob Nichols, the head of the Financial Services Forum, the umbrella association for the biggest financial groups in the US.

The letter said a default, which is still perceived as unlikely, or a downgrade from triple A, which analysts believe is increasingly likely, "would be a tremendous blow to business and investor confidence – raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets".

It comes after bankers, from senior executives to traders, have been becoming frustrated that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default.

With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers said they were not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating.

They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or "repo", market.

"The responsible government people aren’t engaging and I bet a piece of it is they are really not sure what to do," said one person on the industry side. Another said: "We don’t have any information from them. For the government shutdown [when budget disagreements nearly closed down the federal government] at least we had a road map."

The Fed is in the complicated situation of being both the principal regulator of the financial system and the agent of the US government, with responsibility to pay the Treasury’s cheques, process its electronic payments and issue, transfer and redeem Treasury securities.

"In these matters, the Federal Reserve serves as the fiscal agent of the US government. As such, we have been engaged in operational planning with the Treasury," the Fed said. "We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and as Treasury details its specific plans."

As Republicans and Democrats in Congress revised competing plans to avert a crisis, investors have grown more pessimistic over a debt ceiling deal that can deliver large, long-term spending cuts and prevent the US form losing its triple A rating. "The equity market’s sell-off is clearly a reaction to the intractability of Congress and the president," said Jack Ablin, chief investment officer at Harris Private Bank. "It’s clearly frustrating investors worldwide but is ultimately a buying opportunity as this is a contrived crisis." In contrast to the slide in equities, the dollar pared its losses and the euro dropped 1 per cent. Bond yelds rose modestly.

Market participants said the Fed and the Treasury had been engaging with dealers as they usually do to monitor market flows and liquidity but had stopped short of any scenario planning. The Treasury has so far refused to make public any contingency plans for the event that there is no rise in the debt ceiling. Unless the Treasury says, for example, whether it would prioritise interest payments, then it is hard for the Fed to discuss the implications with banks.

Bankers also believe that the Fed is afraid of sending signals that it is gearing up for a downgrade or, a scenario most analysts still consider remote, a technical default. In contrast, the International Swaps and Derivatives Association on Wednesday published information regarding the settlement of credit default swaps on US debt in the event that there are missed payments.

Banks are concerned about a wide range of operational issues as well as the broader question of how the Fed would support the financial system if there were disruption caused by a failure to raise the debt ceiling.

For example, they would like to know whether the Fed would be willing to lend against Treasuries with a defaulted interest payment, which would support the repo market. At a broader level, they would like to know whether the Fed will support the refinancing of Treasury securities by stepping in and buying any unsold stock at auctions.

In terms of the overall financial system, banks want to know what support the Fed would offer if there were a run on money market funds – knowing the Fed will provide them liquidity would reduce the chance of such a run.

They also want to know how the Fed would handle their capital and liquidity regulation if, for example, Treasuries fell in value or they experienced large inflows or outflows of deposits and how principal and interest payments would be made.

Flee to Mars if America commits worst error since 1931
by Ambrose Evans-Pritchard - Telegraph

President Obama has categorically ruled out a constitutional challenge to the US debt ceiling since I wrote yesterday’s blog. Spokesman Jay Carney said the White House cannot invoke the 14th Amendment, which stipulates that US federal debt "shall not be questioned".

"It’s not available. The Constitution makes clear that Congress has the authority, not the president, to borrow money and only Congress can increase the statutory debt ceiling. That is just a reality," he said. That is questionable, but let us move on.

Obama had previously been vague about this, saying White House lawyers were "not persuaded that is a winning argument". It is a revealing turn of phrase. This is indeed about winning arguments, not abiding by constitutional law. It is understandable why he should wish to avoid to an end-run around Congress in this violently polarized atmosphere, though it would not have stopped have FDR. (He went much further by stacking the Supreme Court).

However, the 14th Amendment still binds the nation. The US cannot miss a coupon payment on past debt without breaching the nation’s highest law, and without defiling the honour of the United States. So this shifts the balance of probabilities a little further towards a brutal fiscal shock as spending is cut to meet the debt ceiling, if Congressional leaders fail to marshal their troops in any semblance of order over coming days.

Since tax revenues cover just 60pc of the federal budget, the squeeze would have to be on a scale large enough within a few months to tip the US economy into a downward spiral and take the world with it. As an historic policy error it would match the New York Fed’s decision to raise interest rates twice in one week in October 1931, but at least the Fed had an excuse. (The Banque de France had withdrawn gold reserves from the US).

Mr Obama might conceivably calculate that mass furloughs or Social Security cuts or whatever shape austerity might take would do more damage to the Republicans than to the White House. It seems an unlikely hypothesis to me. I leave it to American readers to debate who would come out of this in worst shape. I adamantly refuse to take sides in this dispute. Both parties have brought America to this unhappy pass over the last 50 years. A plague on both their houses.

Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an "expansionary fiscal contraction", as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

Those who choose to breach America’s sacred bond to creditors across the world in this squalid way, in circumstances short of war or extenuating distress, deserve our contempt. Be they accursed forever if they stoop so low.

As for America’s loss of its AAA rating, a number of readers strongly disagree with my view that this would be a one-day drama, arguing that great numbers of bondholders would be forced to sell their debt under investment rules.

I do not find that sort of mechanical argument to be convincing. You can change those sorts of rules in a heartbeat, just as the ECB tweaked its collateral rules for Greece when it needed to, or Japan softened regulations after its downgrades. The AAA debate is a distraction.

The Bonds of August
by Menzie Chinn - Econbrowser

An Historical Analogy applied to today's debt ceiling crisis, with apologies to Barbara Tuchman

Discerning readers of history (so that excludes a number of people) will recall that in Tuchman’s magisterial account of how the world went to war in August 1914, she identified several factors that accounted for why the leaders of the great powers each felt victory would be painless assured. First, they thought that the war would be quick; "Home before the leaves fall", as Kaiser Wilhelm predicted. Second, they broadly misunderstood the economic implications of the conflict, believing free trade would prevent an expansion of the conflict to continent-wide proportions. Third, military leaders failed to consider the political implications of military plans, such as the German violation of Belgian neutrality.

The result was a costly and prolonged war that no leader sought, or even contemplated, but were pushed into exactly because of their mistaken beliefs.

I think we could very much be in for a repeat of this experience. Even if there are extraordinary measures are implemented which extend the X-date beyond August 2nd, the very fact that the Republicans have no viable plan, given the veto held by the Tea Party component [0], for achieving some sort of compromise indicates that we are inexorably moving to some sort of crisis.

Consider the following:
  • Certain individuals believe the debt default would be temporary (or "technical"), lasting until the politicians come to their senses (Pawlenty, Ryan) [1] or can be avoided by selectively defaulting on only non-debt payments (Bachmann, Gohmert) [2]
  • Certain individuals think the effects of the default would be short lived and minimal.
  • Certain individuals think that the rest of the world (including holders of US Treasurys, like PBoC) will not react to a default, and the policy paralysis evidenced by this event. [3]

My analogy is not completely apt in one important sense. The delusions are almost completely held on one side. As long as these delusional individuals hold veto power in the policy process, we are doomed to some sort of event; perhaps it will take a EESA redux -- with trillions of dollars of equity value wiped out, and municipal bonds being eviscerated [4] -- to make them realize that this is not a game.

By the way, even if the Administration is able to extend funding capacity beyond August 2nd, the one thing those who have studied currency crises in emerging markets know is that -- given rational expectations -- the crisis typically occurs before the exhaustion of reserves (Krugman, P. (1979) "A model of balance of payments crises", JMCB 11: 311-325.) There is some evidence of this wariness already. [5] Of course, as international finance economists we typically thought of first-generation currency crises as a problem restricted to emerging markets and less developed economies. Little did Jeff Frieden and I know that when we entitled the first chapter of our forthcoming book, Lost Decades, "Welcome to Argentina", how apt that title would become in describing policy making as well as policy problems. That policy paralysis due to ideology is something financial market participants have also noted.

For those who think a 4 to 1 ratio of spending cuts to tax increases is still too much tax increase, and believe all adjustment can be done by spending cuts alone, I bring their attention to the following graph of spending and revenues.


Figure 1: Federal current expenditures, line 20, BEA Table 3.2 (red) and sum of Federal tax receipts and social program contributions, lines 2 and 11, BEA Table 3.2, both divided by GDP. All raw figures in billions of $, SAAR. NBER defined recession dates shaded gray. Dashed lines at 2001Q1 and 2009Q1. Source: BEA, 2011Q1 3rd release, NBER, and author’s calculations.

So what will the impact of a default be? The IMF reminds us that, just like WW I did not remain contained to a few countries, the fallout from a US default is likely to global in nature (from Reuters):
An IMF official, briefing reporters by telephone, said that if the United States' AAA debt rating -- regarded as the gold standard for creditworthiness -- was downgraded it could be "extremely damaging" for the U.S. and world economy.

The IMF official said that, since such a downgrade would be precedent-setting, it was impossible to predict with certainty the impact, but it would certainly drive interest rates up.

While underlining the urgency of reaching a debt-reducing agreement, the IMF also cautioned that an "excessively large upfront fiscal adjustment" should be avoided because that would further dampen domestic demand and slow growth.

"With a still-wide output gap and downside risks to the outlook, especially potential spillovers from European financial markets, directors called for a cautious approach to unwinding macroeconomic support," the IMF said.

For another analogy, see Jeff Frankel's interpretation of the game now going on.

Finally, a bad omen (USAToday):
"The markets are pricing in a strong likelihood of no default and no government shutdown," says Don Luskin, chief investment officer at TrendMacro.

This is the same Don Luskin who wrote on September 18, 2008, that "we're on the brink not of recession, but of accelerating prosperity." In the next quarter, real GDP fell 6.74% (SAAR). I'll take the "Don Luskin indicator" to suggest we are hurtling toward a very serious situation.

It's not the default, it's the downgrade
by Carrie Budoff Brown and Ben White - Politico

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade.

Even Republican leaders say the country can’t go into default, and they’ll do everything possible to raise the debt limit by Aug. 2. But what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.

Obama could win and lose at the same time, striking a deal to avoid default but failing to pass muster on the substance of that deal with credit agencies, which could go ahead and downgrade the rating anyway.

Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

It’s what drives his Treasury Department into cajoling and pleading with the bond ratings agencies to be patient, like a harried coach working the refs from the sidelines. It’s a factor influencing Obama’s rejection of a short-term deal: The administration believes the ratings agencies won’t like it.

And it’s what gives these little-known firms a powerful club that they’re wielding with gusto over Washington policy-makers. They hope to force a deal that not only raises the debt ceiling but also makes deep cuts in government spending and eats into the nation’s deficit.

The threat of a downgrade "is very damaging to all of us, and that would be a product of the dysfunction of Congress" said Rep. Peter Welch (D-Vt.), who led a faction of House Democrats who argued for a "clean" debt-limit increase early in the process, only to watch escalating chatter about the "Armageddon" of a missed deal feed scrutiny of the nation’s fiscal health.

S&P raised the threat of a downgrade July 14 by declaring that raising the debt limit alone might not be enough. It wanted to see an enforceable agreement to cut $4 trillion over 10 years to affirm the triple-A rating.

Administration officials were shocked by the move. They suggested privately that it did not seem to square with prior S&P reports, which said the nation’s larger budget problems could be dealt with over several years. Some administration officials dismissed the S&P report as little more than amateur political prognostication by people with limited understanding of how Washington works.

But the White House’s statements in the past week show a downgrade is now top of mind. Obama himself invoked the country’s triple-A rating in a rare prime-time address Monday as he outlined the consequences of default.

"For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet," Obama said. "Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis — this one caused almost entirely by Washington."

Nearly every debt-limit conversation on Capitol Hill is infused with debate over the potential for either a downgrade, a default, or both. Democrats have embraced the argument of the White House: A short-term plan could result in a debilitating downgrade even if default is avoided.

Republicans are moving forward with their two-phase plan, but they’ve shown some concern about the possibility of ratings agencies scarring America’s creditworthiness. There’s significant disagreement in the GOP about the prospects of default and downgrade, and some lawmakers believe the administration and congressional leaders have created a false panic to box them into voting to raise the debt ceiling.

"The reality is these rating agencies have no idea how to rate a $17 trillion economy like the United States," Rep. Darrell Issa (R-Calif.) told radio host Don Imus on Monday. "They have no idea how to rate the debt worthiness of a $14 trillion debt like the United States."

The truth is that Capitol Hill has less insight into the workings of the marketplace than the investment gurus on Wall Street, and even they have varying views on the potential for a downgrade. There is also no clear sense of how the ratings agencies would ultimately judge the two major plans in the mix.

The Senate Democratic proposal calls for a one-time increase in the debt limit through the 2012 elections coupled with $1.7 trillion in spending cuts and about $1 trillion in savings from winding down the Iraq and Afghanistan wars. The House Republican bill would raise the debt limit in two phases and mandate a deficit cut of $3 trillion.

But the second debt limit increase next year would depend on Congress adopting the recommendations of new 12-member legislative committee for $1.8 trillion in cuts — far from certain, given the polarized political environment. That lack of certainty could raise concerns with the ratings agencies, Democrats said.

Aiming for any ounce of advantage, Senate Majority Leader Harry Reid (D-Nev.) argued Tuesday that his plan would shield the country from a ratings drop, while Boehner’s plan would not — a statement Boehner’s office contested.

"The $3 trillion House plan is the only one on the table that forces Congress to take on the drivers of our debt," said Boehner spokesman Brendan Buck, adding that the Reid plan relies on war savings, "an accounting gimmick that will have zero real-world impact on our deficit."

On a Tuesday conference call with reporters, bank analysts predicted the odds of a default are close to zero, but warned that a downgrade is a growing possibility. An agreement that sustains a top-notch rating would have to include $3 trillion to $4 trillion in budget deficit cuts over the next decade, said Terry Belton, global head of fixed income strategy at JPMorgan Chase.

Not just that, said Mike Hanson, senior U.S. economist at Bank of America Merrill Lynch, but credit agencies also want the ultimate plan to have strong bipartisan backing. "It really is important that we need to have a deal that is fairly comprehensive and has fairly broad support," Hanson stressed.

A single downgrade might have limited market impact. But a move by all three main ratings agencies — S&P, Moody’s Investor Service and Fitch Ratings — would likely force huge investment funds that must hold only the safest of bonds to sell en masse. The scary headlines associated with a first-in-history downgrade also could cause smaller investors to panic and dump stocks.

In a recent interview with POLITICO, David T. Beers, head of sovereign ratings at S&P, said the July 14th report was not a major shift and simply reflected an increased concern that there is no clear path to significant deficit reduction. "What we are focused on is not the debt ceiling but the underlying state of public finances," said Beers, a London-based executive who has conducted multiple meetings with administration officials.

In order to maintain a triple-A rating, Beers said, "what would have to emerge would be something that has a material impact on the underlying fiscal issues." "None of us know what this agreement is going to look like," Beers said. "For us to think it is credible it would first of all have to show some choices about what the fiscal priorities are and be actionable in ways that would give us confidence that it is going to be implemented."

Ratings Agencies Views Pulled Squarely Into US Debt Debate
by Stephen L. Bernard - Dow Jones Newswires

Ratings agencies have tried to stay above the fray in the ongoing debt drama in Washington, but whether they like it or not they are being dragged into it.

As the battle has raged ahead of an assumed Aug. 2 deadline to raise the U.S. borrowing limit, the three main agencies - Standard & Poor's, Moody's, and Fitch -- have repeatedly said their interest is in a long-term deficit reduction plan, not the details of how it is achieved. But with reports Tuesday suggesting that S&P favored a plan proposed by Sen. Harry Reid's (D-Nev.) over that pitched by House of Representatives Speaker John Boehner (R-Ohio), it's clear that their opinions are being politicized regardless.

For their part, S&P has said the reports, which appeared in a number of news outlets, were inaccurate. "S&P has been very clear not to endorse any particular plan proposed," a spokesman for the spokesman said. S&P formally released a statement later Tuesday echoing the spokesman's comments.

Such denials won't stop politicians from speculating and using the agencies in their arguments, however. Democrats have been quick to argue that Boehner's plan, which would increase the debt ceiling in a two-step process requiring a second vote on new measures next year would add uncertainty to markets, whereas Reid's proposal for a bigger $2.7 trillion increase in the debt limit pushes the problem out beyond the 2012 presidential election. The idea that ratings agencies would be more inclined to downgrade the country's coveted "AAA" rating in such an event, however accurate, strengthens that argument.

"If I thought it would work, I'd use it," said Michael Dooley, a partner at hedge fund Cabezon Investment Group in San Francisco, of the downgrade threat. "I might argue my plan is likely to have more acceptance from ratings agencies."

Reid did specifically say that in remarks on the Senate floor, arguing that Boehner's plan "gives the credit rating agencies no choice but to downgrade U.S. debt" and does not address concerns raised by credit rating firms.

To some extent, the rating agencies have created the scenario that ensures their role is politicized. Both S&P and Moody's put the U.S. government on review for possible downgrade as the debate moved closer to the Aug. 2 deadline, although Fitch said it saw no need to do so. That proactive move has been interpreted by observers as an effort by the agencies to show that they aren't going to be caught out with an overly lenient rating following the criticism that was lumped on them due to their failure to recognize the credit risks in mortgage assets before the 2008 financial crisis.

S&P has been the most aggressive. It has explicitly said even if the debt ceiling is raised, it could still cut the U.S. government's "AAA" rating if it is not accompanied by a sufficiently aggressive long-term deficit-reduction plan. In a report last week, S&P said a failure to reach a deal or raise the debt ceiling could lead to sharply higher interest rates, a steep drop in the value of the dollar and the possible need for a new bond-purchase program by the Federal Reserve.

Why the Debt Crisis Is Even Worse Than You Think
by Peter Coy - BusinessWeek

There is a comforting story about the debt ceiling that goes like this: Back in the 1990s, the U.S. was shrinking its national debt at a rapid pace. Serious people actually worried about dislocations from having too little government debt. If it hadn’t been for two wars, the tax cuts of 2001 and 2003, the housing meltdown, and the subsequent financial crisis and recession, the nation’s finances would be in fine condition today. And the only obstacle to getting there again, this narrative goes, is political dysfunction in Washington. If the Republicans and Democrats would just split their differences on spending and taxes and raise the debt ceiling, we could all get back to our real lives. Problem solved.

Except it’s not that way at all. For all our obsessing about it, the national debt is a singularly bad way of measuring the nation’s financial condition. It includes only a small portion of the nation’s total liabilities. And it’s focused on the past. An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse.

That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But that’s nothing compared with the real threats to the U.S.’s long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bush’s chief economic adviser, says: “The word ‘unsustainable’ doesn’t convey the problem enough, in my opinion.”

Even the $4 trillion “grand bargain” on debt reduction hammered out by President Barack Obama and House Speaker John Boehner (R-Ohio)—a deal that collapsed nearly as quickly as it came together—would not have gotten the U.S. where it needs to be. A June analysis by the Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion over the next decade—or more than three times what Obama and Boehner were considering.

You start to see why, absent signs of a serious commitment to deficit reduction, the rating services are warning they may downgrade the federal government’s triple-A rating even if Congress does meet the Aug. 2 deadline. Fortunately, our debt hole is escapable. But digging out requires that leaders of both parties come to terms with just how deep it is.

The language we use is part of the problem. Every would-be budget balancer in Washington should read “On the General Relativity of Fiscal Language,” a brilliant 2006 paper by economists Laurence J. Kotlikoff of Boston University and Jerry Green of Harvard University (available online from the National Bureau of Economic Research). The authors write that accountants and economists have something to learn from Albert Einstein’s theory of relativity, about how measured quantities depend on one’s frame of reference. Terms such as “deficit” and “tax,” they write, “represent numbers in search of concepts that provide the illusion of meaning where none exists.”

The national debt itself is one such Einsteinian (that is, squishy) concept. The Treasury Dept.’s punctilious daily accounting of it—$14,342,841,083,049.67 as of July 25, of which just under $14.3 trillion is subject to the ceiling and about $10 trillion is held by the public—gives the impression that it’s as real and tangible as the Washington Monument. But what to include in that sum is ultimately a political choice. For instance, the national debt held by the public doesn’t include America’s obligation to make Social Security payments to future generations of the elderly. Why not?

Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.

A more revealing calculation is the CBO’s measurement of what’s called the fiscal gap. That figure is conceptually cleaner than the national debt—and consequently more alarming. Boston University’s Kotlikoff has extended the agency’s analysis from 2085 out to the infinite horizon, which he says is the only method that’s invulnerable to the frame-of-reference problem. It’s an approach used by actuaries to make sure that a pension system doesn’t contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gap—i.e., the net present value of all future expenses minus all future revenue—amounts to $211 trillion.

Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesn’t favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is “exactly right.”

Which means we’ve been heading the wrong way for years. Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement. Now the gray deluge is upon us. As Holtz-Eakin, now president of the American Action Forum, a self-described center-right policy institute, says: “We’re just in a world of hurt.”

The U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits that sap the strength of the younger generation—benefits that can never be repeated. Kotlikoff argues that we may have reached that point already. He worries that the U.S. could become Argentina, which went from one of the world’s richest to lower-middle income in a century of chronic mismanagement.

Senior citizens are being told by their own lobbyists, repeatedly, that any attempt to rein in the cost of Social Security and Medicare is an unjust attack on earned benefits. “Stop the liberals from raiding the Social Security Trust Fund once and for all!” says a recent mailing from the National Retirement Security Task Force. Similar messages aimed at Democratic voters make the same charge against Republicans. No wonder Obama and Boehner were rebuffed by their own parties for putting entitlements on the table. In the end neither the House nor the Senate debt-ceiling proposals touched Social Security or Medicare. Not pretty.

In April this magazine ran a cover story featuring an alarmed rooster and the headline, “Don’t Play Chicken with the Debt Ceiling.” Washington clearly did not listen. The months of wrangling have dispirited the nation and concerned investors who lend money to the government. The cost of protecting against a U.S. sovereign default in the credit default swap market, while still low, is up 70 percent in the past year. It’s now nearly twice the cost of protecting against Swiss default.

A long, loud debate that produces a meaningful deal would be worth the pain, but a debate that produces next to nothing is worse for the nation than none at all. It simply calls investors’ attention to Washington gridlock. On July 14, Standard & Poor’s made that point when it placed U.S. sovereign debt on CreditWatch for possible downgrade, citing “rising risk of policy stalemate.” S&P said that “U.S. political debate is currently more focused on the need for medium-term fiscal consolidation than it has been for a decade. Based on this, we believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years.”

Economists at JPMorgan Chase said on July 26 that continued deterioration of the U.S. government’s finances (not just a debt downgrade) might increase Treasury bond yields by 0.6 to 0.7 percentage point over the “medium term,” adding $100 billion a year to the government’s interest expenses. “That’s money being taken away from other goods and services,” said Terry Belton, the global head of fixed income strategy.

While Washington is absorbed in the composition of a budget deal—how much in spending cuts vs. how much in tax increases—that’s of secondary concern to macroeconomists. The more important figure to them is the size of the deal. The reason so many of the plans aim for $4 trillion in budget balancing is because that’s the amount that would (at least temporarily) stabilize the debt-to-GDP ratio and calm the bond market vigilantes. The downside, of course, is that if such a retrenchment is phased in too quickly it would drag down growth at a time of 9.2 percent unemployment.

Some economists, such as Holtz-Eakin, say any hit to growth would be small and worthwhile. “Weak-kneed Keynesians—I’m not one of those,” he says. Others would favor shifting the balancing until after 2013, when the economy presumably will have strengthened. “In our view, the U.S. does not need an aggressive near-term fiscal tightening,” Ian Shepherdson, chief U.S. economist of High Frequency Economics, wrote to clients on July 21. A third group, led by Princeton University economist and New York Times columnist Paul Krugman, says the economy needs more stimulus in the short run, not less. The logic: Getting the economy back to full speed would increase tax revenue and shrink the fiscal gap more effectively than draconian cuts. Of course, this fiscal debate is moot if the deal on the debt ceiling is just a stopgap that’s too small to have a real impact on the macroeconomy—a prospect that’s pretty depressing all by itself.

If America’s long-term budget problems were small, they could be fixed entirely by the Republicans’ preferred method, which is spending cuts, or entirely by the Democrats’ favored fix, tax increases. The challenge is not small, however. That’s why nearly every bipartisan group that’s looked at the problem—including the Bowles-Simpson and Domenici-Rivlin commissions—has concluded that some mix of the two will be required. The precise mixture is a political matter, but one would have to place an exceptionally high priority on the well-being of upper-income taxpayers to conclude that none of the adjustment burden should fall on them.

Republicans in Congress, not wanting to appear to defend the rich, have attempted to block any deal that includes higher taxes on the grounds that tax hikes are “job-killing.” But experience shows that in a period of slack demand like the present, tax hikes are no more job-killing than spending cuts, and probably less so. Cutting spending—say, by firing federal employees or canceling procurement—removes demand from the economy dollar-for-dollar. A dollar tax hike, on the other hand, especially one aimed at upper incomes, cuts demand by less than a dollar. Those who pay the tax cover part of it from their savings and only part by reducing their spending. If lawmakers insist on using the phrase “job-killing,” Roberton Williams, a senior fellow at the Brookings Institution-Urban Institute Tax Policy Center, wrote in a recent blog post, “they should apply it equally to both tax increases and spending cuts.”

There is one respect in which the national debt—all $14,342,841,083,049.67 of it—is a good measure of the problems facing the U.S. It’s real money that’s owed to real creditors. (Actually, some is intra-governmental, so only about $10 trillion is owed to the public.) “The numbers are hard enough. The creditors know how much they lent and how much they expect to get back,” says former Congressman Bill Frenzel, the ranking Republican on the House Budget Committee in the 1980s.

In contrast, the fiscal gap captures commitments to future spending and revenue—and while that makes the numbers more daunting, it also means that it’s in our power to change them. They will have to be changed sometime, because current trends are unsustainable. The sooner the adjustments begin, the more gradual they can be. It’s easier to slow down from 70 mph by stepping on the brakes than by slamming into a wall.

The good news is that this speeding vehicle does have brakes—if Washington would only use them. Eliminating deductions would broaden the base of income that’s subject to taxation and increase revenue. On the spending side, it’s crucial to change the incentives that lead to overconsumption and inefficiency in health care. At the same time, cuts in benefit formulas for Medicare and Social Security are painful but necessary. And they should apply at least in part to current beneficiaries. Given how hard-pressed young workers are, it’s unfair to put all the adjustment on them while completely insulating today’s elderly.

Sure, it’s hard to imagine a real deal now, as Washington boils over with anger and partisan differences harden. But from this bitter experience may come a realization that the only way out is cooperation and compromise in the public interest. Meanwhile, that rooster we put on our cover in April? He’s having a heart attack. Let’s not do this again soon.

The Kabuki theatre of America's Debt Ceiling
by Ambrose Evans-Pritchard - Telegraph

Calm down. The US will not miss a coupon payment on its $14.3tn debt next Wednesday.

A genuine default would be "Lehman on Steroids" in the words of Ex-Treasury secretary Larry Summers. Precisely for that reason President Obama will not pull the trigger, EVEN IF the debt ceiling talks break down in acrimony. Obama still has a clutch of cards to play, in extremis. As Yves Smith from Naked Capitalism argues, the White House can challenge the constitutionality of the debt ceiling in Congress.

The 14th Amendment of the Constitution states that the "validity of the public debt of the United States shall not be questioned". Such recourse would kick it up to the Supreme Court, which would take its own sweet time. (Fortuitously a complex matter.) Bill Clinton advised Obama to do just that: blaze ahead, break the debt ceiling in defiance of Congress, and "force the courts to stop me".

Or, the US Treasury could eliminate the Fed’s entire holding of Treasury bonds at a stroke, gaining an extra two years. This would be a simple accounting transaction. Ben Bernanke might feel uncomfortable, and gold might blast to $3,000, but the Bernanke Fed has proved itself supple. The Treasury also has the authority to issue infinite amounts of platinum coins at any denomination it chooses (ie, like fiat paper currency, far above the metallic value): a chest of $1bn coins, say. This is seignorage on steroids, pace Prof Summers.

You get the drift: nothing will in fact change when the deadline expires on August 2. The US is the world’s paramount strategic and economic power, with debts in its own sovereign currency. It can do as it pleases. Yes, the US may be stripped of its AAA by Standard & Poor’s. A nice one-day story, but otherwise irrelevant. Global bond vigilantes are quite able to make their own judgement on the substantive default risk of the US. The rating agencies are out of their league on this one.

(By the way, the serial downgrades of Japan did not stop the yield on 10-year Japanese bonds falling to 0.5pc at one stage. What matters is whether investors really believe that they will be stiffed. In Japan they did not, and still do not.)

Clearly, the bond markets do not yet take the threat of US default seriously, though currency markets are less sanguine. I know this puzzles many in Europe, and angers some, but the cold reality is that yield are still just 0.4pc on 2-year US debt, and 3.02pc on 10-year bonds. Those of us who have lived through many such soap operas on Capitol Hill (I covered the Clinton-Gingrich debt stand-off in 1995 during my Washington years, as well as a few under the elder Bush and even Ronald Reagan) watch this brinkmanship with a jaundiced eye.

Perhaps for that reason, we may be caught off guard (just as veteran gold analysts were the last to understand that gold was in a bull market early. We stick lazily to our outdated paradigms). This time the drama certainly has a more threatening feel, and it comes at moment when sovereign states themselves have lost their sanctity.

I did not like the tone of President Obama’s speech. Rather than trying to find a way out of the impasse, he seemed to be preparing the ground to blame Republicans for default. That creates a very nasty mood.

An epic battle is undoubtedly under way over the future shape of America: whether it should return to the frontier spirit and low taxation of the early Republic, or ratchet ever upwards towards cradle-to-grave welfare and Euro-paternalism. And, of course, whether it really does drift towards bankruptcy down the road.

