Friday, August 5, 2011

August 5 2011: Europe throws in the towel


Dorothea Lange Mrs. Wardlaw October 1939
"Mrs. Wardlow [Wardlaw] at the Society of Friends church, Dead Ox Flat, Malheur County, Oregon"


Ilargi: In Wednesday's The Next Bank Bailout Bloodbath is Here, I gave you an overview of my fictional Google Finance portfolio. For your viewing pleasure, here's the follow-up graph after yesterday's close:



Isn't she lovely? Then on the present: $2.1 trillion in market value was wiped off the MSCI All Country World Index this week as of Thursday's close, write Leika Kihara and Pedro Nicolaci Da Costa for Reuters. Clearly, most of that was lost in Europe and the US, and most of that in turn in the financial sector. So it's no wonder that there's high level political talks going on today between Germany, France, Spain and other EU members.

But what can they realistically do? You can bet they know