My sympathies are with those want to shrink the federal state, though I am not quite willing to join the chorus of abuse against President Obama. He has pledged to cut Social Security and the big entitlements of Medicare and Medicaid, and did at one stage commit himself to a $4 trillion fiscal squeeze over ten years, much to the fury of arch-Keynesians such as Paul Krugman. It is not clear to me that John Boehner’s Republicans are more fiscally rigorous, or genuinely willing to cull the sacred cows of entitlement.

(The great health care cartel is in my view the villain here. It is the root cause of US ruin, and is itself responsible for the epidemic of diabetes, Alzheimers, and several other mass ailments afflicting America. It has systematically failed to keep up with the scientific literature, and refuses to abandon grievous policies when shown to be wrong. Americans need to confront this huge vested interest (nearly a fifth of GDP) before it destroys the country. But that is a rant for another day.)

S&P cited Winston Churchill in its downgrade warning that "you can always count on Americans to do the right thing after they’ve tried everything else." Or to quote the other Clinton as she tried to reassure Asians holding of $3 trillion of US bonds: "the political wrangling in Washington is intense right now. But these kinds of debates have been a constant in our political life throughout the history of our republic"

"Sometimes they are messy, but this is how an open and democratic society ultimately comes together to reach the right solution."

Exactly. If I am wrong, we will all need to take shelter in nuclear bunkers next Wednesday.

Insiders Become Outsiders as Lobbyists Shut Out of Debt Debate
by Alison Fitzgerald and Kristin Jensen - Bloomberg

Sweltering in the heat at his son’s lacrosse tournament, Joseph Stanton sat thumbing through his blackberry -- laptop nearby -- as he tried to track developments in Washington’s debt debate.

The chief lobbyist for the National Association of Home Builders started his work on July 24, a Sunday, at 7:30 a.m. and finished about 8 p.m., knowing little more than he did in the morning about whether the housing market would be hit in a deal. "There’s really just mass confusion everywhere, not on Congress’s part, but the rumor mill of the lobbying world," said Stanton, 49. Asked how the debt-deal talks compare in terms of their frenetic atmosphere with other debates Stanton’s seen in his two decades of advocating on Capitol Hill, he said: "This is in the top one."

Lobbyists earn their salaries by getting information about what’s moving on Capitol Hill, who’s behind it, and how they can amend it to help their clients. With almost every government program, tax and payout potentially affected by a deficit- reduction agreement needed to pave the way for raising the $14.3 trillion debt ceiling to avoid a projected Aug. 2 default, lobbyists are finding it hard -- if not impossible -- to do their jobs.

Lab Co-Payments
With President Barack Obama and congressional leaders conducting closely held private meetings in search of an accord, "it’s been very difficult to get information from them and into them," said Mark Birenbaum, head of the National Independent Laboratory Association. His group is trying to follow the status of a Republican proposal that would require labs to collect a co-payment from Medicare patients.

Michael Buckley, communications director at the Alliance for Retired Americans, said his group has opted to save its energy for the post-deal period, when hundreds of billions of dollars in spending cuts tied to the debt ceiling vote are expected to be implemented. "There are only a handful of people in this town that are the decision-makers on this now," he said.

Other groups are trying to advance their positions by getting ahead of the final negotiations. Groups such as the anti-government spending Tea Party Patriots to the seniors’ advocacy group AARP are marching members up to Capitol Hill. The oil industry, religious groups, unions and a political organization advised by Republican strategist Karl Rove are running ads to influence the negotiations.

Tea Party
Tea Party Patriots members, who oppose raising the debt ceiling, last week met with more than 30 House members and staffers, along with a handful of senators. About two dozen Tea Party activists gathered outside the Capitol yesterday, urging members to oppose any increase in the debt ceiling that isn’t accompanied by a constitutional amendment to balance the budget "I pledge to you that I will not vote for any bill that raises the debt ceiling," Representative Paul Broun, a Georgia Republican, told the flag-waving crowd.

The country takes in enough money to pay bondholders, Social Security recipients, and the military without raising the ceiling, said Jenny Beth Martin, co-founder of the Tea Party Patriots, in an interview. "When President Obama is saying we are going to default," Martin said, "it’s a lie."

Cuts, Taxes
Proposals floated during the last two weeks of talks include cuts to farm subsidies, defense spending, Social Security, Medicare and Medicaid. They’ve also included hikes in taxes on the rich and the reduction of tax breaks for private equity firms, oil companies and home owners.

The July 22 collapse of talks between House Speaker John Boehner and Obama for a deal to revamp the government’s finances through both spending cuts and a tax overhaul left lobbyists with no proposal to review and lots to worry about through the weekend. The situation didn’t improve this week when competing deficit-cutting plans proposed on July 25 by Boehner and Senate Majority Leader Harry Reid also contained few specifics.

The 10-year plan introduced by Reid calls for more than $2 trillion in cuts and savings to defense and non-defense discretionary spending -- programs whose budgets are set in Congress’s appropriations process. It includes changes to the federally chartered housing finance agencies, cuts in agriculture subsidies, changes to eliminate waste and fraud and an auction of additional spectrum.

Boehner’s plan, which has undergone revision, would require two separate phases of cuts totaling close to $3 trillion. Both lawmakers would create a committee to choose specific budget cuts later.

Housing Issues
Stanton, of the Washington-based homebuilders group, is concerned about tax proposals that have been discussed to eliminate the deduction for home mortgage interest, the credit for low-income housing and an increase in the rate on carried interest. "Any one, or partial one of these, could certainly send an uncertain housing market further into the abyss," he said. It’s a message he and his association members have been repeating to anyone on Capitol Hill who will listen.

He’s not alone. The Washington-based American Petroleum Institute is organizing a "fly-in" this week of refinery workers and executives to meet with lawmakers and make the case that the industry creates high-paying jobs and already pays more taxes than most. "We’re doing the old-fashioned burning the leather on Capitol Hill and we’re activating our grassroots," said Eric Wohlschlegel, a spokesman.

Ad Campaign
The group is also running TV, radio and print advertisements across the country. "America needs more energy jobs, not more energy taxes," the ad says. Sojourners, a Washington-based group of religious leaders, is running radio ads in Kentucky, Ohio and Nevada pushing lawmakers to protect programs for the poor. Crossroads Grassroots Policy Strategies, the group advised by Rove, is spending $10.5 million on two ads saying the U.S. economy is "hanging by a thread" and that, "There’s got to be a way to take away President Obama’s blank check." The Service Employees International Union is airing commercials in the House districts of some Republicans accusing them of risking default to "protect tax breaks for millionaires."

Senior Citizens
Social Security Works, a coalition that includes labor unions, groups representing retirees, and advocacy organizations such as the NAACP, sent a dozen senior citizens from Maryland to walk the halls of Congress and argue that the government pension system isn’t the cause of the debt and shouldn’t be cut, said Don Owens, the communications director. Last week, the group organized a telephone lobbying effort, urging 30,000 seniors to call their representatives. "Our sole focus is ensuring Social Security is not the end-all bargain to getting the debt ceiling raised because Social Security is not contributing to the debt," Owens said.

AARP has used its membership lists to generate what it claims are 243,000 calls to members of Congress and the White House, as well as more than half a million e-mails. "We’re talking about the health programs, Social Security, the tax code, you’re talking about all of government," said David Certner, AARP’s director of federal affairs. Julie Allen, a lobbyist who represents the independent labs, said "every day is a new day on this one. At some points, it felt like it was minute to minute. It’s insane."

Europeans Urge US to Reach a Deal
by Gregor Peter Schmitz - Spiegel

US lawmakers and President Obama have until Aug. 2 to find a compromise on raising the federal debt ceiling before the government goes into default. But talks have broken down between the White House and Congress, and Republican and Democratic proposals in Congress appear to be going nowhere. The IMF and some European leaders are calling on the US to get its act together.

The daily schedule of a member of the US Congress has been easy to predict recently. In the morning, the legislators in Washington stand in front of the TV cameras and talk about, one after another, how the country is standing on the edge of the precipice. Then, in the evening they can go back and report that the country did make one small step forward.

Tuesday was no exception. Chaos and internal power struggles ruled, this time within the Republican party. The conservative leaders around John Boehner, the powerful Republican speaker of the House, had wanted to promote their own plan for raising the debt ceiling, but he was forced to postpone a vote on the measure late in the day. If Congress does not raise the debt ceiling by August 2 from its current level of $14.3 trillion, the United States will default on its debt.

Boehner's plan would involve raising the debt ceiling initially by $1 trillion, which is enough to pay off federal debts until the end of the year. That would be offset by spending cuts of $1.2 trillion over the next decade. In addition, a commission would then determine how further spending cuts and adjustments to the tax code could be made.

No Republican Consensus
Boehner wanted a vote on his proposal to take place as early as Wednesday in the House of Representatives, but on Tuesday night he had to announce that he was pushing that back at least one day because he did not have a clear majority behind it.

The independent Congressional Budget Office in the meantime has calculated that Boehner's savings would only amount to about $850 billion -- which would be less than his promised rise in the national debt limit, and too little for conservative hardliners from his own party, who want to shrink the deficit by as much as possible.

It was already unclear before the proposal how many votes Boehner could count on from his own party. His spending cuts did not go far enough, especially for those aligned with the radical Tea Party movement. Some of them oppose any form of compromise on the debt ceiling limits. "I will not vote for the increase," said the Republican presidential candidate Michele Bachmann, a darling of the Tea Party movement.

'Dead on Arrival'
The blow to Boehner has heightened the level of insecurity in Washington, just as the deadline for a US default looms. Still, the Republicans around Boehner had hoped that the plan could make its way through the Senate, which is controlled by the Democrats, even though Harry Reid, the Democratic leader of the Senate, opposed it. "Boehner's plan is no compromise," Reid said. "It was written for the Tea Party, not for the American people." On Tuesday, he declared it "dead on arrival" in the Senate.

Reid's Democratic colleagues in the Senate are working on their own proposal. Their plan would include about $2.7 trillion in spending cuts, but no significant cuts to social programs that the Democrats consider especially important. Tax increases -- a red flag for Republicans -- are also taboo in this plan, for the time being. At the same time, the US debt ceiling would be raised to the same level. The US government could remain solvent under this plan at least until the end of 2012, and US President Barack Obama would not have to enter into another debate on the debt ceiling in an election year.

But Democrats didn't have time to rejoice over Boehner's setback because their plan also does not have a clear majority behind it. Washington threatens to spiral into a world of misunderstandings, bruised egos and political games, which could lead directly to a national default.

40,000 Phone Calls in One Hour
On Monday, the fallout was there to be seen on primetime television. President Obama addressed the nation from the White House and accused the Republicans of waging a "political war." As if he were in the middle of an election campaign, Obama called on his supporters to pressure their members of Congress with phone calls and e-mails, and they did. On Tuesday, Speaker Boehner's website crashed several times, and at one point about 40,000 calls were made to the House in one hour.

Boehner appeared immediately after the president on television and said: "[Obama] wants a blank check today, and that is just not going to happen." Boehner, who until recently was Obama's negotiating partner, is now only working as the opposition leader. But in this political dogfight there do not appear to be any winners. The conservative Boehner has been weakened because he can't rally the members of his own party behind him. In Republican circles, the topic of who will be his successor is being discussed.

Obama, on the other hand, can build on polls that show the majority of Americans, like him, want a compromise to be reached in the debt talks and reject the radical agenda of the Tea Party movement. Still, recent polls show that Obama's approval ratings among African-Americans and liberals have fallen dramatically. These groups grumble about Obama's willingness to compromise, and he needs their support for re-election next year.

A Plea from Lagarde
And the world economy? It could be the biggest loser of all.

"The clock is ticking, and clearly the issue needs to be resolved immediately," Christine Lagarde, the new head of the International Monetary Fund (IMF), said at a speech in New York on Tuesday. If the ratings agencies were to downgrade the credit rating of the United States, or if the country were to default, it would be a "very, very serious event, not just for the United States, but for the global economy at large," Lagarde warned. She said a fiscal shock in the United States could have repercussions for the rest of the world.

German media commentators have also expressed their concerns. On Wednesday, the conservative newspaper Die Welt wrote: "If government bonds were affected, then there would be a collapse on the international financial markets with unforeseen consequences for the real economy."

The French budget minister, Valerie Pecresse, also weighed in on Wednesday, saying: "We think the global economy needs an American agreement ... We need a deal not just on the question of the American debt but also on rebalancing American public finances."

Into the Abyss
But a compromise is not in sight. Instead, experts in Washington have begun to debate whether or not a deal really needs to be reached by August 2, or if the US has more money left over than originally thought. The consensus is that the government will not run out of money until August 10, writes the New York Times. By then, they must borrow more money in order to send out millions of social security checks. If not, they will become insolvent.

August 10 instead of August 2. One doesn't want to think about it: yet another week of collectively marching toward the abyss.

Greek bail-out was a one-off, says German finance minister Wolfgang Schaeuble
by Louise Armitstead - Telegraph

The German finance minister has warned that he will not bail out every troubled eurozone country in a move that rattled confidence in Europe's response to the debt crisis.

In a strongly worded report to German parliamentarians, Wolfgang Schaeuble explained that the €159bn Greek bail-out was a one-off. He said: "In the future such purchases must only take place under very tight conditions, when the European Central Bank establishes that there are extraordinary circumstances in financial markets and dangers to financial stability."

Mr Schaeuble echoed German Chancellor Angela Merkel, who said the union's bail-out fund, the European Financial Stability Facility (EFSF), should not be allowed to engage in "unconditional" buying of bonds from stricken members.

Traders interpreted the letter as a strong signal Germany could not be depended upon for standing by the euro indefinitely. Just a week after European authorities united to rescue Greece, experts fear authorities are already again struggling to contain the region's sovereign debt crisis.

Cyprus threatened to become the fourth eurozone country to need a bail-out after Standard & Poor's downgraded its debt further into junk territory, lowering it to CC from CCC. The rating agency raised concerns that Cyprus' large exposure to Greek bonds - which is among the highest in the eurozone - might hamper its ability to service its own sovereign debt.

According to the European Banking Authority, Bank of Cyprus holds €2.4bn in Greek debt and Marfin Popular Bank holds €3.4bn. Yields on Cypriot bonds maturing in 2014 soared to 10.18pc - above the borrowing rates of Ireland and Portugal, which have both been bailed out. Stock markets across Europe fell. German's Dax was down 1.3pc; the CAC in France was down 1.4pc and Spain's Ibex was down 2pc. In London the FTSE 100 dropped 1.2pc.

Italian banks were hard hit amid fears of their sovereign debt exposure - UniCredit slid 3.9pc while Intesa Sanpaolo dropped 4.2pc. The euro fell from a three-week high against dollar. Michael Woolfolk, from Bank of New York Mellon, said: "The immediate crisis has passed, but it hasn't fixed the underlying problems, and that's why the market has been less than excited about holding euros. [America] will find a compromise that cuts spending and is unlikely to lead to a debt downgrade, and then the focus will once again turn to Europe."

Separately, the International Monetary Fund cautioned France that it would miss its growth targets unless "specific contingency measures" were imposed immediately. The fund, which was carrying out its yearly review of France, said it expects the economy to expand at a slower rate than Paris forecasts – at 2.1pc this year compared with 2.25pc. The IMF said France, Europe's second-largest economy, would have to adopt spending cuts or miss its target of reducing its budget deficit to 3pc of output by 2013.

Francois Baroi, the French foreign minister, said the cabinet was set to approve the Greek bail-out plans next week but parliamentarians will not vote on the package until October.

IMF warns France on budget deficit
by James Boxell - FT

The International Monetary Fund has warned that France will miss its target of cutting its budget deficit to 3 per cent of output by 2013 unless it carries out more spending cuts.

In a yearly review of the French economy, the Washington-based fund said it expected economic growth and tax revenues to be below the government’s own forecasts. The country’s economy will expand by 2.1 per cent this year and 1.9 per cent in 2012, it said.

As a result, Nicolas Sarkozy’s government should prepare "specific contingency" measures for meeting deficit targets in case growth falls short and limits tax receipts. Paris expects gross domestic product growth to accelerate from 2 per cent this year to 2.25 per cent next year, but some analysts have warned that those forecasts look generous.

The IMF said the fact that the country’s tax rates were already high meant the French president had little choice than to target spending, particularly in pensions and healthcare. François Baroin, finance minister, welcomed the report for offering support for Mr Sarkozy’s push for a so-called "golden rule" in the French constitution, which would force future governments to issue three-year plans to balance budgets.

The IMF said the rule change, strongly opposed by the opposition Socialists, would "entrench fiscal credibility". However, the fund’s comments also herald potentially difficult choices for the Sarkozy government ahead of next year’s presidential vote as he balances the need to rein in spending with his political imperative of winning an election.

Valerie Pécresse, the French budget minister, insisted the 3 per cent deficit target remained "sacrosanct" and that the government could cut further the country’s generous tax exemptions if growth slowed. The IMF said measures taken by the government had helped "a gradual recovery from the crisis" but warned of the residual threat of "spillovers" from elsewhere in the eurozone. Mr Sarkozy was at the forefront of last week’s second rescue deal for Greece, alongside Angela Merkel of Germany.

However, the fund urged further structural reforms in France to improve competitiveness and boost growth, with the country’s strict employment protection laws a particular worry. It said steps were needed to cut medium-term spending to safeguard France’s top-notch triple A rating.

"Under staff’s current projections, achieving the deficit target of 3 per cent of GDP by 2013 requires further measures," the report said. "France cannot risk missing its medium-term fiscal targets given the need to strengthen implementation of the Stability and Growth Pact (SGP) and keep borrowing costs low by securing France’s AAA-rating."

Mr Sarkozy’s attempts to break his country’s reliance on deficits, which stretches back 35 years, has also been welcomed by credit-rating agencies, who think the draft constitutional change could increase France’s credibility in financial markets. In 2010, the French deficit was 7.1 per cent of GDP, compared with 3.3 per cent for Germany.

Eurozone crisis fears continue as Italy forced to pay higher rates to borrow
by Telegraph

Italy came under fire from financial markets on Thursday amid further fears the eurozone's third biggest economy could join Greece, Ireland and Portugal into a debt spiral. The Treasury had to pay sharply higher rates to sell off €8bn in bonds including 4.80pc on bonds due in 2014 that had last sold for 3.68pc, and 5.77 percent on bonds due in 2021 compared with 4.94pc before.

Italy's benchmark FTSE MIB index fell as much as 2pc, while the difference between the rate of return on Italian and German 10-year sovereign bonds - a key measure of the financial risks as perceived by investors - rose to near-record highs of around 330 basis points. The euro also fell by a cent against the dollar to $1.4269 and by 0.7cents against sterling to £0.8745.

Investors are concerned that the Italian economy, suffering from high public debt, low growth and growing infighting in the government could follow Greece, Ireland and Portugal into a debt spiral that has thrown the eurozone into crisis. Tensions on the Italian bond market went down after a second bailout for Greece was agreed at a summit in Brussels last week but have returned on concerns over the details of the Greek rescue plan and US debt fears.

"You really feel that the European plan has not calmed the market at all," said Jean-Francois Robin, a bond market strategist for French bank Natixis. The rise in the yields is "a bit disappointing," said Robin, pointing to sweeping budget austerity measures adopted by Italy's parliament this month.

The auction jitters came alongside a report that showed eurozone economic sentiment worsened more than expected in July, with business optimism falling in all sectors. The European Commission's monthly economic sentiment index fell to 103.2 in July from 105.4 in June, its lowest reading since 102.2 in August 2010.

Europe's hot summer as Italy and Cyprus join sick list
by Ambrose Evans-Pritchard - Telegraph

Fears of recession in Italy and the Germans' reluctance to back the EU's bail-out fund with real muscle have set off fresh eurozone tremors, pushing yields on Southern European bonds back to levels seen before last week's emergency summit.

News that Moody's had downgraded Cyprus two notches from A2 to Baa1 due to "fractious politics" and exposure to Greece compounded fears Europe's crisis is far from resolved. The darkening picture in Cyprus raises concerns that a fourth eurozone country might soon need some sort of rescue, exhausting bail-out tolerance in Germany, Holland, Finland and Slovakia, where a wing of the coalition has denounced the EU accord.

"The markets have started to see all the flaws in the summit deal," said David Owen, of Jefferies Fixed Income. "They know there has been no increase in the size of the European Financial Stability Facility (EFSF) and that it will not be any position to intervene in the Spanish and Italian markets for quite some time because the changes have to be ratified by all parliaments." "Unless the European Central Bank (ECB) steps in to buy bonds, this is going to be tested by markets over the summer. EU leaders have sent absolutely the wrong signal by thinking they have done the job and can now go on holiday," he added.

Yields on Italian 10-year bonds spiked to 5.8pc on Wednesday while Spanish yields punched through 6pc once again. Analysts remain perplexed by the decision of Italy's treasury to cancel bond auctions in mid August due to lack of liquidity and "reduced financing needs". Italy was expected to raise €68bn (£60bn) in August and September.

German finance minister Wolfgang Schauble has told key Christian Democrats that there will be no "blank cheque" for EFSF operations, and cautioned against thinking "the crisis of trust in the euro area can be conclusively ended by a single summit". Investors suspect Germany is again talking with a forked tongue, promising one thing in Brussels and another at home. The revamped EFSF can lend €440bn, but a chunk is already needed for Portugal, Ireland and a second Greek rescue. City economists say the fund needs €2 trillion to quell doubts.

Professor Nouriel Roubini from New York University said the EFSF package does not go to the heart of the problem. "For over a decade the peripheral states have lost competitiveness against China, Asia, Turkey and East Europe. Their products are labour-intensive and generate little added value. The sharp rise in the euro has ruined the competitiveness of these products. That is the nail in the coffin."

Italian bank stocks fell sharply in Milan as the mood soured, with Intesa down 5pc and Unicredit off 4pc. Deutsche Bank said it had cut its exposure to Italian debt from €8bn to €1bn since the end of last year, mostly by purchasing credit default swaps (CDS). The Deutsche revelations suggest Europe's banks have been the main buyers of Italian CDS for hedging purposes, rather [than] speculators as claimed by Italian leaders.

The economic outlook continues to darken in Italy. The manufacturing index fell for a fourth month in July, dipping below the contraction line of 100. Italy's business lobby Confindustria said growth would be "almost nil" this quarter, adding the ECB's rate rises have become "an obstacle for recovery and deepened problems for debtors". The group's leader Emma Marcegalgia said Italy's political system was unravelling, leaving industry to its fate.

Michael Gavin from Barclays Capital said the EU authorities had themselves triggered the debt crisis in Italy by demanding banks and creditors share the pain in Greece, a shift in strategy that caused investors to re-examine other countries. The financial support apparatus became a "default machine" instead, raising fears Italy could be drawn into a "downward spiral". Mr Gavin said Italy's current account deficit has been slowly deteriorating for 15 years and is now 3.5pc of GDP, despite the compression of internal demand. Net foreign liabilities have reached 26pc of GDP. "The markets appear to be reserving judgment, so are we," he said.

Jens Larsen, chief economist at RBC, said Italy's debt has a relatively long maturity at 6.8 years, giving it a cushion of security for now. "This is not an immediate and present danger." The trouble in Cyprus is an unsettling development. The island has suffered much the same loss of competitiveness as Greece within EMU, with a current account deficit peaking at 17pc of GDP in 2008. While debt below 70pc is manageable, growth has slumped to zero and the budget deficit may top 7pc this year. The economy was already struggling before an explosion knocked out the main power station at Vasikilos.

Meanwhile, the International Monetary Fund warned that France is "highly vulnerable to growth spillovers from a shock in Spain, while spillover effects from Italy are also large". The IMF said France had the highest debt to GDP ratio of any AAA state this year at 85pc, just above Britain, and would need to tighten fiscal policy further to meet its target of 3pc deficit by 2013.

Cyprus faces triple wave of trouble
by Peter Spiegel and Joshua Chaffin - FT

Everything that could possibly go wrong for Cyprus appears to have done so – in just a fortnight.

European officials have long been concerned about the country’s domestic banking sector, which has assets of more than seven times its annual economic output – giving it a disproportionate role in the island’s economy. The banks weathered the global financial crisis and the initial stages of the eurozone’s debt crisis relatively well.

But then came last week’s decision by European leaders to put pressure on Greek bond owners to accept losses on their holdings. This had an exaggerated effect on Cypriot banks, two of which are among the largest holders of Greek bonds in Europe.

Even as European leaders were causing turmoil in the bond market as they dithered over the size and scope of Greek bondholder losses, another drama was unfolding in Nicosia: the Communist-led government was locked in a bitter fight with trade unions and rival parties over an austerity programme to get its deficits under control.

Just last month, the European Commission warned that without such modifications, Cyprus would not achieve its European Union-mandated budget targets. Then, as if a banking crisis and a political crisis were not enough, a much more grisly disaster struck.

Two weeks ago, the country’s largest power plant blew up after a cache of Iranian munitions confiscated by authorities exploded, killing 13 people. The fallout from the trio of disasters has plunged the island’s government, long known for its military standoff with the Turkish half of the country, into a different kind of chaos, which the head of its central bank likened to the 1974 Turkish invasion that split the island.

Ministers have resigned amid accusations that they may have known of the danger posed by the Iranian munitions. Protesters have taken to the street demanding even more scalps. And the much-needed austerity programme has become a casualty of the fallout. As a result of that strain, the government announced on Wednesday that Demetris Christofias, the president, was to ask for the resignation of all members of his cabinet at a meeting today. This followed the junior party in the governing coalition, the Democratic party, urging its ministers to resign.

In its announcement downgrading Cypriot bonds on Wednesday, Moody’s Investors Service cited political upheaval as a primary reasons for its change in opinion. For the EU and other European leaders, however, it is the banking sector that has been the focus of concern. Nearly 40 per cent of all loans extended by Cyprus’s three largest lenders – which account for 55 per cent of the country’s total bank assets – are to customers in Greece.

In addition, stress tests released by the European Banking Authority this month showed that, among non-Greek banks, two Cypriot groups – Marfin Popular Bank and Bank of Cyprus – were the third-largest and seventh-largest holders of Greek bonds in Europe. Constantinos Pittalis, head of investor relations for the Bank of Cyprus, said on Wednesday that the bank had reduced its exposure to Greek bonds by about €700m ($1bn) to €1.7bn since the stress tests were held as some of the debt matured and some was written down.

But the holdings still raised concerns at Moody’s, which said Nicosia would probably have to recapitalise the banks. Although the potential Greek debt hole in Cyprus is not as large as the losses faced by banks in Ireland, it is still large for a country with a gross domestic product of €17bn.

Moody’s downgrades Cyprus bonds
by Peter Spiegel - FT

Moody’s announced Wednesday that it was downgrading Cyprus’ government bonds two notches, to just above junk levels, in the latest sign the island nation may become the fourth eurozone country heading towards a multibillion-euro bail-out.

In its downgrade announcement, which moved the sovereign bonds from A2 to Baa1 and put them on a negative outlook, Moody’s cited the economic impact of the recent explosion at the island’s main power plant and the "increasingly fractious" political climate in the wake of the blast, which has led to ministerial resignations and halted government austerity plans.

But it also cited Cypriot banks’ exposure to Greek debt, which is expected to be ruled in default after eurozone leaders on Thursday agreed a deal which puts pressure on Greek bond owners to trade in their current holdings for bonds of a lesser value.

"Cypriot banks remain heavily exposed to macroeconomic stress and Greek government bonds," Moody’s said in its downgrade announcement. "A period of prolonged macroeconomic stress would increase the likelihood that these contingent liabilities will crystallise on the Cypriot government’s balance sheet."

It was a similar bank bail-out in Ireland, coupled with rising borrowing rates caused by a run on government bonds, which forced Dublin to accept a bail-out from the European Union and the International Monetary Fund in November.

According to recent bank stress tests conducted by the European Banking Authority, Cypriot banks are among the largest holders of Greek bonds in the entire eurozone. Bank of Cyprus holds €2.4bn in Greek debt and Marfin Popular Bank holds €3.4bn.

Cyprus President Dismisses Cabinet as Crisis Worsens After Blast
by Stelios Orphanides - Bloomberg

Cypriot President Demetris Christofias ordered his cabinet to resign as political discord deepens after a munitions blast wrecked a main power plant and Moody’s Investors Service cut the government’s credit rating.

Christofias requested and received the resignations of his government ministers today, spokesman Stefanos Stefanou told reporters in Nicosia. The president wants to consult government parties about the formation of a new administration, which will happen "soon," Stefanou said.

Cyprus’s prospects are deteriorating after a blast at a munitions depot on July 11 knocked out more than half of the country’s power generation, which Credit Suisse AG estimates may cost the economy 14 percent of gross domestic product. On top of that, Moody’s yesterday said there’s a "material risk" that losses on Greek debt holdings will force the country’s banks to seek a bailout "over the next few years."

Cypriot bonds have slumped, pushing their yields close to the levels on Irish and Portuguese debt. Both countries have been forced to follow Greece in seeking a European Union-led bailout. The yield on Cyprus’s 10-year bond maturing in February 2020 was at 10.05 percent today from 6.22 percent three months ago. Yields on similar-maturity Irish and Portuguese bonds are at 11.16 percent and 10.84 percent, respectively. Cyprus will not need to ask the EU for help as it has already covered its financing needs for this year, Stefanou said.

Crisis Path
Cyprus’s economy, the euro area’s third-smallest, expanded 1 percent last year and the government posted a budget deficit equivalent to 5.3 percent of GDP. Public debt is expected to peak at 62 percent of economic output in 2012, compared with 61.6 percent this year and 60.9 percent in 2010, according to the Ministry of Finance. Outstanding debt at the end of last year was around 10.6 billion euros ($15.2 billion).

"We are not at a point where Cyprus is the next to join Greece, Portugal and Ireland," said Padhraic Garvey, head of developed-market debt at ING Bank NV in Amsterdam. "Cyprus is also tiny compared with other stressed peripheral issuers, and hence it is more of a sentiment issue than something that materially affects the path of the crisis." Garvey said there is "no immediate need for panic" on Cyprus’s funding needs.

The east Mediterranean island’s president yesterday asked the ministers in his coalition government of communist AKEL and center right DIKO to submit their resignations. His request followed the resignation of the two remaining DIKO ministers in his government, who were asked to do so by their party chairman Marios Garoyian hours earlier.

The July 11 explosion at a munitions depot which knocked out the Vasilikos power plant accounted 53 percent of total power generation capacity and has amplified fiscal concerns, Moody’s said. The rating company downgraded Cyprus from A2 to Baa1, the third notch above non-investment grade. On July 26, negotiations between the government and the rest of Cyprus’s political parties on a proposed austerity package collapsed.

Cyprus awash in a tide of troubles (July 21)
by FT Editorial

As Europe’s leaders strive to devise a solution to the sovereign debt crisis, they are understandably concentrating on the 17-nation eurozone as a whole, not the small corner represented by Cyprus. Yet the tide of troubles that has engulfed Greece, Ireland and Portugal is threatening to wash over the east Mediterranean island that for decades has been best known for incubating one of Europe’s oldest diplomatic disputes.

Athanasios Orphanides, Cyprus’s central bank governor, warned this week that the economy faced an emergency similar to that of 1974, when Turkish forces invaded the island after an abortive Greek-inspired coup aimed at uniting Cyprus with Greece. It was a somewhat over-the-top comparison. But he was closer to the mark when he suggested that, without a more determined effort to clean up the public finances and introduce structural reforms, Cyprus might need a financial rescue package similar to those negotiated for Greece, Ireland and Portugal over the past 14 months.

The governor’s comments illustrated how, in these dangerous times, a eurozone member state usually well out of the spotlight can easily succumb to a combination of extravagant budget deficits, contagion channelled through the banking system, government incompetence and sheer bad luck.

Cyprus does not face short-term funding difficulties, but its bond yields have risen sharply in recent months, pointing to investors’ concerns about the very high exposure to Greece of its commercial and financial sector. The communist-led government’s failure to keep public expenditure under control during the world financial crisis of the past three years has greatly exacerbated the problem.

Then, on July 11, came the explosion that destroyed Cyprus’s largest power station, killed 13 people, knocked out half the country’s power supply and disrupted the tourism industry on which the island’s economy heavily depends. The bill for this accident may rise to as much as €2.4bn, or 14 per cent of annual economic output.

Cyprus is sure to receive European Union aid to cope with the aftermath of the disaster. Its banks are flush with the deposits of non-residents, which could in theory be drawn upon in a funding crisis. The biggest problem is the government’s refusal or inability to undertake the fiscal and structural reforms essential for long-term survival in the eurozone. In this sense Cyprus is even more remiss than its struggling Mediterranean neighbours.

Cyprus, Iceland, and German bail-out fatigue
by Ambrose Evans-Pritchard - Telegraph

Credit default swaps (CDS) on Cyprus debt have jumped to 674 basis points, the sort of level that preceded the EU rescues of Greece, Ireland, and Portugal. The CDS were trading in the 300s earlier this month, according to Markit. Yesterday’s 2-notch downgrade by Moody’s to Baa1 – due to "fractious politics" and exposure to Greece – has come as a nasty surprise to markets and the EU authorities. It should not have done.

Cyprus has been sailing close to the wind for several years. The current account deficit reached 17.5pc of GDP in 2008 (IMF data), and is still high. The budget deficit is running at over 7pc this year. The country has lost competitiveness since pegging its currency and then joining EMU, much like Greece. But there is another twist. Its banking system is "roughly nine times GDP", according to Chris Pryce at Fitch Ratings. This is €157bn. The figure drops to €96bn of GDP, or 550pc if foreign banks are excluded. Roughly 40pc of exposure of the biggest Cypriot banks is to Greece.

I don’t wish make some mechanical linkage between bank-to-GDP ratios and underlying risk (the devil is in the details) but this over-grown banking sector has shades of, well, Iceland. The Russians have used Cypriot banks as their conduit into the EU. "This has been a constant reliable source for Cyprus banks, up until now," said Mr Pryce. "If the Russian deposits stop coming, Cyprus still has the ECB. This is the difference between Cyprus and Iceland," he said.

The exposure of the Cypriot banks to Greek government bonds is 33pc of Cyprus’s GDP. The bigger worry is the entanglement of Cypriot banks in the Greek economy. On top of this, an explosion has knocked out the main power station at Vasikilos and cut 45pc of country’s power supply, though imported generators are covering some of the slack.

Cyprus is of course small beer with just 870,000 people and a GDP of €17bn. Clearly the EU can help if needed. The risk is political. Should a 4th eurozone country emerge from out of the blue and ask for a bail-out, it will test the patience of Slovakia, Finland, the Netherlands and Germany yet nearer to breaking point. Exactly where that breaking point lies is the great unknown.

Berlin is hardly sympathetic to Cyprus. There was gentleman’s agreement when Cyprus was let into the EU in 2004 that it should resolve the dispute with the Turkish part of the island. (I might add that Greece was truculent in the talks, threatening to block Poland’s EU accession unless Cyprus was let in).

The Turkish North voted for a united island, but the accord was in essence violated by President Tassos Papadopoulos when he took office. He threw his weight behind the `No’ campaign in the Greek side of the island and helped sabotage the agreement. This is not forgotten in EU circles. This betrayal may now haunt Cyprus if it needs German help. As for Greece, another tear I am afraid.

The European Commission has published more details on the new bail-out settlement. It shows that Greece’s debt will be cut by €26bn, or 11.6pc of GDP. But once a complicated "credit enhancement measure" worth €35bn to secure the AAA rating of the bail-out bonds is included, the overall debt will go up. "There will be an increase in Greek debt of €9bn (4pc of GDP)," said Jürgen Michels from Citigroup. "All in all, the impact on solvency is pretty small,. The debt will still be around 160pc or so next year, under our calculations."

If so, I don’t see how Greece can possibly avoid a third rescue – which has been ruled out categorically by Eurogroup chief Jean-Claude Juncker – or a bigger default, or something more drastic.

The interesting twist in Standard & Poor’s latest Greek downgrade – this time to an even lower CCC, as if it matters – was a paragraph that began: "Should Greece exit the eurozone … "

Well, well.

Greece Will Default on Debt After EU Plan Takes Place, S&P Says
by John Fraher - Bloomberg

Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, Standard & Poor’s said.

The rating company also cut its ranking for Greece to CC, two steps above default, from CCC, according to a statement published in London today. The outlook on the debt is negative. "The proposed restructuring of Greek government debt would amount to a selective default under our rating methodology," S&P said. "We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors."

EU leaders agreed last week that bondholders will contribute 50 billion euros ($72 billion) to a new rescue package, with euro-region governments and the International Monetary Fund putting up a further 109 billion euros.

The cost of insuring against a default by Greece was at 1,695 basis points today, implying a 76 percent chance the government will fail to pay its debts within five years. The price of the contracts soared to a record 2,568 basis points on July 18, when the probability of default approached 90 percent, according to CMA.

"There hasn’t been a big shock to the market as it’s mostly water under the bridge," said David Keeble, head of fixed income strategy at Credit Agricole Corporate & Investment Bank in New York. "I think the market is prepared for the next step, which is selective default and which should happen in a month or so. It will be interesting to see what rating Greece will be assigned after the SD phase."

Seeking a Path out of the Crisis in Portugal
by Alexander Jung - Spiegel

After living beyond its means for decades, Portugal is now feeling the full brunt of the crisis. The government is responding with a brutal austerity package. But savings alone won't do the trick -- the country needs to find ways to expand industry and make itself more attractive for investment. The good news is that positive models already exist within its own borders.

The air smells salty at Cabo da Roca, about 30 kilometers (19 miles) from Lisbon, the westernmost point of mainland Europe. A lighthouse is perched on the cliffs, high above the roaring sea. The sign in front of it reads: "The End of Europe." These words sound strangely prophetic at the moment.

On the way there, a two-lane bike path hugs the coastline for several kilometers between Cascais and Guincho. Special streetlights spaced only 50 meters apart illuminate the brownish red, special asphalt at night. But cyclists are rarely to be found along this route, even during the day, because the wind is simply too strong.

The luxury bike path is a reminder of better times, of the years when the Portuguese were still able to draw on unlimited resources. They built the Colombo in Lisbon, Europe's largest shopping center at the time. They also built state-of-the-art football stadiums and many new roads, including 2,700 kilometers of motorways in two decades, many with six lanes -- which are often completely empty.

Many things in Portugal are oversized, and the dramatic consequences of this exorbitant lifestyle are now manifesting themselves. The country had to resort to the euro zone's bailout fund in April, but it only provided Portugal with a brief respite from its financial woes.

The gravity of the situation became abundantly clear when the Moody's rating agency, after questioning whether the country could still service its debts, downgraded Portugal's government bonds to junk status earlier this month. Portugal has overreached financially, and it will have trouble coping with the crisis. Could the euro zone be facing a second Greece?

Brutal Austerity Measures
The new center-right government headed by Prime Minister Pedro Passos Coelho assembled a brutal austerity package, which includes reductions in healthcare benefits and a pay cut for government employees. Two weeks ago, Coelho expanded the list of painful cuts even further, after new holes in the budget had opened up. Before that, the prime minister had announced that the Portuguese people would have to prepare themselves for "two difficult years."

Margarida Sá Pereira, a businesswoman in Lisbon, is getting ready for leaner times. Her family has sold candles on Rua do Loreto since 1789. The shop sells egg-shaped candles around Easter and candles shaped like pine trees at Christmas, each handmade with the finest wax. Sá Pereira, a petite woman with conspicuous glasses, stands behind the counter. Wood-paneled display cases reach to the ceiling on both sides of the shop. As the minutes pass by, not a single customer enters the shop.

Customers have been holding on to their money for months, says Sá Pereira, and now the new government wants to tax Christmas bonuses, of all things. Sá Pereira, who makes at least a quarter of annual sales in the days leading up to the holiday, says: "Christmas will be very difficult for us."

Portugal Has Lived Beyond Its Means for Decades
The Portuguese have lived beyond their means for decades, but they were also misled into doing so. At first, the European Union tempted Lisbon with generous aid programs. Since Portugal joined the union in 1986, Brussels has sent about €55 billion ($79 billion) to the country. Then the introduction of the common currency gave the economy another boost.

Suddenly Portugal was enjoying the same access to credit as major countries like Germany and France. As a result, its people became accustomed to fast cars and fancy apartments, all paid for with borrowed funds. But Portugal's apparent affluence was deceptive, because it bore no relationship to the country's real economic strength.

Now the Portuguese have no choice but to save money in every possible way. Even smokers have cut back, as evidenced by a 20-percent decline in tobacco tax revenues in May. Signs in shop windows that read "Liquidição total," or total liquidation, especially in smaller communities, are another indicator of decline.

The country is deep in a state of crisis, but it seems foreseeable that the worst is yet to come. Interest rates are going up, borrowing is getting more expensive, banks are lending less money, companies have stopped investing, some are going under as a result of the credit crunch, and the unemployment rate continues to rise. Surprisingly enough, there is hardly any sign of resistance in the country. Many Portuguese are simply shocked.

Unlike the Greeks, the Portuguese did not become involved in questionable business practices. Their banks did not issue nearly as many high-risk loans as their Irish counterparts. And a real estate bubble did not develop in Portugal, at least not to the same extent as it did in Spain. But now the Portuguese are in the same boat as several other ailing European economies. They are hopelessly in debt and their economic future seems questionable at best. Concerned citizens are asking themselves how this could have happened.

Portuguese Victims of Globalization
One answer can be found in Figueiró dos Vinhos, an attractive town in a hilly and densely forested landscape near Coimbra in central Portugal. Gerry Weber, a German clothing company, built a factory there in 1993, where about 160 workers, all of them women, produced jackets and trousers. The women were paid low wages and Gerry Weber benefited from EU subsidies, with Brussels paying about half of the roughly €3 million ($4.35 million) the company invested in the plant.

The factory suddenly closed its doors 10 years later. Local council member Jorge Domingues, the right-hand man of Figueiró's mayor, remembers how surprised they were by the news of the plant closing. "We were all extremely disappointed," he says.

Domingues is standing in front of the entrance to the factory, a white, two-story building. The blinds are lowered and there is a "For Sale" sign in the window. The German managers used to stay in a top-floor apartment, says Domingues, pointing up at the building. In 2003, they decided to move production to Romania, where costs were 40 percent lower than in Portugal. The women of Figueiró became victims of globalization.

Many Portuguese have suffered similar fates in recent years, as one international company after another shut down its factories in the country. Some 50,000 jobs were lost in the shoe industry alone. One in four of the jobs lost between 2003 and 2006 was blamed on outsourcing, particularly to Eastern Europe and the Far East. By comparison, outsourcing was responsible for only about seven percent of jobs lost in Germany.

During this time, Portugal failed to climb further up the ladder of economic development, as the Southeast Asian Tiger economies had done previously, transforming themselves from makers of cheap, mass-produced goods to efficient suppliers of high-tech products. Instead, the Portuguese economy has been treading water for years, but without keeping pace with rapidly rising incomes. As a result, unit labor costs have increased by more than one-third compared to German levels since 1996.

In other words, Portugal is too expensive for what it is capable of producing.

Part 2: A Country that Produces Too Little and Consumes Too Much
There are, of course, exceptions. Volkswagen operates a successful plant in Palmela, south of Lisbon, where about 3,000 workers assemble the carmaker's Sharan, Eos and Scirocco models, almost exclusively for export. VW has worked out flexible rules with the works council, a powerful employee-elected panel that represents the interests of workers, that permit the company to eliminate up to 22 working days a year during an economic downturn.

But there is so much work at the moment that the period in which the plant shuts down for summer vacation has been reduced this year from three down to two weeks. The Palmela plant generates about €1.6 billion in annual revenues for VW, which corresponds to one percent of the entire country's gross domestic product. That makes the plant, which is on the small side by VW standards, the biggest foreign investment in Portugal.

"We are at the eye of the storm," says Jürgen Hoffmann, chief financial officer of VW's Portugal operation. His words also describe the central problem of the Portuguese economy, which lacks a broad industrial base. It needs many more companies to invest in the country and produce goods for export. Portugal's gross domestic product of €166 billion is roughly equal to the combined sales of two major German companies, automaker Daimler and electronics giant Siemens. Portugal's problem is that it produces too little and consumes too much.

A Lack of Competition and Entrepreneurship
This imbalance is partly attributable to historic circumstances. The country lacks a tradition of competition and entrepreneurship. The government has assumed a dominant role for generations, a legacy of the right-wing dictatorship that came into power in 1936 as well as the country's Carnation Revolution in 1974, which brought an end to decades of authoritarian rule. Little remains of the daring that characterized the discoverers of the world's oceans centuries ago.

Today Portugal is a country with an oversized bureaucracy. Of its labor force of 5 million, some 750,000 work in the public sector, and they are well paid. According to the Organization for Economic Cooperation and Development (OECD), salaries for Portuguese civil servants are "far above" incomes for comparable work in the private sector.

Nevertheless, many government agencies are inefficient and ineffective. The processing of tax returns is often delayed, government offices are chronically late in paying invoices and the permitting process can be a waiting game. For example, it takes an average of 287 days to complete all the formalities required to build a warehouse in Portugal. The OECD average is 157 days.

The new government has declared war on inefficiency, at least to the extent of its abilities. It aims to reduce the backlog of pending cases in the court system, but even the targeted new waiting period would still amount to two years. This nonchalant or even negligent approach is also evident in the private sector.

A brochure for potential investors published by the Bavarian Foreign Trade Center points out that in Portugal senior managers "normally arrive at work between 9:30 and 10:00 a.m." Besides, the brochure continues, lunch and the midday break are "sacred to the Portuguese." Its advice to potential investors in Portugal? "Don't try to interrupt the customary routine between 1 and 3 p.m."

A Dearth of Qualified Workers
Another deterrent for some investors is the lack of qualified new workers. Only 15 percent of the Portuguese working population has attended a university. The EU average is twice as high. In addition, many young people drop out of school. According to a survey by the German Chambers of Commerce Worldwide Network (AHK), many German companies in Portugal are not satisfied with the qualifications of entry-level employees. Manager Paul Van Rooij drew what he felt were the necessary conclusions.

Van Rooij manages Gametal, an automotive supplier that is part of the multinational Kirchhoff Group, based in the western German city of Iserlohn. Workers at the Gametal plant in Ovar, south of Porto in northern Portugal, produce metal parts for companies like Volkswagen. They operate heavy presses that plunge onto pieces of sheet metal, molding them into parts as if they were sticks of butter. The impact is so great that the floor shakes at every downward stroke of the presses.

A few temporary offices in containers were recently installed at one end of the building, where Van Rooij has set up a small tool-making school. There were 20 young trainees at first. The program has been so successful that some of the graduates have already been lured away by other companies. Many years ago, AHK also established a dual system based on the German model, which is still an unusual approach in Portugal.

"Industry is not considered sexy here," says Van Rooij, seeking to explain the lack of interest in industrial jobs. Even banks have sometimes shown little interest in working with manufacturing companies, after years of having financed primarily retail projects, such as shopping centers. It's no surprise that Portugal lacks solid industries capable of producing exportable products. But what should those industries be? The answer that António Rios de Amorim proposes sounds deceptively simple: "This country must build on what it does best."

A Model for Portugal
Amorim, 43, is the chairman of Corticeira Amorim, the world's largest producer of natural cork. One in four cork stoppers comes from his factories, which produce about 3 billion units a year. The cork bark comes from southern Portugal, where it has long been peeled from the trunks of old cork oaks. The procedure is repeated once every nine years. At the company's main plant, in a northern village near Porto, the corks are punched out, washed and bleached.

A mural in Amorim's office, about eight meters (26 feet) wide, depicts a forest of cork oaks. What is unusual about the image is that the trees are planted in neat rows. When Amorim became chairman of the company in 2001, screw caps and glass stoppers were threatening the dominant position of cork stoppers. To confront the challenge, he reorganized the family operation.

Amorim expanded the business into emerging winemaking countries like Chile, Australia and New Zealand, thereby enlarging his sales base. He invested in research to determine what makes up the unique taste of cork. Most of all, Amorim expanded the company's product line to include the use of cork soundproofing for floors, wall coverings, seals for oil pans in cars, insoles and even heat shields in spaceships. As a result of his restructuring, the company recently had the best year in its history -- in the midst of a nationwide downturn.

Amorim believes that his approach could serve as a model for the entire country, and that Portugal should identify and build upon its original strengths. "We have so many treasures," says Amorim. "We just have to unearth them."

Austerity measures alone will not get Portugal back on its feet -- or Greece, Ireland or Spain, for that matter. One approach to jumpstarting the economy would be to define the wood and paper industry as a productive core of the economy, especially given that a third of the country is forested. In the shoe industry, a few companies have already shifted their focus to the production of high-quality designer goods. "Portugal must achieve higher productivity by specializing in quality products," the OECD economists recommend in their report on Portugal.

The economists have also identified additional potential in tourism. In Portugal, the tourism sector is only half as productive as it is in France, for example, with too many budget options and weak capacity utilization. A few years ago the chief economist at the International Monetary Fund, Olivier Blanchard, came up with the idea of establishing Portugal as a retirement destination -- the so-called Florida model.

Jorge Domingues, a city council member in the former textile manufacturing center of Figueiró, envisions a similar strategy. He hopes to attract tourists to the region, which is blessed with pine forests and waterfalls, preferably for the long term. Domingues, who estimates that about 100 foreigners already have vacation homes nearby, says: "Even an Australian has settled here."

US corporate cash hoard in the trillions: Moody’s
by Tim Kiladze - Globe and Mail

U.S. non-financial companies sat on a whopping $1.2-trillion (U.S.) in cash and short-term liquid investments at the end of 2010, according to Moody’s. That’s up 11 per cent from the $1.1-trillion at the end of 2009

These cash levels are probably only going to increase. Moody’s review ends at December 31, at which Apple Inc.’s cash and short-term investments balance totalled $60-billion. When it reported quarterly earnings two weeks ago, that balance had climbed to $78-billion.

Because the value of liquid assets is so high, U.S. companies’ debt-to-cash ratios hit a five-year low of 3.06 times in 2010, despite extremely low interest rates and big corporate debt issuance, particularly last summer.

Moody’s estimates that about half of the cash balances, or $600-billion, are housed overseas. (Moody’s was able to calculate this because some of the biggest firms actual disclose their overseas totals, while others disclosed it in private to Moody’s.) The value makes sense because international profits have been driving this quarter’s earnings performance and firms have been keeping this money off-shore so that they don’t have to pay U.S. tax rates. (Earnings from foreign subsidiaries aren’t taxed until they are repatriated to the U.S.)

Much like any wealth distribution, a large chunk of the cash hoard is held by a relatively small number of companies. Moody’s calculated that the 20 top holders of cash account for $488-billion of the $1.2-trillion total. These firms include the likes of Apple Inc., Microsoft Corp. and Pfizer Inc. Technology firms held the most cash than any other U.S. industry.

But really, all firms are at fault, because corporate profits have been widespread. "Between 2009 and 2010, our corporate universe recorded an 11.7 per cent increase in revenues, a 45 per cent increase in operating income and a 24 per cent increase in funds from operations." All of this with a 9.2 per cent unemployment rate south of the border.

Banks Clash Over Foreclosure Tab
by Dan Fitzpatrick, Nick Timiraos and Ruth Simon - Wall Street Journal

U.S. banks trying to negotiate a settlement over the home-foreclosure mess have hit a new hurdle: They are squabbling over how to split the tab.

The lack of a deal so far among the nation's largest home-loan servicers has already depressed bank stocks, and an extended impasse could further spook investors. "As time goes on, banks will lose the PR battle," said Paul Miller, banking analyst with FBR Capital Markets. The terms of a settlement, he said, are less important than getting it done. "They need to get everything behind them."

As federal and state officials prod banks toward a multibillion-dollar deal to atone for a host of irregularities in foreclosing homes around the U.S., Wells Fargo & Co. has told government officials it should pay less than Bank of America Corp. or J.P. Morgan Chase & Co., according to people familiar with the situation.

The behind-the-scenes infighting has delayed a resolution and could prolong the months-long uncertainty over the ultimate cost of ending one of the biggest controversies stemming from the financial crisis.

Negotiations already have dragged on past the mid-June target set by U.S. officials, despite shareholder pressure on banks to reach a deal. Settlement talks with Bank of America, Wells Fargo, J.P. Morgan, Citigroup and Ally Financial Inc. began in March and include a mix of all 50 state attorneys general, the Treasury Department, Justice Department and Department of Housing and Urban Development.

The latest disagreement among banks is a contrast to the largely unified public stance taken by financial firms as they work to put the foreclosure woes behind them. Wells Fargo contends it should be rewarded for having fewer risky or delinquent mortgages than the other two, people familiar with the matter said. Citigroup Inc. also has told regulators the structure of a settlement should reflect differences between financial institutions, claiming it should pay less because of its stronger controls on foreclosure practices, these people said.

The disagreement among banks is one of the issues holding up the process. Other sticking points include whether to release financial institutions from other types of mortgage-related claims. Banks are pushing for broad protections, but that move is running into opposition from state attorneys general. All sides have agreed to a framework that would govern how banks meet their obligations once a deal is reached. Those include principal reductions on certain mortgages, forgiveness of second-lien loans, restitution to borrowers and dealing with foreclosure-related blight. A person close to one of the banks said remaining differences are narrowing.

The furor exploded last fall when banks were forced to suspend home seizures amid allegations that employees routinely signed off on foreclosure documents without personally reviewing underlying details. U.S. regulators later found deficiencies and shortcomings in paperwork procedures, as well as violations of state law, among 14 servicers. Bank of America, Wells Fargo, J.P. Morgan, Citigroup and Ally Financial initially offered to pay $5 billion, but government officials are pressing for a settlement of $20 billion to $25 billion, according to people familiar with the matter.

At first, the banks worked hard to show unity in negotiations with regulators, holding private conference calls to map out their response and possible areas of compromise. As the discussions advanced, some banks began arguing for different treatment compared with other banks.

Citigroup is pushing to keep its part of any settlement at about $1 billion, said people familiar with the situation. Wells Fargo, based in San Francisco, is discussing a range of $4 billion to $5 billion, trying to stay as close to $4 billion as possible, another person said. Bank of America has argued for a speedy resolution, claiming a deal will get the U.S. housing market back on track. "Our portfolio is different from others, and we are very proud of the prudence we had," John Stumpf, Wells Fargo's chief executive, recently told investors. "We tell the Wells Fargo story in plain English when we have those discussions" with state attorneys general and other officials, he added.

About 7.2% of the $1.8 trillion in mortgages serviced by Wells Fargo are at least 30 days past due or in foreclosure, according to industry newsletter Inside Mortgage Finance. That compares with a delinquency rate of about 13% at Bank of America, which services $2.04 trillion in mortgages.

In June, though, the Obama administration said it would withhold millions of dollars in fees for reworking troubled mortgages from Bank of America, J.P. Morgan Chase and Wells Fargo because of poor performance in the government's loan-modification program. Last week, Wells Fargo agreed to pay an $85 million civil penalty in response to allegations it steered thousands of potential prime-mortgage borrowers into more-costly subprime loans.

Friction also has surfaced on the use of widespread loan-principal reductions to help borrowers. Bank of America has privately signaled it is willing to consider write-downs in cases in which they would be less costly than foreclosures. Wells Fargo has indicated it is willing to consider principal reductions, but executives remain opposed to any write-downs of loans held by other investors, these people said.

Tensions between U.S. and state officials over how quickly to finish the deal also are a potential snag. Some state officials and HUD have pushed for a deal that offers immediate aid to troubled borrowers. But some state attorneys general have publicly expressed concerns about any deal that would give banks broad relief from additional legal claims. On Monday, Massachusetts Attorney General Martha Coakley told local officials in a letter she "will not sign on to any global agreement with the banks if it includes a comprehensive release regarding securitization" of loans into mortgages securities and the conduct of a mortgage-loan middleman.

The American Dream slips even further out of reach
by Nin-Hai Tseng - Fortune

A key tenet of the American Dream is that each generation will do better than the last. That principle was severely shaken by the Great Recession. Most of the blame rested on the housing crisis, which forced families out of homes they couldn't afford. Now a new study suggests there's another measure of well being that's keeping Americans from fulfilling the dream.

The typical American family earns more today than it did decades ago. But that's mostly because parents are working longer hours -- not because their wages have risen that much more -- according to a report from the Brookings Institution's Hamilton Project.

Households today are struggling with an unemployment rate hovering above 9%. And those lucky enough to have jobs aren't free of challenges. Median wages for two-parent families grew 23% since 1975, according to the study. But in 2009, two-parent households worked 26% longer than those two and a half decades ago. The figures reflect more women entering the workforce, but it also implies that wages haven't increased as much as the rise in worker hours would suggest.

Those numbers capture only part of the challenge as the traditional nuclear family breaks up. A drop in the marriage rate has resulted in a doubling of single-parent households over the past three and a half decades. In those households, annual hours have risen 53% since 1975, while earnings growth has grown by 69% during the same period. Nevertheless, at single-parent households where the financial burden tends to fall on one earner, median earnings are about $16,500 -- which is less than one-fourth that of a two-parent family.

The Brookings study echoes the conclusions of other research that show American workers are producing more without a corresponding rise in wages. But it also highlights deeper problems that workers are facing down the road. The crash of the real estate market plus the deep recession that followed forced many out-of-work and heavily indebted families to reexamine the notion of the American Dream. And future generations are wondering if it's even a possibility.

Gluskin Sheff Economist David Rosenberg notes in a recent report that unlike baby boomers who often viewed homeownership as a retirement asset, the larger group of 82 million Millennials that followed are more apt to rent than buy.  And they'll likely be paying for the shambles of the real estate market for a while. The 35% spiral in home prices nationwide over the past four years has constrained consumer demand, stalling companies from hiring more employees. So for future generations, stagnant wages won't be the only big issue; they'll have to find a job first.

Deteriorating Transportation Infrastructure Could Cost America $3.1 Trillion
by Matt Sledge - Huffington Post

New tires add up. That's the finding of a report issued Wednesday by the American Society for Civil Engineers, which tallies up the cost of our decaying surface transportation infrastructure, from potholes to rusting bridges to buses that never come.

The engineers found that overall, the cost of failing to invest more in the nation's roads and bridges would total $3.1 trillion in lost GDP growth by 2020. For workers, the toll of investing only at current levels would be equally daunting: 877,000 jobs would also be lost. Already, the report found, deficient and deteriorating surface transportation cost us $130 billion in 2010.

By and large those costs would not come from the more dramatic failings of America's transportation system -- like the collapse of the I-35W Bridge in Minnesota -- but more mundane or even invisible problems. The minivan that hits a pothole chips away at a family's income. The clogged highway that drains away an extra half hour of a trucker's day also drives up the cost of shipping for businesses.

Congestion, the report found, is of particular cause for concern. Already, 40 percent of urban interstates have capacity deficiencies. Currently, that costs us $27 billion a year in lost time and other inefficiencies wasted on the roads. By 2020, that number could grow tenfold, reaching $276 billion a year.

The civil engineers are, by their own admission, a biased party -- they stand to gain the most from renewed investment in infrastructure -- but they paint a picture of an infrastructure shortfall that would have ripple effects far and wide through society.

Companies, the report estimates, would underperform by $240 billion over the next ten years without additional investment. Exporters, which would have trouble moving goods to market, would send $28 billion in trade less abroad. The cost to families' household budgets, the report suggests, would by $1,060 a year. Underscoring the wider appeal of ASCE's argument, the report received the backing of both labor and business leaders.

"Today’s report from the American Society of Civil Engineers further reinforces that the U.S. is missing a huge opportunity to ignite economic growth, improve our global competitiveness, and create jobs," said Tom Donohue, president and CEO of the U.S. Chamber of Commerce.

Richard Trumka, the AFL-CIO president, said, "with a modest increase in investment, we can rebuild a strong economy where business can thrive and workers can afford a place to live, raise a family, take an occasional vacation, pay for their children’s education and have a dignified retirement." The ASCE claims the answer to the transportation problem is simple: Invest more, and quickly. "The problems facing our nation's infrastructure are widely acknowledged and well understood," said Andrew Herrmann, the president-elect of the ASCE.

But that doesn't mean Congress is rushing to fix them. Re-authorization of the transportation bill that pays for most of our highways has stalled. The House Republican outline for a bill would slash one third of transportation funding. The idea behind cutting those funds is that private enterprise could fill the gap.

Further, gas taxes revenues, which have traditionally been used to pay for transportation funding, are falling because they aren't tied to inflation and more people are switching over to fuel-efficient cars. For conservatives, some sort of new tax is verboten, even though they might appreciate infrastructure's benefits to business.

But even the Republican chair of the House Transportation Committee is not satisfied with his transportation plan. He said he was forced to limit his spending plan because of the House GOP leadership's allergy to tax revenue. "They wouldn't vote on a Mother's Day resolution if it had extra spending on it," Rep. John Mica (R-Fla.) told the Wall Street Journal.

David Goldberg, the communications director of Transportation for America, said part of the problem with finding new government funding for transportation lies with the fact that there are fewer new roads to be built. Much of what we need to do lies with fixing old highways. "Maintenance and repair and upgrades are not as sexy as ribbon-cuttings on new projects," Goldberg said, "And there's a lot of political pressure many times to build new projects."

But beyond that, Goldberg would also like to see expanded access to mass transit. One surprising result of the ASCE report was that cost of deficiencies to Americans in bus transit alone would add up to $398 billion by 2020.

Scott Bernstein, the president of the Center for Neighborhood Technology, said that while "the general argument that we need to not lose any more ground is sound," we should look more closely at what our infrastructure spending gets us. "I think they missed the opportunity to talk about what people actually spend on transportation," Bernstein said. He said he thought inadequate spending on infrastructure, especially on mass transit, hurts poor families disproportionately. "Simply spending it on maintaining highway capacity isn't likely to give people much more of a deal," Bernstein said.

The new report is agnostic on where we should direct new transportation money towards, if we ever decide to increasing spending at all. But ASCE does give a nod towards high speed rail, saying that:
"Most of America's major economic competitors in Europe and Asia -- including Japan, Germany, France, Spain and Great Britain, as well as rapidly developing and developed countries such as China, Taiwan and South Korea -- have already invested in and are reaping the benefits of improved competitiveness from their intermetropolitan high speed rail systems. Simply continuing to invest in the nation's existing transportation infrastructure may not be enough to maintain its standing in the global economy in the long run.

So far, Goldberg said, we're nowhere near looking at problems like that. "The big question is, can we come to any kind of agreement about what is worth investing in? And can we do it in a timely enough way to avoid the bills the engineers' report warns us of?" Of course, decaying roads and bridges don't make everyone worse off. One of the report's few bright spots: The future looks good for auto repair shops, which are expected to see increased demand as our roads get worse.

California Counties Reel From Tax Hit
by Justin Scheck - Wall Street Journal

Declining home prices are starting to slam California harder than the rest of the nation, in part due to a state law that sets a ceiling—but no floor—on property taxes.

The toll is evident here in Calaveras County, a largely rural area about 100 miles east of San Francisco. Over the past three years, it has seen among the biggest property-tax roll declines of any California county, with the total value of taxable properties down about 5% from last year—and 18% over the past three years—to $5.67 billion. Statewide, assessed values declined 1.8% last year from a year earlier, according to state data.

Calaveras's shrinking property taxes have resulted in cuts to the sheriff's department and public-health services, as well as an effort to cut 10% of the county's budget for the coming year. The tax drop also has pitted the county assessor, who has lowered taxes by re-evaluating home prices, against the head of the county board of supervisors, who said the reassessments have been too aggressive. "We're getting cremated" by the decline in property taxes, said Tom Tryon, chairman of the board of supervisors.

Calaveras's situation shines a spotlight on the unintended consequences of California's property-tax law. While many counties nationwide have offset property-tax declines by raising tax rates, a 1978 California law dubbed Proposition 13 prohibits that practice in the Golden State. The law caps property taxes at about 1% of a home's value and forbids major tax increases unless a home is sold or rebuilt, though it permits taxes to go down if a home's value drops.

As a result, while local governments in Washington, Maine, Hawaii and elsewhere recently raised property-tax rates to compensate for home-value declines, California doesn't have that option. It can take years for a California county to recover from a short-term decline in property-tax revenue, because tax revenue doesn't go up until home prices rise and many properties are sold.

Nationwide, property taxes make up about 45% of local-government revenue, according to Nathan Anderson, an economics professor at the University of Illinois. They have become a pivotal source of funding for local governments as other revenue sources dried up, said Mr. Anderson, who studies property taxes.

Bob Stern, president of the Center for Governmental Studies, a nonprofit and nonpartisan think tank in Los Angeles, said there were "pros and cons with Prop 13." While the measure has succeeded in its goal of protecting senior citizens on fixed incomes from big tax increases due to rising real-estate values, he said, people didn't expect California property prices would drop for a long period, and therefore didn't foresee the problems in counties suffering from declining property values.

Counties across the state are now grappling with Prop 13's fallout. Central California's Stanislaus County saw its property-tax roll—the cumulative value of assessed properties—fall 4.7% this year and 21% over the past four years. It levied $447 million in property taxes last year, down 11.6% from two years earlier.

In San Diego County, property-tax levies in 2010 fell by more than $100 million to $3.96 billion—the first year-over-year decline in more than a decade. In Calaveras, declining property values and property taxes have put Leslie Davis in the hot seat. Since being elected the county's tax assessor last year, she has been fielding calls from residents who said their taxes were too high because their homes were assessed at prebust values.

Under state law, assessors are supposed to re-evaluate homes to make sure they are being taxed at a fair rate. So Ms. Davis sent employees to re-evaluate home prices, which generally had gone down.

That caused consternation among other officials, who were struggling with state budget cuts and a county unemployment rate of more than 15%. "Budgetary woes continue to plague local agencies that depend on direct tax support for their operations," the county's civil grand jury, an investigative arm of the court system, wrote in a June report.

The county's board of supervisors, led by Mr. Tryon, said it will have to cut services such as sheriff patrols. He has criticized Ms. Davis's reassessments, saying they are too aggressive. "All we live on in this county is basically property tax," Mr. Tryon said, adding that assessors "have a lot of discretion, and [Ms. Davis has] used hers in a way that's devastated the county." Ms. Davis said she is just doing her job. "The law requires me to reassess," she said.

States Miss Pension Targets by 50% Even With Private Equity
by Martin Z. Braun - Bloomberg

In the last decade, as a wave of baby boomers began retiring, America’s biggest state pension systems earned less than half what they needed to keep up with promises made to millions of graying civil servants.

The state of Washington’s 3.92 percent return for the 10 years through June 30, 2010, after fees, was the best in a Bloomberg survey of state pensions with more than $20 billion in assets. That was nowhere close to the average yearly gains of as much as 8 percent that fund managers and public officials count on for meeting obligations to retirees. "To assume that the median plan will reach 8 percent given this environment, that’s optimistic to say the least," said Karl Mergenthaler, an executive director in JPMorgan Chase & Co.’s securities services group in New York. "Public plans have an incentive to maintain their expected rate where it is. The risk is that they’ll overreach for returns."

The last decade is forcing public pensions to re-evaluate the projected returns that determine how much money taxpayers and retirees need to pour into retirement funds. Some systems such as New York, Rhode Island and the California State Teachers Retirement System have reduced their assumptions. It’s a tough call because lowering projected gains can widen funding gaps, forcing lawmakers to put even more money into the programs.

Complicating the issue of what returns to expect are the extraordinary reverses of the last 10 years, including the Internet stock bubble, the financial crisis of 2008 and the worst recession since the Great Depression. Returns over 30 years still average more than 8 percent, according to the National Association of State Retirement Administrators. And in the 12 months after June 2010, markets and fund assets surged.

Largest Funds’ Gains
For the fiscal year ended June 30, the California Public Employees’ Retirement System -- the nation’s largest -- said it gained 20.7 percent, and the California teachers program, the second-largest pension plan, 23.1 percent. The third-largest, the New York State Common Retirement Fund, returned an estimated 14.6 percent in the fiscal year ended March 31, according to the state comptroller.

Even though state pension funds posted near-record preliminary returns for the last fiscal year, their 10-year gains are still less than 8 percent. Calpers’s 10-year return increased to 5.36 percent last year from 2.6 percent the previous year, and the California teachers’ fund, to 5.7 percent from 2.5 percent.

The median state pension fund will achieve an annual return of 6.5 percent in the next 15 years, according to a February 2011 study by Wilshire Associates, the Santa Monica, California, investment adviser.

Alternatives Beat Stocks
In outperforming other public funds over the last decade, Washington’s system benefited from investments in real estate and private-equity placements. Private-equity pools may invest borrowed funds, which can amplify returns and losses, and their holdings are often opaque. Calpers cited gains on private-equity investments for its 2011 gains. "It’s an illiquid, high-risk strategy," said Tim Friedman, head of communications at Preqin Ltd., a London-based private-equity research firm. "You can lose everything."

Washington’s program, with $52.7 billion of assets as of June 30, 2010, is setting the pace as other systems are boosting private-equity investments, according to consultants. Pensions are also cutting their holdings of U.S. stocks and buying assets in developing countries such as China, India and South Africa.

Political Backlash
Three of the top five performing funds -- Washington, Oregon, and the Pennsylvania teachers fund -- had more than 30 percent of their assets in private equity and real estate, according to data compiled by the state retirement administrators’ group. Four of the five worst performers -- Maryland, Arizona, the California teachers and Georgia -- had more than 50 percent of assets in publicly traded equities.

State pension funds increased average allocations for private equity to 8.8 percent in 2010 from 3 percent in 2000, Wilshire found in its February study. Meanwhile, the average allocation to U.S. stocks by 126 state pensions declined 13.9 percentage points since 2000.

Retirement funding spurred a political backlash against public workers this year. The meager returns after years of deferred taxpayer contributions magnified funding shortages, forcing legislatures and city councils to divert more money to the pensions. This left less for public services. Adding to the pressures facing pensions, government workers are accelerating retirements as state budget crises have led to salary cuts. Governors in Wisconsin, New Jersey, Ohio and Florida have attacked unions.

Funding Gap
A quarter of the 363 human resources managers for state and local governments reported a rise in such departures in a 2011 survey by the Center for State and Local Government Excellence. Members of the baby boom generation, born from 1946 to 1964, began turning 65 this year, but many programs allow early retirements for civil servants in their 50s.

Statewide U.S. retirement programs were short $694.2 billion, or 24 percent, of having enough assets to pay future pensions at the end of their 2010 fiscal years, based on data compiled by Bloomberg as of July 15. Hawaii and Wisconsin haven’t reported and weren’t included.

Already, 14 states raised retirement age and length-of- service requirements to help close pension funding gaps, including New Jersey, Florida and Maryland, according to the National Conference of State Legislatures. Fifteen states increased employee contribution requirements in 2011, the conference said.\ State judges in Colorado and Minnesota have thrown out lawsuits by retired public employees challenging reductions to cost-of-living adjustments, ruling the increases not protected.

Performance Data Opaque
Following the money in public pensions is no easy task for retirees and taxpayers, based on the 10-year performance survey by Bloomberg. Audited results may be published online no sooner than six or nine months after a fiscal year. Returns aren’t reported consistently from fund to fund. Some disclosures may appear in annual reports, or in documents for bond sales that are unrelated to the pension funds themselves.

Bloomberg compiled data from the most recent annual reports of state pension funds with more than $20 billion in assets as of June 30, 2010. Bloomberg made follow-up calls to ensure the returns were after deduction of management fees and to request adjustments when they weren’t. The research also obtained 10- year net returns as of June 30, 2010, for funds that use a different fiscal year-end.

Two of the biggest funds whose fiscal years don’t close on June 30 -- New York’s Common Retirement Fund and Colorado’s Public Employee Retirement System -- said they couldn’t provide returns on that basis.

For the 25 programs in the survey, the median 10-year return was 3.15 percent. The pensions did beat the Standard & Poor’s 500 Index, which had an annualized loss of 1.59 percent for the period, according to Wilshire. Maryland’s fund, which stuck with conventional investments, ranked at the bottom of the survey with annual gains averaging 2.10 percent. The fund had assets totaling $31.9 billion as of June 30, 2010. It posted preliminary returns of 20.04 percent for fiscal 2011, boosting its 10-year return to 5.01 percent.

Top-Performing Washington
Gary Bruebaker was behind Washington’s decision to pour money into alternatives to stocks and bonds. He has been chief investment officer of the State Investment Board since 2001, leading a team of 30 investment professionals. The 56-year-old son of a single mother who worked 29 years for Oregon, Bruebaker says he takes his mission personally. He describes it as getting the best return for 400,000 public employees, retirees and beneficiaries at a "prudent" level of risk.

"Most of these people are people just like my mom," he says. Before taking over management of the Washington fund, Bruebaker was a civil servant in Oregon for 23 1/2 years, eight of them as deputy treasurer.

At the end of fiscal 2010, the system was fourth-best funded at 92 percent, behind those of New York, North Carolina and South Dakota, according to Bloomberg data. Alternative investments such as private-equity and hedge funds carry higher risks for retirees and taxpayers than conventional stocks and bonds. Some of the instruments are seldom traded, or not traded at all, so pensions face uncertainty about how much their investments are worth. Investing borrowed funds can amplify losses, which can be hard to limit because money placed with private-equity and hedge funds generally can’t be cashed out on demand.

Private Equity
Public retirement systems don’t disclose most details on their private-equity and hedge-fund portfolios, making it impossible for taxpayers to assess the risks. Pensions themselves may get limited information on holdings from money managers, who argue that disclosing the information could harm their strategy.

Washington was among the first public pension to invest in private equity, Bruebaker says. The state committed $13 million to a 1982 KKR & Co. buyout fund. In 2010, 26 percent of Washington’s assets were in private-equity, Bruebaker said. They’ve picked some big winners. A placement of $25 million in Menlo Ventures VII, a 1997 Silicon Valley venture capital fund that invested in early Internet companies, was valued at $117.5 million as of Dec. 31, 2010, for a 135.6 percent return, according to fund records.

Investing Advantage
Washington’s 30-year history with private equity gives it an advantage, Bruebaker says. The state has relationships with some of the best-performing funds and takes advisory seats on big investments, allowing it to work closely with the general partner, including sharing investment ideas, he said. Serving on advisory boards enables Washington to closely monitor operations and investments, the investment chief said. "Whenever they do something special, we want to be one of the first calls," Bruebaker said.

Washington’s heavier weighting toward private equity gave it a boost from 2004 to 2007, as easy credit enabled buyout funds to borrow cheaply and distribute cash to investors. In 2006, Washington’s private-equity portfolio gained 39.5 percent, compared with 8.6 percent by the S&P 500. Over the decade through June 2010, the fund’s private-equity investments returned 6.6 percent, fund records show.

Index Funds
In asset classes such as U.S. stocks where it believes managers can’t beat the market consistently, Washington has moved to funds that track an index, Bruebaker says. All of Washington’s $10.4 billion of U.S. shares, as of March 31, are in a BlackRock Inc. (BLK) fund matching all American equities, he says. The state has $7 billion of its international developed- market stocks in index funds too, according to the fund’s March 31 quarterly statement.

Washington is also increasing its allocation to emerging markets, Bruebaker says. In April, the state agreed to invest $75 million in a $750 million fund being raised by Prosperitas Real Estate Partners to invest in Brazilian property. "Growth is clearly not going to come from the U.S.," Bruebaker said. "That’s not a slap against the United States. It’s the reality of the marketplace."

Some pensions invested as much as 65 percent in stocks, helping to account for the decade’s low returns, according to Eileen Neill, a Wilshire managing director. The opening 10 years of this century was the first in 70 years in which the U.S. stock market had a negative return, she said. "If you had a lot of equity-like investments in your portfolio, you certainly didn’t get anywhere near that 8 percent return," Neill said.

Maryland had 67 percent of its assets in stocks in 2001, a figure that declined to 51 percent by the end of the decade, according to the fund’s reports. The state’s pension assets at 2010 year-end were 37 percent short of covering pensions promised to 120,247 retirees and 144,343 active vested civil servants, 10th-worst among state systems, according to Bloomberg data.

During the decade, the state’s domestic stock portfolio performed worse than the market, trailing the S&P 500 or the Dow Wilshire 5000 five years out of 10, including four straight from 2005 through 2008, the fund’s financial reports show.

Legislative Critique
The state Department of Legislative Services, a nonpartisan agency that provides research and policy analysis to Maryland’s legislature, has "repeatedly expressed concern" about the performance of the state’s active U.S. equity managers, according to a draft November 2010 presentation to the Joint Committee on Pensions.

For five straight years through 2010, passively managed funds structured to match a stock market index did better than actively managed ones, which collect higher fees, the legislative services analysts found. The percentage of the state’s domestic stockholdings placed with passive funds declined to 45 percent from about 71 percent in fiscal 2008, according to the office.

The performance of active U.S. stock managers has improved this year, beating their benchmark by 0.59 percentage point, said Robert Burd, the deputy chief investment officer for Maryland’s pension system since March. "We have confidence in our current manager lineup to add value over time," said Burd, 42, who has been with the system since 2001.

The state’s decision in 2008 to allocate money to a program targeting so-called emerging managers led to the decline in the percentage of passive managers, Burd said. Emerging managers are small firms that may be ignored by large institutional investors and often are women or members of minorities.

Maryland’s New Plan
Manager performance "only slightly explains," why the fund did worse than its peers, Burd said. "Asset allocation explains 90 percent," he said. "A lot of our peers were earlier into private equity," Burd said. It took the fund’s trustees time to get comfortable with the illiquidity, use of leverage and lack of transparency that are characteristic of private-equity funds, Burd said.

Maryland now aims to put 10 percent of its portfolio in private equity and the same share each into bonds, real estate and "credit opportunities," which include high-yield instruments and distressed debt, according to Burd. It is also allocating 15 percent to assets that will protect against inflation such as commodities, 7 percent to hedge funds and 2 percent to cash. The program is cutting the proportion for stocks to 36 percent from 51 percent, Burd said.

As Maryland diversifies its investments, it has improved expected returns while reducing portfolio risk, according to an analysis by the investment consulting group Hewitt EnnisKnupp Inc., cited in the Department of Legislative Services report.

Boom, Bust, Reaction
Maryland’s Sharpe Ratio, a measurement of the return that can be expected from each unit of risk, increased to 0.377 as of June 30, 2010, from 0.242 as of June 30, 2007, according to the report.

Although it may not appear achievable based on the last decade, public pensions should be able to return 8 percent a year on average over 30 to 40 years, said Wilshire’s Neill. Stocks have earned about 10 percent annually over the last 70 years, and will continue to produce "high single-digit" returns, she said. The debt weighing on the U.S. government, businesses and consumers will decline over the next 10 years, Neill said.

"There are regular booms and busts, and then there’s reactions," Neill said. "Ultimately, there’s always recovery, and that’s what you have to keep in mind as you’re looking out over a 10-year period."

Yes, Food Stamps are More Important than Defense
by Sharon Astyk - Casauban’s Book

On Friday, in a move that shocked, truly shocked America, President Obama said that food stamps were more important than Defense. Since this sort of prioritization is one of the fundamental differences between the US extreme right (aka Republicans) and the US center-right (also known as the Democrats), the fact that this caused an uproar among Republicans should also stun you. Republicans warn us that slashing America's defense budget until it is only double the next largest nations will cripple us, Democrats call the Republicans meanies, and everyone ignores the point.

The point is that food stamps are more important than Defense, for a fundamental reason - it is because we subsidize food stamps that we aren't having food riots like the middle east. Without food stamps, poor Americans would be starving - period. This is both bad for America's public image, but even worse for its civil function, and for its much articulated claims that we are, in fact, getting better rather than worse. Only because of food stamps and related programs can such claims seem even superficially credible.

Let's run the numbers. One in seven households in America receives food stamps, and one in six would qualify. Nearly 1/2 of all American children live in households that receive food stamps. One in eight food stamp households cares for an elder, one in five cares for a disabled non-elderly adult. One out of every five recipient households has *no* other countable income - more than 7 million Americans total.

Cancel food stamps and 7 million Americans drop to zero income. More than 2/3 of those households include children. The average food stamp recipient household owns $101 of goods and savings - total.

Food stamps also have other effects. They are the social program that is most beneficial to the overall economy, because the subsidies are spent immediately. They act as a subsidy to the larger food system - and in fact, when one out of seven Americans requires food stamps to feed their family, they act as an overall subsidy on our food system. Just like many poor nations, we are subsidizing food for a population that cannot afford it otherwise.

Given that food represents a tiny portion of most household incomes - between 10 and 12 percent - the fact that Americans cannot afford food in large numbers is significant. Much of this is attributable to the fact that medical care and food are often the only "fungible" expenses in a low income household. Cutting back on food and medicine are the only ways to get by when an unexpected expense arises. It gives us a measure of the costs of all our supposed previous "growth" - low income Americans can't afford housing *and* food, and almost no one can afford medical care.

Fundamentally, America subsidizes food for precisely the same reasons other nations do - not merely because it is the moral choice, but because it keeps us out of the streets. If Republicans don't know this yet, they'll certainly find out.


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el gallinazo said...

The Anonymous

As I mentioned here many times before, I didn't take the Fed and the USG seriously enough when they said that they would do "whatever it takes." I must admit that this was a measure of stupidity on my part as everyone here knows my opinion of their criminal ruthlessness in matters beyond the purely financial. I agree with Stoneleigh, that the natural duration of the dead cat bounce from mid-March 2009 should have been about half a year. It is well over two years now. This has cost the US taxpayer at least 10T Benny Bux that they are on the hook for (and as the headlines scream at us, counting). I have publicly disagreed with Stoneleigh that I feel that she underestimated the effectiveness of the Fed's criminal activity to kick the can down the road. That said, I think we are reaching the end of the line. To paraphrase the soliloquy of the replicant leader (Rutger Hauer) in Bladerunner, "Time [for me] to die." It is now time for "austerity." This indicates to me that they are going to start pulling back on exponential increases in "liquidity." If that is correct, TSHTF in the stock market soon and we go into blatant deflation.

The hyperinflationistas don't think that the Owners and their puppet politicians can take the heat of the consumerate. With the exception of FOFOA, this is their entire basis for converting a hugely deflationary event into a hyperinflationary event. I disagree. I think they will. That is why God made tear gas and M-16's. That is why we have been conditioned like boiled frogs to accept a police state.

As to not recognizing my hometown by Christmas 2009. I have not been to the USA for a couple years barring a few hours in Miami, nor my home town (NJ) for decades. But, I am getting feedback from friends that the impact on residential areas for the poor to middle/middle class has been severe to devastating. Of course Tiffany, Gucci and the gated communities are still doing well. Manuel - not so much.

Re Seychelles last comment


Ashvin said...

The Anonymous,

The problem for me with your argument is that you are confusing a lack of accurate timing for a failure to keep an open mind and evaluate the objective evidence. Personally, I have never made specific predictions like the ones you mention, but I'll also admit that I was expecting another large leg down in the crisis last year. It wouldn't have surprised me in the least.

Regardless, the inaccurate predictions and/or expectations of large movements in the market is irrelevant to the underlying theoretical and scientific basis of our views, and it should not independently force us to re-evaluate them. That's called being "results oriented". For example, if you have solid evidence to suggest a coin has a probability of landing heads or tails 50/50, the fact that it comes up heads 10 or even 20 times in a row, by itself, shouldn't really make you question your original estimate. That is even more true when evaluating much more complex situations that are more easily manipulated in the short-term.

According to my calculations, the "muddle through" scenario is even less likely than near-term HI, which is even less likely than severe deflation followed by HI.

VK said...

Wow! Now that's a black swan. Lol. Great article, man even that Fleming dude would've balked at that story. Unreality!

Jason said...

Tell me, which writer can make that up and live?

Evelyn Waugh.

VK said...

4 scenarios for the future per my view,

1) Collapse - Society breaks down for a long period. Kinda like what Orlov writes about. Lots of chaos, you'll need luck, wits & should know influential people. Can get real ugly the longer it lasts.

2) Depression - Society breaks down partially, sure banks are closed, factories get shut. But some semblance of order remains. People pull together for the most part & government functions to some extent. Some people might even do very well by being in the right business, right position in bureaucracy.

3) Stagnation/ Muddle through - At best it can go on for 1-2 more years, though some say a decade. Its what we have today but with a deeper gloom through society. Lots of people are doing ok and will continue to be ok but those at the bottom will keep growing.

4) BAU growth - Miracle energy source & voila! No need to worry, big government is there and after that it's singularity.

We can tentatively plan for scenarios 2 & 3. Maybe become really specialised and invaluable at work or start a business related to day to day needs. But a collapse would be tough. Where would you earn money to buy food at the store that can't be delivered or gas at the station that rations you to a few gallons such that you can't get to work? What about crime? Or lack of Government presence? What if you need highly specialised medical care?

Basically it's really a kaput scenario. Complexity collapse => die off.

We can only hope for the best, that is, a depression or muddle through. One can atleast plan & mitigate that to some extent and not be reliant on lady luck entirely.

VK said...

Let's say I have lots of cash & gold stored for the coming decline. Let's say I have an off the grid house - the works! Solar panels, wind turbines, grow my own food, stash of guns & ammo, compost & do hydroponics. Let's even say you live in an isolated area with few people & are thus safe - no overpopulation & minimal risk of attack.

All great! But what if you get sick? And need specialised medicines or maybe your spectacle numbers have gone up? What about a tooth ache? What if your crops get Spoilt due to a bad weather event? WTF can a person do?! It's insane. The level of complexity we have today is way, way beyond anything we've ever had. And our dependance on a functioning system is terrifying.

We are largely trapped.

The Anonymous said...

"El G. said..That said, I think we are reaching the end of the line. To paraphrase the soliloquy of the replicant leader (Rutger Hauer) in Bladerunner, "Time [for me] to die." It is now time for "austerity." This indicates to me that they are going to start pulling back on exponential increases in "liquidity." If that is correct, TSHTF in the stock market soon and we go into blatant deflation."

El G. My point is more of a philosophical one. Not saying this is, but suppose your position above is your "line in the sand". Lets say, it is now 2013 and we still dont have blatant deflation, is there ever a point where you say something akin to "my god, they could keep this going for another 5-10 or even 20 years" or will you simply draw another near term line in the sand for blatant deflation?

Im pretty sure the answer is the latter and not the former. Thus the question is, is there ever a point where one quits drawing continual near term lines in the sand, or is one destined to continue doing this til the end of days?


"Ash said...That's called being "results oriented".

Frankly, I dont think there is anything wrong with least not at some point. Lets expand upon your coin example. Your baseline assumption (correctly) is that it is a normal coin and (in this case has a 50/50 shot of landing on tails. 10 flips in, if its all heads, I agree, no reason to question -- same thing with 20 heads...

But if it goes on much longer then that, I really really think you need to go back to the drawing board and look at your initial assumptions. Is this a weighted coin? Is there even a tails side on this coin? You get the idea.

At some point even you agree that it is better to look at your initial assumptions versus continually coming up heads for the duration. We humans are finite beings with finite timespans and what we are talking about here is a once in a multi generation event. In the overall scheme of things, timing this to within 20 years may be an incredible accomplishment. Unfortunately, it does little for those who were on the wrong side of the trade all those years.

jal said...

@ VK

The scenarios are already existing somewhere in the world.

how about 10M dying because the refugee camps cannot supply enough food.

Did you forget, the conditions existing in the "Arab Spring" countries?

What about the old standby countries of Haiti, Cuba, N. Korea?

We are living in a "green Zone" and the peripheries have been suffering because we do not want to be outside the "green Zones"

The "Green Zones" are shrinking and will continue to shrink.

I'm sure that I&S have done enough "walkabouts" in N.A. and Eu to be able to give a good estimate of which "Green Zone" will be able to last the longest.

I've just done a "walkabout" in my extended area and conclude that I will be in a "Green Zone" until the oil and electric supply run out.

If the lawmakers cannot come to an agreement that satisfy the rating agencies, which is almost 99% sure,
then timmy and ben will probably sell the US gold reserves, to china, in exchange for those worthless surplus t-bills and then they will have lowered the outstanding debt which will give the lawmakers time to spend more than they receive in tax receipts.

See ... gold is worthless.



VK said...

Hey Jal,

I live in East Africa! I see poverty & inequality on a daily basis BUT it's still not as bad as it might be. The economy here is growing, especially the major cities, we can still import the finer things, we have our own property bubble (16,000 mortgages in the entire country but an acre of land at around $1.8 million in the cities main areas - WTF LOL) & there's a tonne of UN agencies here that are helping to support the food crisis in Northern Kenya, Somalia, Ethiopia etc. Not to mention donor 'support' for our budget.

But $hit still meets fan everywhere! We only use a fraction of the oil that the US does but we still need it for transportation & the UN & WFP still need funding, globally banks need to be functioning to allow for exports/ imports.

It's insane! The complexity we have here in our little backwater here and yet we use so little relative to the rest of the world.

Sure wish I could look into the future and find one of em greenzones!!

SecularAnimist said...

I was thinking more like:

2012-2015 - complete economic collapse from successive deflationary collapses; global depression far deeper than 30s, followed quickly by a wave of currency collapses across the globe.

2020 - power grids go down across the world because from lack of cooperation and fighting, never to come back up, followed by a machete mosh-pit style population reduction

2025 - human population down to about 1.5 billion, desperately eking out a spare existence; disease rife; malnutrition routine in a Hobbesian nasty-brutish-and-short nightmare for the vast majority
That's my timeline

el gallinazo said...

The Anonymous

Regarding the coin example when the outcome becomes extremely improbable, I agree with you entirely.

I am not nearly as much of a dogmatist as you think. As I said in my previous comment, it is quite obvious how the central banks and the major governments have pushed back a complete deflationary collapse. Their two major methods have been to counteract deflation in the private sector by expanding credit in the public sector, and to hide the extent of the debts through government sanctioned accounting fraud. As the old saying goes, you cannot cure alcoholism by taking another shot, and you cannot cure an unsustainable debt burden by going deeper into debt. This time it is not different. They must be defaulted on through a traditional default or HI.

The basis of the current economic crisis is unsustainable debt. If TPTB can avoid the full consequences of this for, say, another 3-4 years, I would be willing to completely re-examine my suppositions. OTOH, I would be watching them intently the whole time, and constantly weighing these suppositions as events unfold, so the chances of having a sudden, Saul on the way to Damascus moment are small. At this point, however, I would be very surprised if severe deflation or hyperinflation, either leading to a grinding depression could be avoided.


Some people have complained about the constant debate here between a deflationary or hyperinflationary outcome. So I have taken Stoneleigh's 9 lifeboat points,

and listed them under

Good advice in either case

5) Gain control over the necessities
6) Work with others
8) Be valuable to your employer
9) Look after your health

Really bad advice if we go directly into hyperinflation, and bad advice in the case of moderate inflation (moderate inflation implies no depression)

1) Hold no debt
2) Hold cash or equivalents
3) Don't trust the banking system (minor)
4) Sell everything and rent
7) Limited reliance of PM's as a store of wealth

So this simple list show you just how important the debate is.

As to today's essay, would the theft of the ship in question in the Red Sea by the USA navy be considered an illegal act of war by international law?

D. Benton Smith said...

@El gallinazo

Hey there Oh Feathered One.

I had just started thinking about the Carol saga when the new TAE post came up, so my brain was still processing some of the old stuff. It struck me that her single word comment, “ HELOC “ speaks volumes.

Her situation ( and I assume her predicament is what she says it is ) is just a modern version of the debt slavery described by B. Traven in his “ The Jungle Series ” of short novels about exploitation of the Indios in Mexico early last century.

Just extend “credit” for something ( in Carol's case, a house ) that's worth a small fraction of the loan amount and rake in payments forever. If the victim ever gets close to clearing the debt then loan 'em some more ( like Carol's HELOC ) against the same piece of collateral that has “miraculously” doubled or quadrupled in value!

Those guys pumping the bubble ( knowing it will leave victims strewn across the country like road kill ) add NOTHING to the intrinsic value of assets , but get RICH just by finding new victims, luring them into the trap, and selling the same item over and over for ever increasing amounts each time.

If Carol was one of their small-timer lackeys then I suppose there's some basis for saying she got what she deserved, but on the other hand, taking candy from babies is still a crime.

There is no culpability in being tricked. Embarrassment, maybe, but not guilt. People were TRICKED into believing houses were “worth” 5, 10 or 20 times more than when they were built. Which is physically impossible. Houses don't get younger and prettier over time, they rot away like anything else. Otherwise I would be the the sexiest handsomest man alive by now... present company excepted, of course

And then were tricked again into believing that it was “safe” to borrow against that illusory increase. The people responsible were fully aware that what they were doing, but greed enabled them to justify the crime. To them it is totally the VICTIM'S fault for being trusting and gullible.

Well, caveat emptor may be a legitimate warning for victims … but that don't mean the Perp ain't a Crim.

Most people are REALLY bad at math, but that doesn't make them cheaters. However, the guys who are really slick with numbers, and use that to create millions of victims and wreck an entire civilization ? THOSE guys ARE cheaters, and to them we should apply two basic rules of play :

'turnabout is fair play' and 'when fighting for your life there is no moral obligation to play fair.'

I hope Carol ( and everyone in a similar situation ) figures out a way to stiff those creeps, keeps the house AND the $300 G's , AND dumps the remains in a land fill.

I'm sure the bankers would be more than happy to do the same for her.

Come to think of it, maybe there is some sort of moral obligation here.

Greenpa said...

since we seem to be all about shit hitting fans and doom today:

From NHK news:

"1,500 tons of radioactive sludge cannot be buried
Nearly 50,000 tons of sludge at wastewater treatment facilities has been found to contain radioactive cesium as the result of the accident at the Fukushima Daiichi nuclear power plant. Over 1,500 tons is so contaminated that it cannot be buried for disposal.

"Water treatment facilities in eastern and northeastern Japan have been discovering sludge containing cesium.

"The health ministry says there is 49,250 tons of such sludge in 14 prefectures in eastern and northeastern Japan.

"A total of 1,557 tons in 5 prefectures, including Fukushima and Miyagi, was found to contain 8,000 or more becquerels per kilogram. This sludge is too radioactive to be buried for disposal.

"The most contaminated sludge, with 89,697 becquerels per kilogram, was discovered at a water treatment facility in Koriyama City, Fukushima.

"The ministry says 76 percent of the roughly 50,000 tons of radioactive sludge is being stored at water treatment plants and they have no ways to dispose of most of it.

"It says more than 54,000 tons of additional sludge has not been checked for radioactive materials.

"The ministry plans to study how to dispose of the radioactive sludge.
Friday, July 29, 2011 04:35 +0900 (JST)


Trying to get my head around sewage with 89,000 nuclear disintegrations/second/kilo. That's each second. Each kilo. That's really really hot shit.

I think this stuff has to include rainfall runoff- if people were pooping stuff that hot, they would definitely be dead, right now.

Just being close to it, though, is going to mean a lot of dead people, eventually.

Ashvin said...

The Anon,

"At some point even you agree that it is better to look at your initial assumptions versus continually coming up heads for the duration. We humans are finite beings with finite timespans and what we are talking about here is a once in a multi generation event. In the overall scheme of things, timing this to within 20 years may be an incredible accomplishment. Unfortunately, it does little for those who were on the wrong side of the trade all those years."

I agree with your general point above, but I don't understand why you think "at some point" is "at this point". I can understand why you would be frustrated with someone like Pretcher, who is an intelligent person and has developed insightful views about "socionomics", but is still operating under the detailed financial adviser paradigm. People in that industry need to give you a certain degree of certainty and specificity to sell their product. I prefer following people like Dr. Steve Keen, Stoneleigh, CHS and perhaps a few others, who rely less on TA and fractal wave formations to constantly make specific market predictions, and more on big picture macro-trends in economics and finance, as well as social dynamics and geopolitics to some extent.

Going back to the coin example... I think it's important to understand that as we evaluate relatively more complex systems, such as markets or economies, the less instructive specific results become. Perhaps 50-100 flips of heads in a row should alert us to some fundamental error in our assumptions about the coin (such as it being a fair one), but a few years without a market collapse doesn't provide nearly as much instruction.

This fact can be seen when you move from something like a coin flip to a more complex game of craps, blackjack or poker. I've seen people defy the odds in those games for what seems to be impossibly long durations of time. In poker, I've heard many people claim that the game is rigged and they legitimately believe what they're claiming, because they lose with the best hands for so long that they can't imagine any other possibility... but they're wrong, it's not rigged, that's just how the game works.

That's also why you almost never hear people here at TAE tell you to place bets against the market. Most middle or upper-middle class people in the developed world have been trained to think that if we are not participating in the game and making nominal returns, we are losing out somehow. That's not really true in your "muddle through" scenario, and only partially true in the HI scenario (if all of your cash savings gets wiped out). There is a lot of value in minimizing your exposure to risk by staying away from the markets all together, getting out of debt, retaining cash for expenses and making various preparations that are relatively cheap right now and that will be useful no matter what happens.

el gallinazo said...

I don't know Greenpa. Cesium is a valence I metal with the lowest electronegativity of any natural element. This means, as you are undoubtedly aware, that just about any conceivable salt would be extremely soluble. Which means that it would be unlikely to precipitate out in sewage treatment plants. Most of it should stay in solution. What is your take on that?

Greenpa said...

boy, good question, El Gal. Sludge is mostly cellulose from bacterial cell walls- lots of really tangled branching molecular structures. Maybe the big atomic radius of cesium encourages it to get caught in that kind of gunk?

Greenpa said...

Ok, I'm sinking lower and lower. I just posted part of a Punch and Judy script in the comments on a WaPo article on the debt drama.

Look, they need better scripts, and I need the entertainment.

Lynford1933 said...

I thought all the gold bars were gold plated tungsten ...

ThatGuyInTheBack said...

I have a depressing theory about the financial machinations in Washington DC. I think the debt ceiling debate is a sideshow – a small part of a bigger global picture. I think there are factions in government/finance in Europe and the USA who want to collapse the USA and European economy to preserve Euro-American hegemony (and neutralize the Chinese) by killing the US Dollar and the Euro.

The scenario, I think, will go like this:

1) No debt ceiling agreement is reached.

2) Congress dithers for weeks or months as the government meets fewer and fewer of its financial obligations.

3) Eventually, the bond market panics. The USA’s debt is now unfinanced by China, et. al. exacerbating the government’s crisis. The panic spreads to Europe where the Euro dies a noisy death.

4) The shrinkage of government money tanks the economy of the USA. Deflation follows rapidly. The Euro becomes yet another failed fiat currency.

5) Through QE3, QE4, QE-forever or some other method, the government starts printing money in dollar denominations and injecting it into the economy in any way it can until inflation reaches Zimbabwe levels.


1) In the traditional fashion, the USA has hyper-inflated its way out of dollar denominated debt.

2) New currency is issued, but wages and prices in the USA are now realigned with BRIC and Chinese standards, making the American economy competitive on price.

3) The Chinese must either keep their currency pegged to the dollar, making it worthless and causing major political upheaval at home, or let it rise, making their export market much less competitive, which suppresses their economy.

In short, China is de-fanged while America and Europe are given breathing room while they still have military power, and oil is plentiful. The alternative, waiting 10 years for the inevitable default, would simply give China and the BRIC countries overwhelming military and economic advantage.

Better to take your pain now, if it takes your enemies with it.

Put yourself in the position of the "old money" elite in the USA and Europe vs. the upstart and uncooperative Chinese elites. If you were old money, what would you do?

D. Benton Smith said...

@Greenpa El G

Probably uptaken biologically by the various bacteria and other small organisms that thrive in septic sludge.

I'm no chemist (or microbiologist for that matter ) but my layman's understanding is that living organisms process cesium as if it were potassium, so it literally becomes part of their gooey little bodies ( or carcasses, post mortem . )

Gives a whole new meaning to " Hot Shit! " doesn't it ?

souperman2 said...

"...the government starts printing money in dollar denominations and injecting it into the economy in any way it can..."

This is where the rubber hits the road in the inflation vs deflation debate.

Explain this action, complete with well researched links please, then we can talk.

My opinion... There is no mechanism to "inject" even a tiny fraction of what needs to be injected to overcome deflation into the REAL economy.

Steve From Virginia said...

It's hard to predict the future so I won't. Look to the now ...

Democracy in action: it's messy! Americans have had it so easy for so long that nobody knows how to deal with the fact our way of life has literally 'run out of gas'.

People -- not just government apparatchiks -- are like children wanting that 'easy solution' when these have been chosen over and over for decades. The repeat easy choices are why Americans have had it so easy. Now the well of easy solutions is dry.

The hard solutions ... well, they are hard. Something has to be jettisoned like automobiles or concrete towers in Blade Runner cities. Nobody wants to give up the Blade Runner cities because they're 'modern' and the people who own them get 'rich' by their means.

America has been about 'earning' money by speculating, having Mexicans or Chinese do the heavy lifting, drive the yacht-like SUV to the corner to buy a corn dog. Nobody wants to sacrifice this wondrousness, no wonder people like bond rating agencies are spreading scary stories.

Confronted with a 'real' problem -- not an imaginary weapon of mass destruction somewhere over the horizon -- exposes a leadership cadre incapable of identifying cause-effect relationships ... In America, EU, China, Japan, Australia, Brazil, etc. Our precious 'systems' are supposed to run themselves and make cadres look good -- and get rich in the process. Now?

We cannot admit to ourselves we are good at what we are about: stripping stuff out and feeding it into machines. Now we have to come up with a 'Plan B' that includes something other than machine feeding. Nobody knows any other way.

There will be mistakes and more hopeful lies. America will default, it has to. Maybe not next week but sometime sooner than later. So do all the rest of the countries: the world has changed under everyone's feet.

Out of gas.

Ka said...


It appears the major corporations disagree with the likelihood of your scenario. See "US corporate cash hoard in the trillions: Moody’s" article above.

Phlogiston Água de Beber said...


At last, a reality-based comment. And, I rather like the way you put it. Well said.

Anonymous said...


>>1) In the traditional fashion, the USA has hyper-inflated its way out of dollar denominated debt.<<

I don't think most people knows what this means. It means the end of debt based money into printing unbacked currency.

Why would people who are raking up society's assets in droves, all under the radar, end their Alladin's lamp of criminal wealth wishes?

Not to mention they hold the vast amount of cash - essentially, they'd wipe out their wealth and bail out the debtors who now pay for their homes with loaves of bread.

Deflation makes more sense. They fully asset strip society and leave it impoverished. Their money has now been transferred into real wealth.

An impoverished society will go along with any plan - not because they bought their home for the price of bread, but because they are starving and just want a loaf of bread.

Big Finance Capital economics will drive where we go from here, IMHO.

Patrick said...

@ VK

"The level of complexity we have today is way, way beyond anything we've ever had. And our dependance on a functioning system is terrifying.

We are largely trapped."

Indeed we are and there is virtually nothing else to say--but we will keep on saying--just saying.

snuffy said...

I have to believe the antics of the Ideological fanatics in the tea party are starting to wear thin with "Old money"...It might well be that Dick Armey might have started something that will end up eating the guts of the republican party...It was with his money,organization,and political skill that they have reached the place,now,where they may well due some serious damage to the powers that be.Stay tuned.

The power elite have always sought to control from behind the blue curtain,any political movement or force that could threaten their control of the REAL levers of power.I think Armey and Freedomworks are that control,but at this stage,we could well be seeing ,with the dumping of the current house leadership[which sounds like is in the works]a new, and very dangerous to TPTB,political force forming...He may well not have control now.Cantor is lusting after the speakership...and he has the teaparty yahoos in lock-step.

These people are BELIEVERS in the political dogma they are chanting...And were not inside "the machine" in Washington long enough to be co-opted by the money,whores,and POWER in that town. John McClain rant about "People who had been in this town for 6 months"ect. was very telling...the good old boys really don't have control of this lot.If this is really truly the case.
That in itself,the failure to co-opt that freshman class of congress-critters fast enough,might well cause some real damage to the comfortable life of washington elites...
Or not...
Already they have set the dogs after the that was ranting about not putting one dollar more in charges on "His kids and grandkids creditcard" has been exposed as a "Deadbeat Dad" to the tune of 100k+....expect to see more potshots at all of them as the system desperately trys to exert some kind of control....

Were I not more than a bit concerned about this being a for real political dogfight that might well trigger some real bad,bad shit,I would say "Time for popcorn and giggles"as I watch the system so carefully constructed to insulate "The Leaders" from the consequence of their actions Implode.With senior senators making nasty,hard assed insults,and old money loosing LOTS,and LOTS of money....

Life has just got more entertaining...
Hearing that lobbyist whine about being out of the loop was sweet.For way too long they have been the they may well loose some real skin in this game,Ho ho ho oh...sweet.I love it.

I never thought political theater could be so much fun to watch..

Being pre-occupied with the exact timing of "The Phase-change",we are headed into,can/is distracting to one.My own feeling is it will manifest itself to each of us in different ways that will tell,each of us,that "It" has occurred,as each of us have different criteria,for the type of events[event horizon?]that will constitute this occurrence.

To some,being a 99er has brought this home in a cruel,hard loss of home,belongings and position, has already grimly shown a cold,brutal future.

Each of us have within us a list of what we think will be the "true sign".It might be a idea for the board to discuss this in a future rant...

Much work tommorow time for sleep.

Bee good,or
Bee careful


Josh said...

@ Stoneleigh,

Your comments regarding Tempe Arizona real estate is too qualitative. To know the dip size, you need supply info and demand info. I'm tapped into both. I work the phones and I hear the demand, from the big money investors. They're waiting, and picking out their properties -- premium props. Joey and Janey Bagadonuts doesn't get these unless they join the heavy hitter club.

@ el g, come north and see what your missing in AZ. It's safer than Mexico, and the snow birds love it. Take a closer look to see what you're missing.
A-Z is the place to be

@ skipbreakfast, I knew you weren't that catty. And you'll see the progress once we all chip in together to fix this. We're all Americans. We come together in times of trouble and real estate is what we're built from. This is a nation of homeowners and homebuilders. It goes back to 1776 at least.

ben said...

evelyn waugh - good one, jason.

mid-century author lawrence durrell, foreshadowing the cypriot fiscal predicament:

"Now if I wish to bring pressure to bear upon my [Greek-Cypriot] neighbour I simply say to
him: «My dear fellow, no Greek would do that, charge that, think that, etc. You astonish me.»
And this phrase acts like a charm, for everyone is jealous of the good character of the Greeks
and tries to be as like them as possible."

though in the regrettable event of the munitions disaster we see that

"the vagaries of fortune and the demons of ill luck dragged Cyprus into the stock-market of world affairs."

Alexander Ac said...

Regarding peak oil vs. peak debt - first oil gave us money, then money gave us debt, that debt gave us more oil, and now peak debt brings on the peak oil and peak peace :-)
but more importantly, who is right on the debt ceiling - Ambrose EP with "go to Mars" or Mish with "it is a blessing" if the debt ceiling is NOT hiked...




gylangirl said...

I think the ones swimming in cash are just tired of low rates of return on their money and are engineering higher interest rates on purpose. The banksters wouldn't mind higher HELOC and ARM and credit card rates of return either. Always ask of the worst case scenario, "Cui Bono?"

Stoneleigh said...


If you don't help me pay my mortgage then I'll default and drag my neighbors home down in value.

That doesn't help anybody.

I'm working. I've got income and I can pay it off--eventually--with a little help from my neighbors, who'll thank me for preventing their own real estate from falling.

I can't help you pay your mortgage. I am not an American taxpayer.

Your neighhbours might find it in their interests, but a majority of the country will not. Think how the people who have never had anything will feel if the over-leveraged are bailed out. I think there will be a huge groudswell of anger eventually. Conspicuous beneficiaries of the boom years will be at risk of being on the receiving end.

I know people only did what everyone else did, and what was considered normal for the income bracket and the times. Still, the over-leveraged of all income brackets werre the willing victims that predatory lenders require to make bubbles happen. Looking in the mirror and recognizing that would be a good idea. When you ask for a bailout, be aware that you are asking those much less fortunate than you to cover your losses. That what the bankers do, and it doesn't make them popular either.

Ultimately it won't work anyway. The government might reduce your principle, but the market has so far to fall that you'll be underwater again in no time. Subsequent bailouts will be harder to get, as tax revenues will have fallen by then and the government will be overwhelmed by competing calls for aid from the desperate. You are in a very vulnerable position. I strongly suggest you get out of it while you can. It won't be possible to do so if you wait for all the liquidity in the real estate market to dry up again. Then you really will be stuck. If the government changes the rules to make mortgages recourse loans then the trap will be complete. Unless you fancy a life of debt slavery, I would act while you can. You are not actually wealthy. You have merely the appearance of wealth, and only temporarily. Living beyond your means is a dangerous game to play.

Houses need appliances and furniture. Somebody makes that stuff. Perhaps the factory is in your town. Maybe your husband works in one of those factories.

In any case, your pension fund is probably holding my mortgage, or at least a piece of it, so you might as well help me help myself.

It'll cost you more if I default than it will to help me.

No one will be buying appliances and furniture when they don't have any money. Keeping over-stretched debtors in large homes will do nothing to keep those sectors alive. Pension funds are mostly history too. They were chasing yield without realizing that meant chasing risk. Many of their assets will be worth pennies on the dollar at most in the coming asset price collapse. Keeping you in your home will make no difference to their fortunes because the money has already been gambled away. The crash will merely reveal the scale of the losses.

sumacarol said...

From the "real" estate file: I was talking to a contractor yesterday about getting some home repairs done and I learned that, due to health concerns, the fellow has to get out of contracting and has moved into....buying depressed real estate. That's right -- he has taken out and used a rather large line of credit against his paid-for house and is buying many houses for about one-third of the asking price (in the US), hoping to flip them for more than he paid for them. For some reason (I did not query) he thinks that someone will pay more than he did, with no apparent explanation for why the seller was willing to unload the houses to him for one-third of the asking price. The guy was completely unaware of the title fraud. "Many opportunities to lose your shirt" Here's one -- gut-wrenching -- he's an extremely hard worker and got taken in by some get rich quick scheme. (BTW: he paid dearly for the training to get into this - sounds like a ponzie).

Jack said...

Hi Ian
Thanks for your help
When you say bank runs I guess you mean bank failures.
About this web site I think it is very helpful and the economic conditions are changing fast so we need more than the archives.
You cant find a perfect place and this place also is not perfect but it would be a better thing to say some nice things about them rather than bashing them all the time.
God bless you.

Alexander Ac said...

Sory, but I have to do that, and economist on my blog provided mathematical evidence of endless economic growth with finite resource, here it is:

Productive function to be Y(t) = A(t) * X(t).Let the productivity grow exponentially, i.e. A(t+1) = k * A(t), k > 1. If the resource use is X(t+1) = c * X(t), and given that 1/k < c < 1, the result will be exponential growth Y(t+1) = (c*k) * Y(t), where (c*k) > 1. And at the same time use of the finite resource till infinity will be X(0) * 1/(1-c), which is finite number.

Funny or tragic? Rebbutal?



p01 said...

I have that Lehman feeling...

Alexander Ac said...

sory, here is the rest:

Y = GDP, X = utilization of finite resource A = productivity, t = time

p01 said...

Tell him to read today's news. And get out more....

Alexander Ac said...

Yeah, I know... crazy stuff :-/

You know, worse is, they never find out what went shit wrong...

Greenpa said...

D. Benton Smith said...
@Greenpa El G

"Probably uptaken biologically by the various bacteria and other small organisms that thrive in septic sludge."

yep. Duh. :-) The duh is for me- and this tiny conversation is a beeutiful illustration of how easy it is for our "logical processes" to get derailed. The way El G phrased his question put my brain into "chemistry" mode, and I totally forgot I'm a biologist.

I DID remember- when I was in bed and 96% asleep last night- sludge is not dead, for crying out loud. So it's not only possible, it's certain, that the bugs are actively binding useful ions, like, of course, potassium/cesium.

The scary thing then is how strongly they seem to be binding it. El Gal's chemistry is correct, of course, cesium is exceptionally soluble- but that shit is really really hot.

So. How hot are the bodies it came out of? I don't know; of course; there are many ways the stuff could wind up in sludge without the humans also getting radioactive. But the opposite is true, too.

Jack said...

Hi ThatGuyInTheBack
All you have to do is look at what they are all about and than you can conclude the outcome.
I dont know what their plan is but I would not be surpised if US GOV said get out of here we do not owe you anything.
Or they could say that in a more polite way

p01 said...

That sounds like itsy-bitsy-tiny-little Godzillas.

Stoneleigh said...


Your comments regarding Tempe Arizona real estate is too qualitative. To know the dip size, you need supply info and demand info. I'm tapped into both. I work the phones and I hear the demand, from the big money investors. They're waiting, and picking out their properties -- premium props. Joey and Janey Bagadonuts doesn't get these unless they join the heavy hitter club.

I don't need to know today supply and demand info at all, I need to know tomorrow's. Today's numbers reflect the artifical and temporary support of a rally that will not last forever. Extrapolating recent trrends forward is dangerous. It is far more important to anticipate discontinuities.

Under a deflationary scenario, with a real liquidity crunch the like of which hasn't been seen for decades, no one will be getting mortgages. Credit will either not be available at all, or will only be available for the very few at punitive rates of interest. If the pool of buyers consists of those who can afford to pay cash, and are prepared to use scarce cash for that purpose at that time, there will be no price support. Add to that the fact that sellers will be desperate and will have no bargaining power whatsoever, and then think where prices might end up. Good luck selling for more than 10% of what your house is worth now in a few years time.

el g, come north and see what your missing in AZ. It's safer than Mexico, and the snow birds love it. Take a closer look to see what you're missing.
A-Z is the place to be

Who's going to be a snowbird when no one has any money? I was in AZ very recently. It's a desert. This is a big picture site. We integrate finance, energy, other resources, environment and many other things. AZ is almost unbelievably over carrying capacity, and critically vulnerable to water shortages, which are themselves dependent on cheap and plentiful energy. Quite apart from finance, much of AZ is a major accident waiting to happen.

How arw you going to air condition your home? Airconditioning a large home will be much less affordable than a small one. AZ used to use swamp coolers, but all the pools and lawn watering have produced too much artifical humidity for those to work.

Think through your life and your dependencies. I assure you they are many and they are critical.

skipbreakfast, I knew you weren't that catty. And you'll see the progress once we all chip in together to fix this. We're all Americans. We come together in times of trouble and real estate is what we're built from. This is a nation of homeowners and homebuilders. It goes back to 1776 at least.

On a large scale, that's about when our current expansion cycle began. We're about to experience a major correction of that entire upward move IMO. Human ingenuity can't create energy, and without energy we can't access other critical resources that are themselves limited.

Americans are not necessarily going to come together in times of crisis. Such times are far more about division that togetherness, at least on a national scale. Neighbourhoods may come together, but nations are far more likely to fragment into rival interest groups. That is the psychology of contraction. It's not a cheerful can-do message of the kind Americans prefer, but it is a reflection of reality rather than fantasy. I would rather live in the real world myself.

Frank said...

@Alexander Ac sure, all you have to is postulate that productivity rises exponentially.

Why that postulate is true is the question to ask him.

Chas said...

Any thoughts from the Euros here about real estate in Paris?

Paris seems to be unusual in that there is worldwide demand and an under supply of housing with limited expansion possibilities.

What do you think will happen to Paris real estate in the next 10 - 20 years?

p01 said...

Honestly I'm shocked that we have not yet seen Paris making headlines MENA-style. About the real-estate...80-90% as all bubbles go.

Greenpa said...

looking at the "news" today, and the market behavior; if my observation about bad news= market up is accurate- then the market ought to end the day slightly up, or maybe flat.

Or, of course, not. :-)

The Anonymous said...

El G. Very much enjoyed your comment, and agree, especially in the sense of bifurcating the lifeboat points into the (a) good advice in any case versus (b) only good advice if we get deflation.

Regarding the point at which you reconsider/retest the whole theory, I have no objection to the 3-4 year timeline -- everyone has their own personal comfort/risk tolerance, and if that is yours, so be it.

The only thing I would do if I were you is not speak of it as "3-4 years" as its too tempting to treat that as a moving timeline. Instead, give it a fixed date i.e. "2014-2015" such that it then becomes more like a coundown clock.

In either event, appreciate the thoughtful consideration of my original comment.

Anonymous said...

Re home invasions (yesterday)

Thank you for your responses.


Scary times, indeed! Down the road, a few weeks ago a home was burglarized while owner (family with three young children) was out for the day -- $15,000 worth of stuff stolen. Then, three days later, the thieves returned and stole the well equipment! We never used to lock our doors.


We do live simply. Hope it will deter potential robbers. Hmmm, so fake cops might not be fake. Now this is even scarier...


Yeah, we gotta get to VT! :)

Greenpa said...

A fun observation for fans of distorted universes; at the moment, Apple, Inc, has more cash on hand than the US Federal government.

Assuming their numbers are correct, of course. This has to be my favorite statistic, displacing the one a couple years ago where Harley Davidson was "worth more" than General Motors; according to stock values.

Anonymous said...

"Theft is on the rise in a worsening economy"

Jack said...

The Anonymous
From what I see in this forum and also from looking at the way things are it will definitly be a deflation befor HI

Anonymous said...

VK said:

"We are largely trapped."

Yes, our collective predicament... I feel it!

The Anonymous said...

"Ash said...I agree with your general point above, but I don't understand why you think "at some point" is "at this point"."

I dont think "now is the time to reconsider" for everyone -- far from it. Remember, the original question was when, if ever, will people reconsider the model? The answer for everyone will be different. Everyone has their own personal wall of worry to climb, and there is no one size fits all answer.

Still, its interesting to hear others answers. My honest opinion is that for some people, the answer will be never, in that if the predicted catastrophic outcome hasnt happened, they will simply continuosly push the timeline of the catastrophe forward, til the end of their lives. Perhaps thats a minority, perhaps its a majority. We simply dont know.

That said, im glad to see there is finally some candor here. Again, im not saying "now is the time to reconsider", im merely asking "when, if ever is the time to reconsider"? 2 years ago, daring to even ask this question incited a terse response. More recently it was met with silence. Now, it is occasionally it is met with a thoughtful response, which is big progress in my book.

"Ash said...There is a lot of value in minimizing your exposure to risk by staying away from the markets all together, getting out of debt, retaining cash for expenses and making various preparations that are relatively cheap right now and that will be useful no matter what happens."

I generally agree, so long as inflation remains basically minimal to nonexistent in my muddle through scenario. That said, I do differ from you WRT to debt and real estate.

Outside the bubble markets, there are fairly sizeable areas in the US (perhaps elsewhere) where the price/rent ratio is not majorly out of whack. If can kicking is successful for another 10-20+ years, its not outrageous to think that you could have your doomstead paid off by the time the great kaboom happens. As such, I think it is borderline foolish to tell homeowners to sell in that they very well could "beat the clock" and have their place paid in full regardless.

Moreover, for the renters, I cant help but think of the guy I know who has been renting for 24 years because he continuously kept thinking deflation was "just around the corner". Imagine how much better off he would be if he seriously reconsidered his beliefs in say 1993, versus his chosen path of thinking "deflation is imminent" for more than 2 decades.

SecularAnimist said...

""My honest opinion is that for some people, the answer will be never, in that if the predicted catastrophic outcome hasnt happened, they will simply continuosly push the timeline of the catastrophe forward, til the end of their lives""

God forbid we get the slow boil. We need scalding hot water thrown on our backs. This is truly doom! Under this scenario, it will be nature to finally throw capitalism off. That is the worst case scenario.

Glennjeff said...

Kevin Slavin: How algorithms shape our world

el gallinazo said...

The new disaster (crony) capitalism:


1) Figure out how you want to alter the laws and society. Don't think small.

2) Draw up detailed legislation and put it in a locked draw.

3) Determine the necessary changes in executive function (banking rules, law enforcement, constitutional rights, war making activities, etc.) and start to implement them slowly, where possible, and clandestinely. Screening *** all*** Americans' emails through predator supercomputers (completed by 2004) for example.

4) Design a crisis custom built to implement your otherwise unpopular legislation. The type of legislation will determine the nature of the crisis. The one thing that they all must have in common is that they scare the bejesus out of the public. It could be a false flag operation with the loss of thousands of lives or it could be the eminent destruction of retirement funds.

5) Execute crisis. Make sure that the MSM you own turns up the volume to 11 and bombards the consumerate with the news of their impending doom. Ideally, at least 80% of the consumerate with IQ's over 60 should be suffering loose stools.

6) Wait one week and remove said legislation (which should consist of thousands of pages for obscuration purposes) from the drawer and introduce to a panicked Congress.

7) Consolidate the executive power to terrorize, manipulate, and fleece the consumerate.

SecularAnimist said...

"Americans are not necessarily going to come together in times of crisis."

You're correct. After centuries of that bootstrapper, maverick, sink-or-swim capitalist jihadist cultural "divide and conquer" memengineering, they don't know which way is up. At least not for a while, they won't. And from our collective immaturity we will suffer more. It's like cosmic forces are not going let us leave the table until we eat our broccoli. The question is; will we starve ourselves to prove reality wrong. I give it a 50/50.

"Such times are far more about division that togetherness, at least on a national scale."

And TPTB will see to that. The last thing they want is solidarity. Though, being insistent on it probably does not help.

" I would rather live in the real world myself."

The real world is about 180-190 million americans don't have assets to build a lifeboat. Thinking lifeboat strategies, doomsteads and transition towns - while preaching patterns of behavior that increase social ills - are going to protect you, is not being in the real world. Sorry, it's not. If the scope of damage that you predict is coming, and I think it, very obviously, is as well. Then those are only temporary put-your-life-vest on strategies. I know the average age of posters here is 60+, but come on, not everybody is a AARP member. Some of us have to make it more than a decade or so. The madness will catch up with you. Eventually, social institutions need to be dismantled and rebuilt.

If you want to be in the real world, start with being honest. Capitalism is dead, it's over, it's done -never, ever to return. Humpty dumpty is about to fall off the wall. And when analyzed, it was a piece of shit from philosophical underpinnings onward anyway - regardless of what the brochure says. Start with that and you will feel better and move people in the positive direction.

But this, fragmented and scattered mini-society collapse fantasy that is prevalent in the doomer community, is not going to last. Because it excludes large swaths of the population that will need to be "managed" and infrastructure maintenance. Sorry, you are not going to be able to watch the world burn on the internet from the safety of your doomstead for long. That is not how this is going to play out(fast or slow).

This is not the 30s, where nobody knew what was going on and thought economic crashes were acts of god. That is not the world we live in today. Though, we will see the same tendencies for that to flare up - but access to information will counteract it.

The rules of Money and property are not going to save us.

souperman2 said...

Now this is what I call forced austerity, AKA Demand Destruction. Just think how much more oil the ME would be using by now if we never went into Iraq, "bombed lebanon back to the stone age", didn't do "regime change" in Iran, not to mention all the other covert actions to them from using their own oil.

NATO war crime: Libya water supply

el gallinazo said...

The Anonymous

Let me applaud your current efforts. Far subtler than your previous efforts from early in the year. The implicit and pervasive message in all your posts is that deflationary collapse is probably 20 years or more down the road, if ever, and the majority strain of thought in this blog is doing a disservice to everyone. And like the kindly missionary priest, you are asking us how long it will take for us to give up our false gods and embrace your one true God.


"Still, its interesting to hear others answers. My honest opinion is that for some people, the answer will be never, in that if the predicted catastrophic outcome hasn't happened, they will simply continuosly push the timeline of the catastrophe forward, til the end of their lives. Perhaps thats a minority, perhaps its a majority. We simply dont know.

That said, im glad to see there is finally some candor here. Again, im not saying "now is the time to reconsider", im merely asking "when, if ever is the time to reconsider"?"


First of all, Stoneleigh always gives, intelligent, well considered, and ***candid*** responses in the comment section. Events may turn out other than she expects, but there is nothing dogmatic or duplicitous about her ideas.

Prechter is a straw man. I for one do not accept technical analysis in a market controlled by the central bank and its owners/primary dealers. And as to your friend whose prediction of deflationary collapse was decades early, well let me tell you about my friend who was quite sure that the plagues of Revelation were going to hit us in 1983. His finances also were in disarray. He invested in locust pie recipes.

"How long will it take for you heathen to see the light", you keep asking? Well, TPTB got one last bubble to kick the can down the road, the sovereign debt bubble. It gave them almost a two year delay over the 1930 scenario, when it was not implemented in the USA. Barring intervention by the IGMF ( The InterGalatic Monetary Fund), I cannot conceive of another bubble to kick the can down the road. Perhaps you can. And the sovereign debt bubble is obviously collapsing as daily headlines from Europe and the USA scream.

But the sovereign debt bubble gave the owners two great gifts, and not coincidentally. One was that it permitted an even greater, immediate looting of the remaining wealth of the middle class. The second is that it weakened nation states, perhaps fatally, which were the last remaining obstacle to the globalized neo-feudal NWO.

Well I cannot reverse your question - how long will it take before **you** reconsider **your** arguments. I just hope you continue to lurk here afterwards so I can take some time off from the general mayhem to thumb my nose at you.

Ashvin said...

The Anon,

"Still, its interesting to hear others answers. My honest opinion is that for some people, the answer will be never, in that if the predicted catastrophic outcome hasnt happened, they will simply continuosly push the timeline of the catastrophe forward, til the end of their lives. Perhaps thats a minority, perhaps its a majority. We simply dont know."

Yeah, we can't know for sure, but my guess is that you are still under-estimating the ability of people here to keep an open mind and re-evaluate their ideas. I mean, this is something we all think about every day, and it's almost all negative in some way (frustrating, maddening, depressing, annoying, etc.). As SA mentioned, every day that it goes on like this is agonizing in many ways. True, there are some benefits, such as our ability to keep sharing ideas in a relatively stable environment, and maybe we even get a bit of pleasure from being "ahead of the curve". After all, no one is perfect.

However, we are also not your everyday person who clings to beliefs and/or predictions because we want to desperately avoid the embarrassment of being wrong. I say "we" because I imagine I'm speaking for at least a few people here. I carefully consider every counter-argument that is presented to me and try to stay objective when deciding whether its net persuasive in pushing me away from my current views. Many times I have found that they actually push me closer, and while that may appear to be blind faith or stubbornness on the surface, I believe it is the hallmark of a solid theory and perspective.

"If can kicking is successful for another 10-20+ years, its not outrageous to think that you could have your doomstead paid off by the time the great kaboom happens. As such, I think it is borderline foolish to tell homeowners to sell in that they very well could "beat the clock" and have their place paid in full regardless.

Moreover, for the renters, I cant help but think of the guy I know who has been renting for 24 years because he continuously kept thinking deflation was "just around the corner". Imagine how much better off he would be if he seriously reconsidered his beliefs in say 1993, versus his chosen path of thinking "deflation is imminent" for more than 2 decades."

Its not necessarily "outrageous" to buy RE and pay it off, but that doesn't mean its necessarily a beneficial thing to do either. Even if rates remain somewhat low, you are still paying off higher interest to banks in a mildly deflationary environment. That is a real cost that must be seriously considered when looking at alternatives, such as renting or simply staying where you are. Just because there is no huge crash in the period of 1-2 years, doesn't mean people will have job security or access to subsidies/benefits that help them with payments. How much "better off" would the guy you know be? I don't know, but I imagine many scenarios in which he still would have been worse off buying in the early 90s. How much money would he have borrowed against his home equity, and at what interest? How much value would the property have lost in 2006-09, and how much downside risk would he still be facing in the next few years? Would he have sold the property at its peak value or would he have hung on like many people did? How much would he have spent in maintaining/upgrading/insuring the property along with taxes and what not? You could even ask whether he would have been personally satisfied participating in the RE big finance ponzi scheme, as Carol claims to be. That may seem like a stretch, but those types of ethical/moral principles are real considerations for many people here.

p01 said...

The Anonymous said
In either event, appreciate the thoughtful consideration of my original comment.

It happens after you stop calling people idiot doomers for some time. :-)

Ashvin said...


Also another thing comes to mind. It's interesting how two people can look at the exact same situation and can evaluate its "severity" differently. Perhaps you are placing too much emphasis on the nominal value of global equity markets, rather than the clearly worsening economic data (unemployment, housing, manufacturing consumer spending, confidence), as well as environmental, social and political dynamics around the world.

In the course of one year alone, I have observed many developments in all of those categories that were in line with expectations, and carried extremely devastating implications for tens of millions of people around the world. In the US, the suffering has been relatively less pervasive and evident, but there is also no doubt that more and more people here are struggling to make ends meet every day, as local/state governments are flirting with insolvency, officially recognized in some cases. In complex systems such as the global economy, these instabilities have a tendency to build up for unpredictable periods of time before releasing their energy within a short time-span. It won't be all at once, and there may even be another faux "recovery" period after the next leg down, but its very unlikely that will last nearly as long as the current one.

seychelles said...

The A said

im merely asking "when, if ever is the time to reconsider"? 2 years ago, daring to even ask this question incited a terse response. More recently it was met with silence. Now, it is occasionally it is met with a thoughtful response, which is big progress in my book.

And for THIS group to have gone through this psychological transition, it is a big contrarian sign that TS is about to
HTF. Most probable Elliott wave pattern
suggests that we are on the cusp of a MAJOR wave 3 down, have already had an extended wave 2. These third waves down
are usually fast but it takes until halfway through 3 of 3 before the light bulb comes on for most people. Multiple
smart people think bottom will arrive by 2015-6.

el gallinazo said...


Strange as it seems, I think Carol is for real. Most of the trolls here are:

1) Paid gov shills or the delusional who embrace the "nothing to see here guys, BAU, just move on, and BTW time to buy that house in that gated community"

2) Libertarian hyperinflationistas

One might say that Carol fits into category 1, but they usually do not present their personal, economic difficulties so bluntly. And 2) would never suggest that the taxpayer should bail people out with her problem.

OTOH, there is always the chance that our troll population is getting more creative and imaginative.


@ el g, come north and see what your missing in AZ. It's safer than Mexico, and the snow birds love it.

Actually, where I am living right now, it is (for the moment) very safe. As mentioned earlier, the cell phone girl even leaves her netbook on the counter at the central market when she has to run to the lady's room. And I am getting by in modest comfort on a SS check of $1225 per month. Can I do that in Tempe? (I blew so much dough on my romantic misadventure in Argentina, that I went on my own austerity program without the coercion of John the Boner or Obumma.)

But maybe I will come up and pick up one of those distressed houses. I would be looking for:

a 4 bedroom, 3.5 bath, granite counters, surround sound for about $150k. Any bargains like that around? Gotta stay ahead of the curve and my budget is limited.

macnow said...

I see this not as a black swan, but pure stupidity...

probably something more on the line of "Common Mode Failure."

I don't know, I guess I just see a lot of those things happening now, simple things we should catch or adjust for, but we are becoming to lazy/arrogant to do it.

The Q said...

"Moreover, for the renters, I cant help but think of the guy I know who has been renting for 24 years because he continuously kept thinking deflation was "just around the corner". Imagine how much better off he would be if he seriously reconsidered his beliefs in say 1993, versus his chosen path of thinking "deflation is imminent" for more than 2 decades."


I was a longtime renter when living in the middle of a big city. Why the obsession for being tied down in a box of chipboard and glue? I've also lived in declining towns and watched solid, beautifully constructed houses that couldn't be built today (lack of skilled craftsmen) abandoned and burned. When I was younger, Detroit was a boomtown, now look at it. When conditions change, houses can drop to ZERO value very quickly.

I didn't put down roots until I had found a place where I knew I could build a degree of independence and security for old age. The appeal of being tied to a box with no productive capacity and no cohesive community is mystifying. I'm not a "doomer", have no guns or hidden cache of "ammo", but my lifelong interest in history had made it obvious the money-for-nothing ethic of the past few decades will be short-lived.

Ashvin said...

So did anyone else catch this yesterday?

ECB plans on using Real Madrid soccer star Ronaldo as collateral for a loan to Spanish banks...

ZH: We were pretty much speechless when we read this - it sure puts guarantees by Noyer, Trichet and all the other bureaumonkeys that the ECB does not accept just any collateral in perspective.

From "The most expensive footballer in history may now be used to guarantee the solvency of a Spanish bank. “Ronaldo in the bailout fund,” headlines Süddeutsche Zeitung. The daily reports that the Bankia group of savings banks, which financed Real Madrid’s acquisition of the Portuguese player, is now seeking to borrow funds from the European Central Bank. In response to the ECB’s demand for guarantees, Bankio are putting up… Ronaldo and the Brazilian Kaka, who also plays for the Madrid football club.

soundOfSilence said...


I have to tell you -I've been expressing to my wife for some time that this isn't the place to be.

But you know what ... the picture of hamsters running around in a bucket has convinced me this is the place. At least until the water runs out. Or the electricity which powers all the A/C isn't so reliable. Or...

At that point we (me and the family) can get in the car. If the tank is full we'll be able to go 400-450 miles. The only problem is at that point there will likely be another 4.5 million people with the same idea which will make it significantly harder to act on.

The Anonymous said...

"El G. said...Well I cannot reverse your question - how long will it take before **you** reconsider **your** arguments. I just hope you continue to lurk here afterwards so I can take some time off from the general mayhem to thumb my nose at you."

Now you are assuming too much of a dogmatic approach from me. I happened to be scared shitless in late 07, mid 08 when it seemed clear the govt wasnt going to step in and "save" anything. Likewise, I was amazed how quickly (and how extensively) they reversed course and "can kicking" became the law of the land. In my mind, it was the easily the most telegraphed inflection point I have ever seen. I have no delusions of prescience however. In the timing department, I recognize I was far far more lucky than good, but I will take it.

For what its worth, now that all the mid 09-early 11 momentum is getting long in the tooth, I am scaling back and now actively searching for more definitive signs of another lehman style event. Perhaps the biggest difference between you and I right now, is you are fully in the deflationary mode, whereas I am not back there...yet.

Nevertheless, dont be surprised if I sidle back over to your view at some point, perhaps quicker than you think.

The Anonymous said...

"Ash said...

Also another thing comes to mind. It's interesting how two people can look at the exact same situation and can evaluate its "severity" differently. Perhaps you are placing too much emphasis on the nominal value of global equity markets, rather than the clearly worsening economic data (unemployment, housing, manufacturing consumer spending, confidence), as well as environmental, social and political dynamics around the world."

Somewhat. In fact I think it can be seen in this post. Aside from the equity markets, some of the indicia above that you describe as "clearly worsening" I may view as simply "very bad" but not getting worse.

My larger view, especially regarding the US is that it is currently transforming from a worlds superposer to another also ran a la the UK. I am generally skeptical of the "straight line down" hypothesis. I would not be surprised if there are longer counter trend rallies on its eventual path toward middle of the pack status. It took 200 years for it to ascend from a backater to the worlds lone superpower, then another 20 or so years at its zenith before it started its descent. Is it unreasonable to think it might take not 10 but 50 years of fits and starts to fully unwind?

The Anonymous said...

"It happens after you stop calling people idiot doomers for some time. :-)"

Fair enough. Full disclosure here, I do somewhat bristle at what I see as hyperbole -- be it "I can 100% guarantee you you will double your money in 2 years" or "I can 100% guarantee you that TSHTF by 2013"

The Anonymous said...

"The Q said...Why the obsession for being tied down in a box of chipboard and glue?"

Ask the people here. Notice I was very careful to use the word "doomstead", and I specifically excluded the bubble cities. There are a number of people here who have found exactly where they want to live to ride out whatever may come. The only question then is how to accomplish that.

My larger point is that there is no one size fits all answer and avoidance of all debt does not always help in all circumstances and on all timelines.

el gallinazo said...

The Anonymous said...

My larger point is that there is no one size fits all answer and avoidance of all debt does not always help in all circumstances and on all timelines.


Good. I am happy that you and Stoneleigh are on the same page. She has been saying that for years.

In a severe deflation, any and all debt is a disaster for the indebted.

You want to debate that?

Ashvin said...

"Is it unreasonable to think it might take not 10 but 50 years of fits and starts to fully unwind?"

No, but It is pretty unreasonable to think people here haven't carefully considered that possibility simply because we still don't agree with you, as you initially implied with your first post. I hope we have at least persuaded you that is not so much the case now.

The Anonymous said...

"In a severe deflation, any and all debt is a disaster for the indebted.

You want to debate that?"

Nope. The math is the math, and you cant debate the math.

The only debate then is the facts -- will it happen now or later. If the deflation happens in year 1 of the debt you are screwed. If it happens in year 31 when the debt is gone, do you really care?

The Anonymous said...

"Ash said...No, but It is pretty unreasonable to think people here haven't carefully considered that possibility"

Again -- Silko asked the question twice. He received no all. Now that I followed up by asking it in this grating manner, we now know that at least 2 people here have. Thats good to know.

p01 said...

El Gallinazo said
Strange as it seems, I think Carol is for real.

Maybe, but the profile is false. I have yet to see a Megadeth fan misspelling the band's name. ;)

The Anonymous said...

Actually Ash, I think I need to take that back. I know El G's timeline for reconsideration is 3-4 years (i.e. 2014-2015). I know you are cognizant of it, but did you actually answer the "when" part of the question? Did you actually say when, you too will reconsider the baseline assumptions?

I mean this in all sincerity now. Its possible that you put out some date/timeline, and I did not see it. If so I apologize in advance for not reading more carefully.

Phlogiston Água de Beber said...

It is the beginnings which are critical, when political opportunists realize that arousing fear and hatred is the easiest way to fortune and power, when social misfits become nationalist and religious fanatics, when attacking helpless minorities becomes acceptable as legitimate politics, when funny little men turn into monsters.

Is that Dr. Goebbels I hear laughing in hell?
Uri Avnery

p01 said...

Well, JPY is going through the roof, soon to take the quake highs. I'm absolutely amazed how this thing still holds together. It's fascinating and very scary at the same time.

Greenpa said...

IM- "when social misfits become nationalist and religious fanatics..."

yeah. The news from Egypt (10s of thousands in street demanding a religious state) and Turkey (secular military leadership resigns en masse after pressure from religious gov't) is not good in that regard.

Ashvin said...

The Anon,

"Again -- Silko asked the question twice. He received no all."

Could that possibly be because people did not see it, or saw it and then got distracted by another disucssion? I know that I don't remember even seeing it. Skilo does have a tendency to write multiple lengthy posts in a row, and perhaps he stuck that question within a post focusing on another topic. I really doubt people here were so intimidated by his question that they chose to ignore it.

"I know you are cognizant of it, but did you actually answer the "when" part of the question?"

No, did you ask that question? I have been responding to the argument in your initial post to Skilo, and I gave my brief answer to Skilo's question that I hadn't seen before. For reasons stated before, I think the way you are thinking about this issue is fundamentally flawed. But, I'll indulge you anyway and say that 5 more years of economic and financial stagnation like we have had in the last 2 years would be extremely surprising to me, and would lead me to seriously re-consider what TPTB are really capable of. That's just a tentative guess, though, and I would place much more importance on the substantive developments over the next few years, rather than just the timing alone.

Greenpa said...

An old but stinky diaper from Japan that the mainstream is refusing to notice so far:

"Chubu Electric: NISA tried to deceive public forum

"Chubu Electric Power Company says the government's nuclear agency asked it to make sure that questions in favor of nuclear power be asked at a government-sponsored symposium in 2007."

They're saying that the gov't nuclear agency was packing the public opinion responses, way back.

Not going to help the nuclear industry there- so far as I can gather from afar, the Japanese herd opinion is drifting very steadily towards "don't need it, don't want it" on nuclear power.

Phlogiston Água de Beber said...


A casual observer, might be forgiven for concluding that the banksters will be dragged to the gallows by men in priestly robes. I am still inclined to doubt it, though I'm sure they will participate. Building up a mighty military and security apparatus and then humiliating it is not my idea of good planning. It's one that has often been popular with Mammonites and one they have often come to rue.

Phlogiston Água de Beber said...

While Carol and TA worry about our mortal souls, er wait no it was about either reblowing the RE bubble or not missing out on the next one or something like that, a couple of our better informed friends have some things rather more here and now for us to think about. RE bubbles do not seem to be much on their minds.

Disastrous Outcomes From an Orchestrated Crisis

Shadow Banking and the Repo Market

The Anonymous said...

"Ash said...No, did you ask that question?"

Fair enough. Im not so sure that I did.

"Ash said...
But, I'll indulge you anyway and say that 5 more years of economic and financial stagnation like we have had in the last 2 years would be extremely surprising to me, and would lead me to seriously re-consider what TPTB are really capable of. That's just a tentative guess, though, and I would place much more importance on the substantive developments over the next few years, rather than just the timing alone."

Incidentally, you hit on something that actually makes the question, harder to answer than it seems. When I say, for some people, the answer seems to be "never", its not that they go into it thinking "I will never reconsider my position", its just they have a tendency to push that reconsideration date further out into the future, over and over again for 10-20 years or more.

Now one way to prevent that of course, would be to set a hard and fast date, such as "I shall reconsider my position, come hell or high water, by no later than May 25, 2014". However, that doesnt necessarily seem like a great answer either -- in large part because as you noted, its natural to place more "importance on the substantive developments" as you get closer to that hard and fast date.

Yet, if those developments get more and more ominous as you get closer to your hard and fast date, its natural to push the reconsideration time back further, and thus the continuous push back the date for all eternity, may have begun.

Yet again, it seems foolish to simply ignore more ominous developments near your hard and fast date either.

Perhaps a blended approach is more appropriate - say "any 2 years continuous years of relative calm on the ABC, EFG and XYZ metrics will cause me to reconsider"? Or say, a 25% increase of the A B and C metrics and its time to go back to the drawing board"?

So in the end, the question is not so innocuous as it first seems. Im not saying any of these is the right way to go, and my suspicion is you kinda threw that 5 year reconsideration mark out there to indulge me, but that if pressed, you very well could come up with some different answer based on all or some of the options above.

ben said...

i suspect we all heard silko's question. i dig his/her alt-breivikian manifestos. :) still need to check out those videos skilo plugs. what's that word again, one more time? (:P) only cause i've been busy. it's a valid question i guess, what skilo's asking about questioning our collective self, but i also find it redundant. i assume that's what we're doing everyday with our DPOV (doom point of view) and otherwise. this goes without saying. and those of us who are indisposed well that's what we have LG's perusals and mixedly metaphorical peregrinations for. thanks LG. besides, this whole thing, the deflationary call, while certainly beyond my purview to construct independently, isn't rocket science. nor is it swaddling cloth; ultimately, if we are surprised by HI, or EF (exo-flation), well won't that be fun?

you all catch over at the Undertow that SFV let drop that he is a high school dropout? gawd, what a loser and anti-hero extraordinaire.

el gallinazo said...


Yeah, I have been watching the yen also. 76.9! Holy shit! I am starting to think of the scenes in a submarine war film where the sub loses control of its bilge purge and just drifts further into the inky depths. The audience starts to grind their teeth awaiting the final crushing of the vessel as rivets pop like bullets, then sea comes in through the rivet holes like a cutting laser, and then the sub implodes like a tin can.

p01 said...
El Gallinazo said
Strange as it seems, I think Carol is for real.

Maybe, but the profile is false. I have yet to see a Megadeth fan misspelling the band's name. ;)


Maybe it was a fat finger. Frankly, I missed it as I didn't realize it was "misspelled." (Now if a group billed itself as Nanodeth, even I would give them a listen if, unlike Spinal Tap, they turned their amps down to minus 1.)

Hope she is more careful on her listings though. Or maybe it was really suppose to be Deathleopard.

Phlogiston Água de Beber said...

@ ben

Yeah, I saw SFV's amazing admission. Shames the hell out of me. I actually had a diploma once. Lost it somewhere along the line. I stand in awe of him and bow in his general direction.

Shamba said...

Stoneleigh said "Who's going to be a snowbird when no one has any money? I was in AZ very recently. It's a desert. This is a big picture site. We integrate finance, energy, other resources, environment and many other things. AZ is almost unbelievably over carrying capacity, and critically vulnerable to water shortages, which are themselves dependent on cheap and plentiful energy. Quite apart from finance, much of AZ is a major accident waiting to happen.

How arw you going to air condition your home? Airconditioning a large home will be much less affordable than a small one. AZ used to use swamp coolers, but all the pools and lawn watering have produced too much artifical humidity for those to work."

Agreeing with Stoneleigh about this Arizona overshoot statement from the center of Phoenix!

However, I do think that when water shortages really hit and the lawns have all turned to desert landscaping naturally and the pools are mostly reduced and we have rationing, the swamp coolers could work very well again.

I remember swamp cooling and it did work. AC is more comfortable but swamp cooling is okay.

then again... who knows how it will play out in each individual area. You can do what you can do ... Everyone in the US southwest can't move in with Stoneleigh or Sharon Astyk!

peace to all, shamba

P.S. I stepped back from watching all the details and emotion around the debt ceiling thing about 2 weeks ago. I peak at the financial news a couple of times a day to see how it's going.

I've seen a lot of people the past two weeks demonstrate intense bursts of spontaneous combustion about this issue! Whew, strong feelings out there that people are carrying around inside of them.

peace again, shamba

scandia said...

This " debate " is a bit like, " Will it be a boy or a girl?" Will we have twins or a monster?
I have no idea what the outcome(s) will be. For shites sake we don't even know who's pulling the puppet strings. We don't know what small event or big event will collapse the system.Propaganda ensures we don't know what the fcuk's going on.
I have retreated to psychological preparation, as much resiliency as I can muster, eliminating expectations and staying alert daily to the small signs.
Nor do I think we are asking the right questions. There is a cacophony of answers/predictions to the wrong question.
I am looking for the right question.

Shamba said...

P,P.S. to Stoneleigh ..

Safe travels, as always.

Your/Ilargi's information here has helped me make big decisions in the past 4years based on my own situation. I can't solve all the possible predicaments but I 've leaned to solve some.

peace, Shamba

Greenpa said...

scandia: "I am looking for the right question."

very nice. :-)

el gallinazo said...

scandia: "I am looking for the right question."

Could take a few million years. But the answer is 42.

Ben - thanks back.

Ashvin said...

The Anon,

"Perhaps a blended approach is more appropriate - say "any 2 years continuous years of relative calm on the ABC, EFG and XYZ metrics will cause me to reconsider"? Or say, a 25% increase of the A B and C metrics and its time to go back to the drawing board"?

So in the end, the question is not so innocuous as it first seems. Im not saying any of these is the right way to go, and my suspicion is you kinda threw that 5 year reconsideration mark out there to indulge me, but that if pressed, you very well could come up with some different answer based on all or some of the options above."

Exactly... now we're getting somewhere. The time issue is obviously an important consideration, but it only takes on any significant meaning in the context of underlying theories, facts, data, etc. When you combine those things, one could view a few years of unexpected stability as a very instructive factor, or, alternatively, as not being very important at all, depending on what your underlying perspective is. That evaluation process is something that is almost too complex to adequately formulate in writing, but it is something that most of us do on a continuous basis. That's why I felt your initial assumptions about people here were too simplistic, and you were jumping to unwarranted conclusions. I can also understand why you may feel that "human nature" leads us to keep pushing predictions or expectations back as they fail to materialize, because that is a hallmark of peoples' mentality in the developed world, as evidenced by concepts like the "American Dream". However, it is not some genetic trait that we cannot shake by distancing ourselves from the system, which is something I think many of us here have done to a significant degree.

Phlogiston Água de Beber said...

scandia said...
Nor do I think we are asking the right questions. There is a cacophony of answers/predictions to the wrong question.
I am looking for the right question.

I am struck by the feeling that there is something fundamentally right about that kind of wisdom coming from the keyboard of a geezette. :)

I absolutely agree that we have not discovered the right question. Something floating around in the back of my mind says it is like looking for the proverbial needle in a haystack and we are probably looking in the wrong haystack. One thing that does seem certain is that repeatedly answering the same wrong questions is getting us nowhere. I think some people like it that way.

seychelles said...

Alice B leans over as Gertrude S is taking her last breath and whispers
"What is the answer?"
Gertrude S barely manages to reply
"What is the question?"

el gallinazo said...

Charles Hugh Smith just came out with a new book titled An Unconventional Guide to Investing in Troubled Times in Kindle format and is on a 30% off sale at $6.85 until midnight tonight. I downloaded it just now and read the intro on my iPod and it looks really good. Since I read his blog all the time and haven't donated, it felt good to send a few Benny Bux his way.

For those unfamiliar with the Kindle format, it can be read on non-Kindle devices such as an iPod touch or iPhone, Mac, Windows, or iPad simply by downloading the free app from Amazon for your particular device. The Kindle app is not as good as Stanza for the iPod/iPhone, but it is quite satisfactory. Stanza is amazing for a piece of freeware, but it cannot show Kindle for proprietary reasons.

ben said...

rap that's real:

la coka nostra with immortal technique and q-unique

ben said...

no one does perfectly delightful, clueless condescension better than the british. right? never fails to warm the cockles. readers may want to bookmark under 'domestic strategies' this how-to on surviving brownouts. even though everybody knows it's a peculiarly cypriot problem.

ah well, this is cyprus

timekeepr said...

Interesting article (not sure if it was posted b4):

An Investment Manager's View on the Top 1%


Not surprisingly, Wall Street and the top of corporate America are doing extremely well as of June 2011. For example, in Q1 of 2011, America's top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries. Somewhere around 40% of the profits in the S&P 500 come from overseas and stay overseas, with about half of these 500 top corporations having their headquarters in tax havens. If the corporations don't repatriate their profits, they pay no U.S. taxes. The year 2010 was a record year for compensation on Wall Street, while corporate CEO compensation rose by over 30%, most Americans struggled. In 2010 a dozen major companies, including GE, Verizon, Boeing, Wells Fargo, and Fed Ex paid US tax rates between -0.7% and -9.2%. Production, employment, profits, and taxes have all been outsourced. Major U.S. corporations are currently lobbying to have another "tax-repatriation" window like that in 2004 where they can bring back corporate profits at a 5.25% tax rate versus the usual 35% US corporate tax rate. Ordinary working citizens with the lowest incomes are taxed at 10%.

I could go on and on, but the bottom line is this: A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules. I am not optimistic.

Greenpa said...

"do not understand how they work, are unlikely to participate in them,"

Whaaat? You crazy, dude. I KNOW I'm winnin the Lottery, one of these days!

Then I'm movin on up! Beverly Hills! You just gotta have faith, they keep telling me.

jal said...

Deflation will not affect me. I cannot even take advantage of the basement prices that would be out there. ie. buying dirt cheap house and flipping them.

On the other hand, I get burt everyday by inflation.

D. Benton Smith said...

@ Scandia wrote : " Nor do I think we are asking the right questions. There is a cacophony of answers/predictions to the wrong question. I am looking for the right question. "

@ IMN wrote: "I absolutely agree that we have not discovered the right question. Something floating around in the back of my mind says it is like looking for the proverbial needle in a haystack and we are probably looking in the wrong haystack. "

I am quite sure that both of you are asking the right question.

And I daresay your subconscious has been trying to tell you some answers. The trick is in listening without prejudice.

Personally, I enjoy the company of my subconscious. We converse frequently (joke !! ), but it is sometimes such a tease and seems to delight in puns, riddles and goofball symbology that is half wisdom and half joke.

To say I believe less than half of what it hands me would be quite the understatement, but it has it uses ! One such use is that it accepts homework assignments.

I can hand the back office of my brain any task, even an impossible one, and it will grind away in silence ( sometimes for years and in a few cases decades ) and then suddenly, without notice or preamble, POP! Out comes an answer that is frequently right on the mark... and several clicks more astute than my day-job IQ could account for.

I realy should be more responsible about giving assignments, because sometimes the answers are to uselessly inane questions like, " Why are those nice dull helpful decent people of Kansas so zenophobically militaristic about people they not only have never met... but entire races and societies they will never have any contact with whatsoever ?"

(answer: because their forebearers grew up on farms that were typically many many miles apart. Danger was synonymous with strangers... especially groups of completely unknowable strangers... coming from the unknowable " out there ". With no means of forewarning the farmers' ONLY security lay in their hope and faith that the frontier Army would kill any and all marauders before they could sweep down on these defenseless farmsteads to rape, pillage, etc.

(A guilty conscience from having stolen the farmland from murdered Indians did not engender all that much serenity either.)

When I ask more sensible questions the answers tend to be more relevant to my needs. Plus there is the pleasant anticipation and wonder about what the old cerebrum might reveal to me today. In either case, High functioning autism does have the occasional upside.

Phlogiston Água de Beber said...


Well thanks for that bit of encouragement. Obviously, you are not likely to get to the right question if you don't know that it hasn't been asked yet. Our Finno-Canadian wise woman has opened that door for us. I fully anticipate that you will be a great asset in the search for it.

In contrast to all the attempts to grapple with complexity. I think the right question will be quite simple, expressible in a few words. I expect it will be difficult and perhaps even painful to answer.

seychelles said...

DBS said

High functioning autism does have the occasional upside.

Hear! Hear!

--- said...

If you want to know what God thinks of money, just look at the people He gave it to. - Dorothy Parker

Ralph T. said...

“The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are being looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care? When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media? Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.” - Ron Paul

Phlogiston Água de Beber said...

el gallinazo in the first comment to this thread wrote the following.

I didn't take the Fed and the USG seriously enough when they said that they would do "whatever it takes."

They have indeed done whatever it took and it seems they will stick to that promise. They have broken more laws and customs than you can shake a stick at. Why? (no that's not the "right question") They never needed resort to such wild and crazy actions before. Only one answer works for me. They clearly saw this was a regime changing level crisis. And being turfed out was not an acceptable outcome for them.

Everything has consequences and their criminality has dropped us all down a hole into a world where many things are not as they were. If Lewis Carroll were still alive, I think he would have recognized it right away. Here are a just few examples that I have identified.

1. We no longer have any definition of what constitutes a war.
2. Market indices no longer tell us anything about the economy.
3. Ignorance and malice are attractive qualities in political candidates.
4. Corporations wield a level of personhood not available to actual persons.

What I am suggesting here is that we are all and that means even the Fat Cats in a place we have never been before. A place where we can't be sure of much of anything. I wonder if the question-answer matching logic we learned in the pre-Lehman world has any validity in Wonderland?

Maybe the right question hasn't been asked because it wouldn't make any sense in the world we like to believe we are still living in.

Nassim said...


I lived in Paris for around 15 years 1981-1995. The housing inflation in Paris since then has been amazing. For example, I rented a place very similar to this one - this one is listed for sale at 498.000 €.

I lived at number 55 in the same street in the early 1980's for 2000 Francs/month (305 €/month) and it would have sold for 100 months of rent or 30,500 €. It would rent today for 1,600 €/month. If the rents have gone up 5-fold, the price has gone up 12-fold as France in the 1980's had much higher interest rates.

France, unlike the UK and the USA is not a bolt-hole for hot-money. It is not a tax-haven. I suspect that the crash will hit property prices in Paris (especially areas that benefited the most over the past 20 years like the 9th, 10th and 11th arrondissements) much harder than the good parts of London and New York.

Groupdmt said...

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trazado de recorte

Alexander Ac said...

UK Home Prices since 1952

no bubble :-)

snuffy said...


There are many of us in the lower rungs of the economic ladder who are well aware of how those higher on the food chain stay there.We are the accountants,the Secretary,the maid who listens at the door...and so forth.
We have no loyalty to the system...that keeps 99.9% "Out",like a house thats built for too few to live in comfort.

And the net has made it easy for "the lists" to be made I think...

At some point the wealthy will decide its time to "take care" of the scary ones,some sort of "Pacification"...or "the edge" will be reached by enough of the population for a trigger to some serious bone mean civil unrest.{I think they are setting the stage now}.and a readjustment of the wealth distribution will occur.As well as a bit of the hangmans justice.
Should that wonderful military machine we so cleverly designed decide to impose order,I think those at the top of the food chain had be very,very careful,as the cause of this "change"might be viewed as a attempt to root out deep and poisonous that same layer of society...The french solution,[cutting off a lot of high-class heads]can always become popular.
Yes,I am aware many will flee with their loot... But as a very old fashioned patriot,I think our country might do well w/o their like.[at least until we breed another batch]A long period of isolationist policy might do this country,and the rest of the world,a whole hellava lot of good.

I understand the mindset of those who can do whatever they wish,I have met a few.They are as the Irish were discribed..."ME-ism"and are "poor" citizens,having been raised to view the public as louts,fools and lower life forms.["What? you wernt born with a 10 million nest egg?"poor you".

In any environment besides that they live in,they don't do well...something like a goldfish in a tank of pike.

I am way tired...

Bee good,or
Bee careful


Nassim said...

Alexander AC,

Here is the link

UK House Prices Since 1952

When I was a teenager, at an English Public School, some of the kids of my age had parents with huge palatial houses with lots of land that they could not afford to maintain. People forget.

I guess a reread of Evelyn Waugh's "Brideshead Revisited" - the part during WW2 - is in order.

Glennjeff said...

ANONYMOUS is attempting to to implement a plan

I'm in.

Skip Breakfast said...

Some notes regarding the question of timing:

Historically, things change fast. But Mark Twain has pointed out that history doesn't repeat itself--it only rhymes. And I can't help wondering if this largest of all debt bubbles also won't have the longest of all undwinds. There is so much momentum behind this bubble. Such a coolusion of interests supporting it. I am beginning to opt for a longer time-frame for the unwind. Like 10 years. And the problemw ith such a long time frame is most early-adopters will long be exhausted (and possibly broke) by the time the unwind begins. It's a conundrum. If you're right about the ultimately disaster, but so far off in the prediction's deadline that you lose credibility, you have failed to successfully help the needy--which was the original intention for warning people all along.

Jack said...

@ Skip Breakfast
It is really a challenge to talk to people about the current crisis and that we are most likely going to be falling into a depression.
However as things are unfolding they realize that something is wrong but until a person has lost a job or a business or is stained for money they will not take you seriously

Jack said...

For example 2 people were looking at vacation locations in the local papers in places like Mexico and they were saying it cheap and its probably because it is off season.
I have talked to them about this crisis and still they don't see it.

bluebird said...

@ben - appreciate the link to the blog about Cyprus. Interesting to read about the rolling blackouts and seeing the pictures showing them reading books and playing games, activities I did with my children and now grandchildren.

@timekeepr - interesting article about wealth and power. Some of my siblings are, to me, in the 99th to 99.5th percentiles who obviously are wealthy, but lack access to power to influence legislation. They have not taken the time to prepare for the upcoming collapse, and instead are relying on their professional financial planners to save their wealth.

bluebird said...
This comment has been removed by the author.
Josh said...

I'm $300000 underwater on the house
I've got $27000 student loans
I've got $11000 credit card bill
I've got $8000 car loan

So is it Chapter 7 or Chapter 11 or Sugar Daddy? I'm thinking more and more about Mr. Goodbar. You need a primer on the ins-and-outs of Bankruptcy protection.

Can they take my home theater system? What about my Miata?

bluebird said...

@Jack - Same with my circle of family and friends. Their bubble has not yet burst. They all have good income and access to credit so can continue to spend, spend, spend. Until they are personally affected, they don't see the crisis because they have other priorities.

Josh said...

el g....

You're living on $1200/month?

I love budgets.

Tell me more.
Electricity? Rent? food? fun? How do you make it work south of the border?

I can't get by without $3000/month. Cut below that and you might as well get the bone saw.

scandia said...

@ board, I took a long time getting to sleep last night,wishing I hadn't voiced my thoughts about " the right question". Especially when it arose out of intuition and feeling.

@DBS, your comment,
" The trick is to listen without prejudice " was helpful.Thanks.

@IMN LOL I too have been feeling like Alice in Wonderland:)You expressed my sense with" wouldn't make sense in the world we like to believe we are still living in"

@macnow, your reference to common mode failure is right on. These little failures are the signs I see around me. I don't think the cause is lazines or arrogance. It is more that complexity and lost knowledge leaves noone with an understanding of the whole.

@Glennjeff ,The story of the man who woke up one day changed in the Anonymous video speaks to me. Dr. Gabor Mate turned a common phrase upside down for me. He said it is not about high self esteem, it is about esteeming the self. One right question for me personally now is " Who is this self " I certainly have not been esteeming the self. I have been trying to be/achieve what some external program defines as success.

@Stoneleigh, I wish I had your command of language as in " It is far more important to anticipate discontinuities" You make the point without triggering the panic button, without conjuring up fearful imagery. Your language encourages resourceful responses.

D. Benton Smith said...


Are the 'owners' fixing to fix us ? Probably yes, but they will screw that up too, like everything else they have touched.

I don't like it at all, but the facts speak loudly indeed : our current regime are great believers in the preemptive strike.

The other favorite clubs in their bag include:

Overwhelming Force
Not just 'enough' force, mind you, but the psychologically paralyzing kind which instills 'shock and awe.'

Agents Provocateurs
Which enables them to choose the time place and conditions of engagement.

Total Information Awareness (TIA or TIA System)
A misnomer, actually, because what they really mean is total information CONTROL... and ideally that means control of the info on BOTH sides of the conflict.

Nice thoughts, but don't be overly alarmed. Just because they WANT these things, and spend a trillion a year building and using them on civilian populations, does NOT mean that they are very successful at it.

Just look how a handful of old men with muzzle loading muskets are holding out in Afghanistan.

The fear that such cowards try to instill in me will never compare to the terror they hold in their own hearts.

Be a Taoist. Be the water that flows around obstacles, not the rock that resists the flow and is thereby destroyed. The reed that bends not the tree which breaks.

Psychosis is NEVER victorious, and there is a world full of life that prove it.

el gallinazo said...

Skip Breakfast

"And I can't help wondering if this largest of all debt bubbles also won't have the longest of all undwinds."

None of us can see the future ( though I once knew a psychic who sure could make you believe otherwise.) But we have to go with our reason and the study of history. You seem to think that the bubble being huge will make it take a long time to unwind, on the same basis as how long it would take to clean out all the crap in your garage. I don't think it works this way. I think it works more along the lines of the bigger they are, the harder they fall.

I urge you to read the economic history of the past 600 years. The tulip bubble, the South Sea bubble, the John Law bubble.

I am reading CHS's new book which I just downloaded last night. (In chapter 4 and I recommend it without reservation). He makes the analogy of the high jinx that the central government and central banks are playing as preventing smaller fires in a national park forest to keep the status quo and allowing the dead wood (from moral hazard) to build up to the point that one unpredictable lightning strike puts the whole park into a total conflagration. Stoneleigh is always writing that Ponzi's are slow up and breathtakingly fast down as all the bagholders run to the doors to get out. But this **is** the whole globe and history doesn't end in a flash (unless it is thermonuclear). So it will go in fits and starts down with dead cat bounces followed by breathtakingly large drops. But as the parachute commandos say, "Watch out for the first step - it's a big one."

el gallinazo said...


Step 1

Dump the palacio.

As I said previously, I am living in ***modest*** comfort. My surround sound is the Sonoran desert (which is no longer a desert since the annual rains came in early July). I drive a somewhat shoddy Mexican 110 cc moto to go to and fro town which cost me $800 new and take a bus to go elsewhere. My dental surgery cost me $85 and was comparable to anything I might expect in the States at 10-20 times the price.

BTW, I finally agree with p01 and IMN that you are a fictitious character, but I will play along for a bit anyway.


So is it Chapter 7 or Chapter 11 or Sugar Daddy?


re the Sugar Daddy. You do any price discovery lately? That market ain't what is used to be either.

Josh said...

@ Stoneleigh,

Do you really believe they'll bring back debtors prisons? What will they do with you if you're no good for the army? You can't squeeze blood from a stone and all I've got to offer are my marketing skills and my knowledge of premium mixed-use rental/commercial properties in south Tempe. I'm no good for anything else, unless drinking chocolate-mint Martini's is useful to somebody.

jal said...

@ eg and board

The regular readers and posters are aware of the trends.

(the results of two competing exponential growth)

I like your quotes from the old and ancient wisdom

"Be a Taoist. Be the water that flows around obstacles, not the rock that resists the flow and is thereby destroyed. The reed that bends not the tree which breaks."

I & S have been saying to prepare by keeping one foot in each, (possible outcomes).

Humanity has gone through worst times and the wise men have passed on their lessons of what to do many times only to have their wisdom forgotten or ignored.

D. Benton Smith said...


you wrote, " I'm $300000 underwater on the house
I've got $27000 student loans
I've got $11000 credit card bill
I've got $8000 car loan

So is it Chapter 7 or Chapter 11 or Sugar Daddy? I'm thinking more and more about Mr. Goodbar."

Okay, I'll bite.

First off, if you're seriously considering 'Mr. Goodbar' then you have OBVIOUSLY never been through divorce court. The pain of losing $346,000 is a hangnail in comparison to being eviscerated by Mr. Goodbar's lawyer on the witness stand with the world watching and the tax man taking notes.

Cut your losses in advance. Do NOT sell your life for such a pittance unless the Sugar Daddy in question is 100% in on the game, agrees with your venal intent, and awarely supports the strategy... although it is difficult to imagine such an enlightened man.

As for the over-leveraged 'assets':

First you must wrap your wits around the fact that they are not YOUR assets. The only value they represent is the actual greenback money you have put into them so far from your earnings.

From that figure you must subtract the utility you have already extracted from them by USING those things for the past several years.

The house saved you rent. Subtract that. It saved you income tax payments, and maybe even some depreciation deductions. Subtract that, too. The car saved you cab fare, etc. so subtract the amount that all that transportation was worth and some of the income that it enabled you to earn.

That leaves the student loan and the credit card. Too bad about the student loan. You got ripped off and there is probably no escape route because the banks have sealed the exits on that scam.

Credit card? Why not just stiff them? You'll lose access to easy credit... but so what? It only got you into deep doodoo in the first place, so who needs it? Use a debit car instead, or even that stuff we used to carry around, what did they call it? Oh, yeah, "cash."

Hope some of the above helps, or at least gets you thinking in a productive direction.

And remember this above all: you are alive, young, healthy, probably good lookin', and have the whole world before you.

That's better than most of us have got... by a long shot.

Ka said...

I don't see the question of timing as a legitimate question. If "corruption is the system", which it is, then it is one's moral obligation to not take part, even as a lowly cog. But since it is nearly impossible to survive completely outside the monetary system, we're all immoral to some degree or other. The difference now is that we can note that the moral (or at least less immoral) course is also the practical course: to get as far from the system's center as possible. (This is a functional distance, not necessarily geographical.)

In sum, it is better for you, for humanity, and for the earth, to break off now and on your terms, than to worry about how long you can continue to live within the belly of the beast.

(The preceding message is something I've known for about 40 years, yet here I am still attached. Oh, the hypocrisy.)

Phlogiston Água de Beber said...

@ Carol

Livng as I do in a household that has recently completed Chapter 7 and is now in Foreclosure, I can give you the short form of that primer right here.

Assuming they are of the government guaranteed variety. The student loans are yours to keep, forever. BK cannot discharge them.

Chapter 7 will wipe out the credit card debt.

You are allowed to keep one car. You will have to keep up the payments on it.

BK will not wipe out or alter the mortgage. You are going to lose the house to foreclosure after the BK is discharged. You can probably live there rent free for at least a year.

Can't really say about your home theater. I suppose if it is really valuable they might take it, but you are allowed to keep most personal property.

It may appear that BK doesn't gain you much in debt relief and in your case it doesn't. But it will extend some possibly sizable benefits to you in the aftermath of foreclosure. Now you need to consult a BK attorney. Word of warning, they are not created equal.

Regarding the Sugar Daddy option, are they growing on trees in Tempe?

And yes, I do believe you are a fictitious character, but whether you are or not, thanks for the opportunity to share what little I know about how it spirals down. The thing about debtors prisons is that even they require energy and some surplus wealth to operate. Even when that was available in our recent past, society has favored homelessness as a much cheaper alternative. The good news is that with your knowledge you should have less trouble finding abandoned structures to take shelter in.

Josh said...

Thanks D. Benton. I'm thrice divorced so I know all about it. The key to come out on top is to hire the best private investigator money can buy. That's how I got my Manor House. The foolish thing was to take out loans as it appreciated. D'oh!

el gallinazo said...

I don't think that they will bring back debtors prisons. We already have a $600 B a year prison industrial complex. The USA has a lot more people doing hard time than China, a theoretically more repressive totalitarian government with four times the population. As Dmitry Orlov suggests, they will probably have a big release so the rest of us can deal with the (perhaps) 10% of the sociopaths who really belong there. The rest of the sociopaths, of course, are on Wall Street, CEO's, or politicians, of which one, Bernie Ponzi, is doing hard time.

But I do think they will bring back forced conscription to deal with the long, global resource war we are ten years into. And don't think flat feet, being a woman, or being over 40 will get you out. The days of outfitting cannon fodder with million dollar equipment is drawing to an end.

But mainly, I think they will bring back classical indentured servitude. On the Caribbean island of St. John where I lived for 13 years, back in the 18th c at the time of the great slave revolt, the average life span of a Danish indentured servant there was six years, a bit less than that of an African slave. It occurred to me recently that sharecropping with a company store in the south after the Civil War ( though there was nothing civil about that war) was just a form of indentured servitude. Actually, it was pure serfdom, as an indentured had a contract with a time limitation. If you managed to survive, you could receive your "freedom."

D. Benton Smith said...

Regarding the debt ceiling debacle:

It ocurs to that if there is anyone even remotely in charge of this thing ( be he good guy or bad ) then there must be a "Plan B" already sitting there ready for implementation in the last second of the 11th hour.

This hypothetical plan could be prettty much anything, INLUDING the intention to just let the dominoes fall, take the ratings hit, dislocate the bonds market, and so on.

That nature of the plan is not my question. It is its EXISTANCE that I wonder about.

If there is one, then fine, that's what I currently suspect. But if there ISN'T then that's a whole new kettle of fish.

If there is no plan whatsoever, and the government is really and truly deadlocked and going over the falls without a barrel, then that is a scenario so new and unexpected that I would have to re-think pretty much everything previously thunk about upper management of Corporation Earth, LLC.

Could the overlords REALLY be that incompetent?

What a captivating idea! Surely it is not possible, and yet......

Okay, I've gotta admit that they've got me. They have 'frozen the tip', I am ready for the 'jam.'

We will know by Tuesday whether we get to see the two-headed frog boy ... or just get pick-pocketed and blown off.

I can barely wait.

el gallinazo said...


My advice is to take out an ad in the Arizona Geriatric Review in the incipient Alzheimer's classified section. You seem real good at listing your assets.

Phlogiston Água de Beber said...

Could the overlords REALLY be that incompetent?

A high percentage of the high muckety mucks that I have been in contact with were indeed that incompetent. The dirty little secret of the Usan economy was that it was the competence of the people on the lower end of the payroll scale that made it work. When it comes to understanding the real world, most of the overlords are dumber than stumps.

Phlogiston Água de Beber said...

scandia said...
@ board, I took a long time getting to sleep last night,wishing I hadn't voiced my thoughts about " the right question". Especially when it arose out of intuition and feeling.

Oh wise woman of the Great White North, please do not apologize or feel shame for thoughts arising out of intuition or feelings. In Wonderland that is about all we have to go on. Bringing up the subject of the right question was brilliant. A very bright guy named D. Benton Smith and a not quite complete ignoramus both seem to agree on that. Stay with us here. We just might discover something really worth knowing.

Josh said...

el g,
Sometimes you remind me of my ex-husband Charlie. He never understood me, he never understood the hamsters, and he wouldn't stop leaving his banana peels at the breakfast table.

el gallinazo said...


1) Actually I do understand you or who you are purported to be. Perhaps our blog is being test marketed by a freelance Hollywood script writer for a pilot of "Desperate and Ruthless Ex (multiple) Housewife." A post financial crisis series on comtemp American life - and you are the titled protagonist. Hope we can offer some new ideas.

2) You like to keep little, horny rodents around? Won't even go there.

3) Actually I am quite tidy though sometimes I let the dust and grime settle a bit too much, I do my dishes as only an ex-chemist would clean his glassware, and never let other people pick up after me. No banana peels on the table. Sorry.

scandia said...

@Carol, Long ago, when I was young and beautiful and destitute, I thought about aligning myself to a sugar daddy. A wise woman said to me, " Yes, you can do that. Just remember you will earn every penny."
Bless her. I chose to stand on my own two feet.

macnow said...

Carol... become a stripper fixes many things and can help in the sugar daddy hunt.

Thats if your body is still defying gravity.

Otherwise what Scandia said.

: - >

Chas said...


My brother-in-law lives in the 17th arrondissement.It's a rather large apatment (~2000 sqft?)but it needs updating. I think he paid about $2M Euro.

My father-in-law is quite bullish on Paris real estate. I'm not so sure. The prices are mind boggling to me. For what I paid for beautiful 1922, 4, bd, 2 ba, 2700 sqft house in rural WI, I could only buy a 2 room flat in a Paris suburb.

Ashvin said...


"Could the overlords REALLY be that incompetent?

What a captivating idea! Surely it is not possible, and yet......

Okay, I've gotta admit that they've got me. They have 'frozen the tip', I am ready for the 'jam.'"

Don't let them get into your head now, because that is what they want above all else. Are they dragging this thing out to the last minute? Yeah. Is that a function of how desperate they have become? Probably. Have we completely misjudged their intentions or failed to notice they are flying off into the night without any radar whatsoever? I still doubt it.

They have framed this thing in several clever ways. For one, Aug. 2 appears to be the hard and fast deadline for getting a deal done, after which all hell breaks loose if no deal is reached, because the government runs out of money to meet obligations and gets downgraded by various rating agencies. Is that really true? It's difficult to say for certain, but I think its much less true than most commentators are making it out to be. It's really in everyone's interest to give us a grace period as long as something is in the works.

Also, a resolution at the last minute will seem like much more reason to celebrate, rather than some boring resolution a few weeks ago, and by "celebrate" I mean dump more money into stocks and bonds. Every person on both sides of these "discussions" has basically staked his/her job and reputation on avoiding a fiscal catastrophe in the near-term and bringing more "balance" to the budget in the medium to long-term. The latter is necessarily a subjective evaluation and can be spun to their advantage, regardless of what specific details emerge from the deal. The former is not so much, and must be done by increasing the debt ceiling sometime soon.

This is one of those situations for me where the timing doesn't even matter anymore, unless the time has passed and a bond crisis has already occurred. Then, and only then, will I admit I was wrong.

jal said...

@ Ash

Both the R & D are using smoke and mirror and are pretending to reduce the cash flow.

It is not happening ... it will not happen.
There is no mfg., base to increase the gov. revenues.

There are more and more people retiring and demanding their pensions.

They cannot even freeze the budgets.

Karl has been doing a great job with the numbers.

Austerity is not in their plans.

Here comes Greece.


jal said...

There are 1 + 80 zero particles in the universe

50% of all the particles in the universe has 40 zeros.
25% of all the particles in the universe has 20 zeros.
15% of all the particles in the universe has 12 zeros.
A trillion is 1 + 12 zeros. The USA debt is 14 trillions.

Biologique Earl said...

"BEA Reports 1Q-2011 and "Great Recession" Far Worse Than We Were Previously Told"

Astonishing summary of BEA revisions, after the fact.


Robert 1

Rototillerman said...

D. Benton Smith wrote:

Nice thoughts, but don't be overly alarmed. Just because they WANT these things, and spend a trillion a year building and using them on civilian populations, does NOT mean that they are very successful at it.

I was reminded of this earlier in the week when I read some news about the lawsuit progressing in Ohio over the stolen 2004 election. I, along with a great many other people, KNEW it had been stolen in 2004; we just didn't know how. You don't get exit polls suddenly losing validity after decades of successful election prediction. It takes time, sometimes a very long time, but eventually the truth seems to leak out.

ben said...

yes, bluebird, sue's family (of the This Is Cyprus blog) sounds really nice, and offbeat. i hope my focus on her cluelessness and condescension didn't grate. i see from your comment that i confused rolling blackouts for brownouts. there is a new, equally mundane (in the uncritical sense of the word) post up from sue if anyone's interested, but i'd rather link to a much more informative post by another expat blogger (and a farmer) in cyprus.

life with power cuts

here's an animated music video by the arcade fire, from 'funeral,' an album legendary for both its verve and its disaffection.

power out

Ka said...


50% of 1 + 80 zeroes is 5 + 79 zeroes, not 1 + 40 zeroes. The ratio of national debt to # of particles is 1.4 to 1 + 67 zeroes. So we can rest easy.

jal said...

@ Ka

Dammmm it.
How do you put up a an embarrassed smily for doing an amateur mistake.

ben said...

jal, I bet lautturi has something for you but he might be in bed.

Ashvin said...


"Austerity is not in their plans."

Some form of austerity has to be in their plans if they want to keep the debt-dollar ship together for awhile, which I'm confident they do. It will probably not be as rapidly imposed as it is in Europe now, but it will occur, probably in as soon as a few days or a week when some kind of deal is reached. It has already been occurring pretty extensively at the local and state level, but now is the perfect time for them to take their game federal (at least, "perfect" from their point of view).

el gallinazo said...

Reading CHS's book

He thinks the Fed is trying to do the strategy of keeping the interest on treasuries near zero and keeping inflation at 4%. After 10 years they will half the national debt in real terms. Of course it ain't gonna happen, but that really might be what is in the Bernank's supposed synapses. Look at how successful the Japanese were at keeping a 4% inflation rate, and not from lack of trying either.

Give me a break. Of course all this bullshit is scripted. OK, like an improv theater they get some freedom to ad lib if a really stupid line pops into their heads, but the basic script was written before they started. They are not that stupid - they are just foolish and have bad values.

A drop to AA for the USA is baked into the cake no later than the end of the year. I would bet the farm on it.

Greenpa said...

scandia- IM is quite correct, subconscious intuition is where a lot of insight happens.

Ok. I have a question. :-)

As far as I can determine, if you spend some time digging around in the zennish places, there IS a question that underlies everything; and is actually the point to most Zen practices.

Ready? Here it is. Deep Thought would have done well to study Zen.

"How shall I live?"

Much, much much later, one can get to the question mostly addressed on this blog-

"How shall we live?"

seychelles said...


"All life is suffering."

As the clock ticks and urgency acclerates, we all eagerly anticipate the new season premiere of "Bend Over, Sheeple."

Surely TPTB will go through a few cycles of handing those greedy, cynical capitalgainsers who think they can get in on the action their heads on a platter, especially after cherrying all of the non-toxic assets from long-term "investment" pools.

Has anyone thought about how soon it may be before pension fund investments and withdrawals are severely restricted and we face retroactive changes in pension laws? Also, when cross border commerce and currency movement will become at the very least
unpleasant exercises? The little corners we are getting boxed into keep getting smaller and smaller.

ben said...
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ben said...
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Phlogiston Água de Beber said...

"How shall I live?"

That is a very good question, Greenpa, but I think too deep to be "the right question" that scandia intuited has not been asked and needs to be asked. I know how I shall live for as long as I can, but most people cannot answer that question.

My intuition is that we are not looking for a question to which the answer is 42. Not everyone is going to accept my thesis that we have dropped into a less magical variation of Alice's Wonderland. I think we have and for me the problem that poses is how to escape. It seems clear that we cannot go back to where we were.

So, I don't think this is "the right question", but still one needing an answer. Is there a way out of Wonderland to a place where rules are mostly followed and meanings not shifting with the wind? I don't expect anyone to know the answer to that question, but here is one that each should ask themselves and then ponder a bit.

While searching for that exit, are you more willing to trust the advice of a disembodied Cheshire Cat or the same "experts" and "authorities" that led us here?

Nassim said...

re: Paris


The 17th is a good area - parts of it are almost as good as the best parts of the 16th. It has lots of large apartments in the best parts - near l'Etoile - but is much more lively and has a real life of its own (unlike the 16th). I lived most of that time near the Trocadero in the 16th. I started at the crappy end of the 16th and moved twice to reach that magical place on the roof of a building with a huge terrace with a view of the Tour Eiffel. The living area was only about 400 sqft (38m2) but it was sunny and felt spacious. I had great parties there. Single life had its attractions.

I guess your in-laws have little understanding of French history. Do they know how many revolutions there were in Paris in the 19th century? Do they realize that it is almost surrounded by the hostile banlieues. Do they ever visit the banlieues?

The best oil fields of France were in the Paris bassin and I think they are almost dry by now contrary to this optimistic piece by the WSJ - Texas oilmen believe Paris Basin contains billions of barrels of crude oil

On the other hand, which other great city has geothermal heating?.

Phlogiston Água de Beber said...

I wish I could write like this.

God it's wonderful—really diverting in a macabre sort of way, at least if you have a diseased sense of humor and enough Padre Kino red. Which I do. As I write the world's only delusional superflower, perennially in love with itself, navel-gazing as narcissistically as ever, ignorant, self-indulgent, gurbling like an insane relative in the attic and fondling electro-trinkets from Japan, is broke. Yes, we see a beautiful dive from the high board, two somersaults and a half-twist, into the Third World. And so richly deserved.

Congress, a collection of whores, con-men, and penny-ante sharpers from East Jesus, Nebraska, ponders the Great Question: Default now, and admit manfully to being the economic lepers everyone else already knows we are? Or raise the debt ceiling, keep spending like a spoiled Swarthmore sophomore with daddy's credit card, and collapse a bit later?

Slouching Toward Guatamala

scandia said...

When I ponder the " right question " predicament comes to mind.

Phlogiston Água de Beber said...


Yes, we have predicament to the right of us, predicament to the left of us, predicament all around. The right question will have something to do with either how to escape predicament or how to live with it. Maybe that is the question. Should we devote ourselves to an uncertain escape or learn to love our predicament?

Sort of a Strangelovian quandary.

Anonymous said...

Clowns to the left of me, jokers to the right here I am stuck in the middle with you...

Phlogiston Água de Beber said...


el gallinazo said...


No, you got me right the first time. The "give me a break" referred to the legislative circus in Washington right now.

The more that I read CHS, the more I respect him, both his ideas and his ability to express them. He is not saying that "the 4% solution" is the Fed's game plan. What he is saying is that there **may** be a third way out of the default scenario beyond a deflationary default or HI, and this would be it. And maybe this is the Fed's game plan.

From the Fed's point of view the idea has a certain elegance. In theory, a constant 4% increase in the money credit supply might be enough to stop an internal collapse. It's small enough not to alert the frogs in the pot. Because of the intrinsic nature of interest, the supply must always increase or the system collapses. In theory, it might work in a global economy that had no growth or negative growth of real wealth production. It would amount to a 4% tax on all remaining wealth funneled to the elites, who always have first crack at inflation money. So it appears to keep the Ponzi alive by screwing savers and investors. The Chinese central bankers certainly think that this is what the Fed is up to, and that is why they are so pissed off.

But there are a lot of problems with it also. First it seems really hard to implement while keeping the zombie banks alive which is the prime directive of the Fed since the zombies own the Fed. The Japanese have been trying to do it for twenty years, totally without success. And as p01 and I have noticed the last week, the yen is in free fall upward right now, which could have huge global implications if it continues at this rate. A hugely deflationary event. The sudden death of the Japanese carry trade is no small deal. In summary, if the JCB couldn't do it in 20 years, why should the Fed pull it off?

Second of all, to work, QE and excess government spending would have to be drastically reduced. The 4% growth in the money supply would have be be done through the private banks and not the central bank or the USG. Otherwise the deficit would just continue to grow and there would be no escape from USD sudden default spiral. Back to the Japanese example, they have the highest central government debt to GDP of any major economy, and they still haven't been able to inflate their economy. I assume that this was the JCB idea as well.

This reminds me of an old Ukrainian joke. Two peasants are trying to sell a skin and bones horse. So they decide to put a straw up its butt and inflate it to fool a potential customer. The first peasant huffs and puffs for 5 minutes until he gets dizzy. He turns to his partner and says, OK, it's your turn. The partner say, "I am not going to put my lips where your mouth was," so he pulls the straw out, reverses it, and starts to blow again. I could see Timmah and Benny in this scene.

Finally, deflationary forces are too large for the Fed to control or calibrate. The Sanders audit indicates that they panic pumped about $15T into the system since 2007 to prevent the deflationary collapse of their sacred institutions. Things have just gotten too far out of hand. The Fed has the same problem as a quasi rational summer camp counselor whose kids are ill behaved thugs who are a lot tougher and meaner than the Fed, namely the TBTF global banks. Their reckless individual and corporate greed is making any sort of steady state outcome, difficult under the best of circumstances, impossible.

In summary, I think the Fed is attempting to pull off the 4% solution. I think the Bernank thinks that he is smarter than the Japanese central bankers, and he can do it. He just hasn't found the right helicopter. I give him an ice cube's chance in hell to succeed.

I have been kicking these ideas around for less than a day, though they certainly aren't original, so I would welcome any constructive input and criticism.

D. Benton Smith said...

I recently wrote to a friend about topics of mutual interest and then popped back over here to TAE to check up on what was the latest in finance.

It was immediately apparent that part of our correspondence was applicable to one of the recent turns of focus here ...

... namely, " What is the elusive right question we should be asking ourselves ? "

Incidentally, and as mentioned in earlier posts, I am intensely interested in autism and Asperger's Syndrome, since those conditions effect me and many other members of my extended family.

I will just clip a chunk out of the middle of that letter and past it here without further preamble, so it sort of starts in mid-thought.

" ... your heresies about the possible role of cognitive outliers in our species is so pertinent to what I've been thinking about lately. And you and me ain't the only ones thinkin' it.

Charles Hugh Smith (over at ) just posted an essay about how his own mental quirkiness ( some variant of bi-polar disorder ) has been a major factor in the creation and content of his deservedly popular website.

And that drags into the picture three other of my favorite hangouts on the web: Gonzalo Lira, Max Keiser and, of course our mutual hero Stoneleigh at The Automatic Earth.

Now if that short list (and a lot of the folks who frequent their sites ) doesn't encompass a broad range of borderline genius and high-functioning mental disorder of several varieties then I am, personally, the Universal Standard of neurotypical mental health.

So which is the case ? Are we wierdo outliers responsible for wrecking the world, or will us Loonytoons save the species ?

I dunno, but it sure is fascinating.

This leads back to your ruminations about “self”.

"There is a very brief but absolutely tantalizing allusion to the core issue of what “self” even is … in the March 2005 issue of National Geographic , page 22, titled “autistic genius.”

The article introduces a severely autistic 15 year old boy named Tito Mukhopadhyay, who through the heroic efforts of his mother learned to write. I haven't read his book, The Mind Tree (2003) but I certainly intend to.

Tito is probably as far down the “spectrum” of autism as we are likely to see and still be able to communicate with the outside world.

What he says about his inner world is amazing, and in my view totally pertinent to our species' existential crises with our environment, resources, social and economic systems.

He speaks of his "scattered" self, and describes an "action self" over which his intellectual self has almost no control.

This is relevant to our problems. Since we are wired to 'no-holds-barred fight to the death' in service to (and preservation of ) of our 'self', then I think it behooves us to examine what in the hell this 'self' actually is.

By the way, and maybe I've misinterpreted what you meant, but our ruling class does not consist of outliers. The ruling class hire, impresses or otherwise suborns outliers into service. High pay, prestige and special privileges work pretty well in most cases... but there are other ways, too.

I know two genuine (170+ IQ, and highly educated ) geniuses … and both of them cheerfully and shamelessly contributed to a couple of the most evil projects yet conceived. Both worked on precursors to Predator Drones, and one of them, who was my best friend in high school, graduated from building war planes to develop one of the first fully automated computerized high-frequency-trading services on Wall Street.

Yet in their personal lives they are completely nice people. Really and truly. Not fake. You would love them.

I can only conclude that there is something dreadfully wrong with the inner wiring of their scattered 'selves'. “

ben said...

LG addressed me in response to the two deleted posts a little ways up. I hated to interrupt a good read (translation: I thought they might be crap). many thanks birdman for elaborating.

D. Benton Smith said...


Another word for predicament is dilemma (a pretty close synonym, and a more useful choice in this case, I think.)

' Lemma ' is actually a whole word.

Wikipedia says that in mathematics a lemma " a proven proposition which is used as a stepping stone to a larger result rather than as a statement in-and-of itself."

In other words, it is something one believes to be a proven fact. The prefix "di," obviouly, simply means "two."

A 'dilemma,' is thus the problem (predicament) that arises from having two lemmas that seem to contradict each other.

In other words, they cannot both be true. At least one of them is wrong.

So when you ponder our crises, and come up with at least a partial answer of "predicament" it seems to me that you are on the right track.

Some "proven" assumptions of fact is not, in fact, a fact at all.

In my own error laden experience assumptions do that a lot.

Anonymous said...


>>I am beginning to opt for a longer time-frame for the unwind. Like 10 years.<<

10 year seems long to you? I'm not so sure. Why? WWII (the annihilation of competition and the creation of lots of demand) brought us out of the Great Depression.

Ex that, I'm not sure the Great Depression would've bottomed in 10 years and... this bubble is bigger and the people are much less able to weather it.

The long emergency sounds about right to me. Or the camping trip that never ends.

NZSanctuary said...

Greenpa said:
Trying to get my head around sewage with 89,000 nuclear disintegrations/second/kilo. That's each second. Each kilo. That's really really hot shit.

Yeah, that's approx 89Mbq per cubic metre [sic]. A pool of sludge could easily contain 100s or even 1000s of cubic metres. Anyone working near that is shielded mainly by distance – a few metres away and you're dose is relatively low, but get right next to it, or handle it even with protective gear – that's the real danger.

Calculating exactly what that dose would be involves a few variables (see here). Standing next to such a pool would probably give a dose rate in the region of 10–20 microsieverts/hour. Handling it, and you could be talking several millisieverts per hour or more – that's a lot! That stuff has to be handled very carefully.

Anonymous said...

@Carol and any one else caught in the first stages of price collapse.

1. Get a good attorney - I am not it and I can't even get a gig on TV to play one.

2. Ask your attorney when losses on the house become taxable at the federal level. I understand that occurs in 2012. That $300k loss might turn into a $110k loss - and Federal Reserve needs some cash right now.

3. I've heard some people have filed Chapter 7 and listed their home as an unsecured asset. This forces the banks to prove standing... whoops, the dog ate the paperwork! The house could remain yours and the debt wiped off the books. Of course, that assumes the law isn't subverted. Given that these tyrants bribe judges, bribe government officials, launder $378 billion in drug money, recognize Libyan Al Qaeda, grow heroin in Afghanistan, sell guns to their Mexican drug cohorts and file 10s of thousands of perjured documents and nobody ever gets charged, I'd be on the lookout for subversion.

Did I mention giving children syphilis, radiating foster children (Quaker Oats and MIT), and knowingly selling AIDS and hepatitis contaminated blood to Europe (Bayer)?

Come to think of it, ignorance was quite blissful.

Anonymous said...

@Ash and DBS, I think TPTB know what they are doing. Think big picture. America doesn't think austerity can come to our shores.

It will - and it will hit hard.

Do you oil up the bike before you take it for a ride? Consider this process, at the very least, the oiling process for austerity.

At worst, this could be the way the Fed scapegoats the Republicans for the collapse that this process is orchestrating. The Fed and Treasury are doing all they can to blame the political Kabuki theater participants for any badness that cometh our way should they not increase the debt.

The bottom line is they know that collapse will come with 100% mathematical certainty. It is pure nonsense, IMHO, to think they are desperately trying to "stave off collapse" - as if they thought that was possible.

IMHO, the last 3 years has been all about looting society under the thinly veiled cover of "helping the economy."

When the looting is done, they will direct the economic collapse, IMHO.

As for the "law," I have to chuckle. The Federal Reserve has broken Section 2a of the Federal Reserve Act for 25 years running - nobody cares.

The FDIC completely disregards the "prompt corrective action" law - nobody cares. They even spent their wad baling out bond holders so that future hurt depositors won't get the cash. BRILLIANT! Well it was, if you are the thief getting all the cash and none of the debt!

Oh, and how about some penalties to go along with those laws... laws written by the criminals themselves.

This debt debacle is well within TPTB's acceptable courses of action spectrum.

Ilargi - last post for a while! ;-)

snuffy said...


You have always provided a interesting and thoughtful addition to this [merry?} crew.Please,never worry that your musings are something for which an apology is needed.

[I,on the other hand,seem to have a permanent foot lodged in my mouth]

D.Benton Smith.

I have met some pure,Real badass Gangsters types over the years,very very sharp fellows.They were also charming and well-mannered,as well as one one for real mafia family kinda guy,who was a wonderful person.[He had 2 degrees and was very very sharp.Witty,charming,helpful,ect.
Our acquaintance in all cases ,was social,not proffesional.
I understand exactly the situation with your two acquaintances.Nice people do bad things,for a living...for the damnedest reasons.
Your take on the debt ceiling is interesting.

Could this house of cards[house of pain] be brought down by a bunch of stupid,crazy, teaparty freshman congresscritters...?

Ohhh ...The Irony...the delicious,wonderful Irony

Two headed frog boy...

I think threr is plans apon plans...but reality is moving faster than their plasn...

Bee good,or
Bee careful


ben said...


"From the Fed's point of view the idea has a certain elegance. In theory, a constant 4% increase in the money credit supply might be enough to stop an internal collapse. It's small enough not to alert the frogs in the pot. Because of the intrinsic nature of interest, the supply must always increase or the system collapses. In theory, it might work in a global economy that had no growth or negative growth of real wealth production. It would amount to a 4% tax on all remaining wealth funneled to the elites, who always have first crack at inflation money. So it appears to keep the Ponzi alive by screwing savers and investors. The Chinese central bankers certainly think that this is what the Fed is up to, and that is why they are so pissed off."

i can see that making perfect sense as being the fed's thoroughly used and abused Plan A. shame about those M3 numbers.

but the PBOC - is it really that thick? do they collectively not see what we see? or is that political anger? because there's no need to actually get mad about an ice cube's chance in hell. also, might Steve's (from virginia) First Law of Economics apply? if so, might the '4% solution,' also benefit china by reducing the inflationary costs associated with managing its surplus by reducing its value? (BTW, this is me straining my brain.)

"Economics is a way to manage costs associated with increasing surpluses. Our economy has run out of ‘cost sinks’ as those that remain — seniors and school children — lack the means to carry the cost burden. This is consequent to ‘Steve’s First Law of Economics’: Costs associated with managing any surplus — money, credit, water, oil, autos, armed force — rise faster than the surplus to a point where costs exceed the value of the thing itself.

The inflation cost of China’s foreign exchange surplus is greater than what the surplus can return and is bankrupting China. The negative- cash flow cost of Greece’s surplus credit has bankrupted Greece. The social and energy waste- costs of America’s automobile surplus have brought the country to the lip of catastrophe."
- 7/27/11

i like the bernank as camp counselor analogy. i wonder if the precocious psychopaths break out the (fractal) good cop/bad cop routine on him, taking up the roles themselves and leaning soft then hard on benny boy in the cabin after 'lights out.'

bluebird said...

skilo said "the camping trip that never ends"

I know some people who could relate to that analogy, thanks!

Greenpa said...

skilo, et al: "the camping trip that never ends"

a couple years back, Spice and I, in need of a little escape, decided to go camping in the tent for a few days. Anniversary, before Smidgen arrived; just tenting on our own farm.

Spice met a neighbor in the grocery store, and in the info swap told him we were going to go camping.

"How can you tell?" was his quick, and humorous jab.

We were amused too.

A lot of people do it for fun, you know. And very often, at the end of the camping trip, can be heard to sigh "Oh, if only this could go on forever."

Attitude is important!

Alexander Ac said...

And telegraph informs:

Savers desert stock market amid fears of another global recession

start of the BIG sell-off?



D. Benton Smith said...

Just a reminder to not be so distracted by the puppet show in Washington that you miss the Ponzi-technic implosion over there in Israel.

Protests have expanded in both size and demographic at a geometric rate ( MORE than ten times bigger in under a week. )

The gloves are coming off in Netanyahu's corner of the ring, too. In Round 1 just a few days ago he was making sweet talk. This week (opening seconds of Round 2) he's making threats already.

Beyond the obvious implications of Israel de-fanged by economic collapse and introverted by civil unrest amongst its own Jewish citizens, there are less obvious but even more serious ramifications internationally.

The impact of individual and collective Jewish fortunes on the domestic affairs of G-20 countries would be difficult to overstate.

What happens when they and their money must run home to save the bacon ( oops! make that mutton. Sorry. NOTE: as 1/16th Jewish I am entitled to ONE semitic joke. Since I am mostly Irish Catholic, I have an unlimited season ticket on THAT bunch. )

Seriously, the situation in Israel is extremely likely to go from alarming to dire very quickly if the Likud handles this with their typically heavy handed belligerence.

The Likud are OLD as well as rich, and I do not expect them to have either the mental agility, emotional vigor, nor patience to fight this legitimate uprising creatively.

I think they are going to try mean and brutal as a first option ... and that it will blow up in their faces very very badly indeed.

It's one thing to bomb Gaza... quite another to tear gas their own children.

If you hold assets there, do not delay. Cash out right now.

If you live there, start being very nice to your Muslim neighbors and buy a good used gas mask and hard-hat.

This next suggestion is for any lurkers who might be working for an unmaned Western Regime which counts on Israel as its invincible point guard in the Middle East and North Africa. Now might be a good time to recalculate your defense asset deployments over there in sand land.

scandia said...

@DBS...Knowing now about " lemma " makes me happy! Truly! Happy because " lemma " holds the promise of the larger result or outcome that I seek.
When I first started to think about when and how the brain is wired in childhood I discovered a lot about my " self ". Not all brains are the same/equal.
Rather than mis/underdeveloped wiring of the brain as disease I can now see different brains perform differently and may indeed reveal options that " normal " cannot conceive.It would be useful to present our predicament to a person with dyslexia.
Vive la differance!!!

Phlogiston Água de Beber said...


When you revealed your autism my first thought was, I wonder if he can do for us what Temple Grandin has done for the cattle industry. After your comment referring to conversation with a friend, I am thinking you probably can. Really glad to have you here.

@ scandia

We are where we are because of the people with "normal" brains. I have found them to be so resistant to the ideas we toss around here, that I rarely even bother to mention how screwed we are to them anymore.

I don't know what dyslexics might contribute, but I know they seem to find the dilemma easy to recognize. My wife was dyslexic. When I introduced her to Mish back in mid-decade, she immediately grasped it and made me read it to her every morning. Golem XIV is dyslexic.

I guess what I was trying to say in my comment last night about the Cheshire Cat is that unlike in the now lost fairly well regulated world most of us grew up in, here in Wonderland we almost certainly need to pay attention to those with the "abinormal" brains (h/t to Gene Wilder and Marty Feldman).

jal said...

Re.: "Self"

The search has been going on for thousands of years. You do not need to rediscover what has already been discovered. You need to do a lot of critical reading.

Start with the "baby development" books.

Examine your "motivators" and their triggers.

As you learn you change.

Don't expect to attain an elevation to an other superior sphere of existence.


A moderator said...


We have no idea what happened to those posts. Blogger is getting stranger and stranger, and we will all be relieved when the new software is ready.

Phlogiston Água de Beber said...

The "self" issue was brought up some months ago, in a guest post on Cluborlov, by Sandy Krolick. He wrote that a Spectre was haunting the earth and it was coming for who we think we are. I assumed he was implying that many of us are not who we think we are. There could be a different way of looking at it.

I am inclined to think that for the most part we are who we think we are. I also think that if that self is not adapted to a radical change in circumstances, our thinkertoys harbor the ability to dream up a new self. That Spectre Sandy dreamed up would be pushing us to activate that ability or suffer unnecessary additional consequences.

The "establishment" recruited what they liked to call the best and the brightest to run the old system. What they really were was the selves that were well adapted to the needs of the Old World Order. We are no longer in that world and they are now more useless than tits on a boar hog, as my elders used to say. Since they are not yet suffering, they see no need to dig for a better adapted self.

Those of us who can feel the Spectre breathing down our necks, might do well to give this some serious thought. It kind of wraps around toward Greenpa's question.

How shall I live?

Only I think it might be something like this.

Who shall live the rest of my life?

Phlogiston Água de Beber said...

For the benefit of those who may not believe we are in Wonderland. Dave Lindorff's observation on the jobs picture.
America's Big Speed-Up: No Wonder the Jobless Rate is Staying at Depression Levels

Yeah, that's going to work really well. :(

p01 said...

DBS said
It's one thing to bomb Gaza... quite another to tear gas their own children..

Or they might "find" something else to bomb around them; keep the kids busy.

War. Coming soon.

el gallinazo said...


Very interesting last comment regarding Israel. And this regime cannot afford an Arab and an internal front. Their situation is too precarious. However, as p01 implied, the insider word is that an air assault on Iran, which of course would be unthinkable without US support, is baked into the cake before the end of September. This is one of the reasons Gates left defense. He realized how stupid it was, so the Zionist lobby forced him out. We will not need a Repug or Democan scapegoat for austerity. $300 a barrel oil will do it when the dire Straits of Hormuz are shut down. Israel cannot do the deed without the Saudis giving them an air corridor. Wonder whether Iran will regard this as an act of war as the Saudi oil facilities are well within Iranian missile range. Stock up on beer, popcorn, and gasoline.


I was born with a severe wandering eye and didn't have it corrected until I was over three, which is too late for the brain to program depth perception parallax. Thus my visual world is a Matisse. When I was in my early 20's, I read Buckminster Fuller's Nine Chains to the Moon, where he talks of his early life. He had the same eye problem and felt that was the reason why he saw the world differently. OTOH, I had a girlfriend in the early 70's who was a secretary to Nelson Rockefeller. She told me that he was so dyslexic that he could barely read. So these brain problems do not inoculate one against the Dark Side.

Re hot shit

Ce137 is technically a beta emitter. However it decays 95% to Ba137m which is a gamma emitter. But Ba-137m has a half-life of only 153 seconds before it gives of a 662 KeV photon which drops the nucleus to the ground state. So when one looks at the dangers of Ce137, one has to look at it as a package with Ba-137m. Other than very heavy lead shielding, the only thing that reduces gamma is the dilution by the inverse square of distance. NZSanctuary, your comment doesn't seem to factor in the Ba137m gamma component danger.

Phlogiston Água de Beber said...

el g said...
So these brain problems do not inoculate one against the Dark Side.

I don't believe anyone said it did. John Nash had an abinormal brain and he invented significant parts of the modern Dark Side.

p01 said...

Stock up on beer, popcorn, and gasoline.

No depends?! :)

seychelles said...

In a cheery email this AM an old neighbor and friend refers to Bill HR-4646 introduced by US Rep Peter DeFazio D-Oregon and US Senator Tom Harkin D-Iowa. It is now in committee and will probably not be brought out until after the Nov. elections. This bill will impose a flat 1% transaction fee, in and out, for doing business with ALL financial institutions.

Ref "the question". It will come when a confluence of circumstances bring it into clear focus, i. e. when we are "ready for it." It will be simple, beautiful and ethical. It will occur to multiple people at the same time. It will not take an IQ of 176 to propose it or to understand it.

scandia said...

@seychelles, re your comment about " the question " it reminds me of " When the student is ready the teacher appears."
I have always found this to be so.
This site seems to attract natural teachers. I learn a lot here.

el gallinazo said...


Thanks for the heads up on this bill. A summary can be found at:

which also links to the full text.

It also stipulates the phasing out of the income tax by 2017. Of course it stands an ice cube's chance in hell. They couldn't even get co-sponsors. At first glance it appears to be regressive as it is a flat tax like a sales or VAT. But when CDS's get taxed 1%, it puts a whole new light on it. I haven't issue a CDS for a while now. Maybe I should start. I am as solvent as the Squid and the Morgue.

seychelles said...

Scandia said

I learn a lot here.

Me too.

Greenpa said...

a small spotlight on our current human condition:

Clark Gable's only grandson was arrested for shining a green laser into a police helicopter.

Not that Gable ever had the reputation of being a genius, but surely his descendants had opportunities not available to folks living on the outskirts of Mexico City. And yet:

"On Thursday, he will return to an eight-week acting school program at the New York Film Academy in Los Angeles, Davis said. Before becoming an actor a year ago, Gable was working at a pet store in Agoura Hills, California, unloading dog food for $9 an hour and working 56 hours a week, Davis said"

Part of education, I think, is discovering how very many ways there are to become lost.

D. Benton Smith said...

El G ,

Hey, be happy it's Matisse. Coulda been Picasso.

Seriously, though, EVERYONE'S neural hardware falls SOMEWHERE on the bell curve... ours just falls a little farther from the tree than most others. (you smart, me "Aspie" )

That curve describes the whole herd of which we are just another couple of parts... and not THAT much different in any case. At least I'M not ( can't be too sure about El G .)

The friend I was writing to suggested that perhaps we "atypicals" ( so much nicer than "abnormals" ) serve an evolutionarily beneficial purpose: to serve our neurotypical fellows during bewildering times, with our tendency to see, think and function well outside of the box... and not panic so badly when the world gets turned upside down.

Hell, the world has always looked wacko to me, so this is just more of the same... only a little more interesting.

Make no mistake, my brain IS damaged goods (even if there are some "fringe" benefits ... pun intended. ) I don't mind. It's all I've ever known and I've learned to enjoy it.

But it would be unhealthy and just plain WRONG for we outliers to harbor any delusions of grandeur.

If our slightly altered wiring was superior for survival purposes across the boards then it would be WE, not the neurotypical, who constituted the mainstream.

Maybe it is times like these, however, that justify our existence and make us worth keeping around.

One thing I have noticed. Almost all of the sensible observations seem to be coming from us 'defectos' in these past few years, whereas the mainstream is sounding more bewildered and ineffectual by the day.

p01 said...

There is a solution to the debt crisis. Since all money is digits on computers anyway, simply state the debt ceiling is in fact 14.3 Terabytes:
2^40 instead of 10^12. Done.

What? It's as good as any idea at this point!

Phlogiston Água de Beber said...


Sorry for using the "abinormal" word. I just love the scene in I think the movie was called "Young Frankenstein" where I learned the word. Your brain is indeed bringing in some of the best observations presented here and I for one actually mean to honor those contributions.

Ashvin said...

Re: people with mental "abnormalities" and insightful perspective

It seems that at the heart of this correlation is something very simple. People in that category are forced to think "outside of the box" throughout their lives, because it is, after all, a social and institutional category of our system. The very act of labeling someone as autistic, bi-polar, schizophrenic, etc. forces society to view them as existing on the fringe of "the system" or "normal society", which also reinforces their own views of themselves, regardless of the underlying biological extent of their "disorder". The biology is no doubt real in many cases, but the perspective is necessarily informed by surrounding economic, social, legal, political and "medical" structures. As with every form of collective socioeconomic oppression, it creates the conditions of its own demise over time. The tipping point is the time at which a critical mass of previously "normal" people are forced or voluntarily choose to join our "abnormal" friends in the outskirts of the system, which has arguably already occurred.

Anonymous said...

@bluebird & Greenpa,

Re: Camping trip. I picked that up from Charles Hugh Smith, author of the OfTwoMinds blog. I consider his writing style and insight to be excellent, although, I never agree 100% with anyone - and that's just fine. He is generally excellent, IMHO. el g has been talking about his current book, which i plan to pick up shortly (missed the 30% off). I have his other book, Survival+, and look forward to reading it.


>>i like the bernank as camp counselor analogy.<<

The Big Finance Capital controlled media sells this meme - that Ben is somehow doing "his thing" independently.

I think that's 100% false. He was groomed and put into place because Osama bin Bernanke REPRESENTS the RMHes and does so very well. He's in on it and has been since the very beginning. His typical response is "yes, master" to his Sith Overlords.

"Bank" on that. Of course, they can't tell you that, so they created a meme plausible to people who aren't really paying attention to the "big picture."

This is how they lie about the Federal Reserve mandate. Read it yourself - google "Federal Reserve Section 2a" and READ IT.

The mandate IS NOT to keep unemployment low and prices stable.

Those are the expected results of following the actual mandate itself.

Oh, and they pile lies upon lies because stable prices do not inflate - BY DEFINITION.

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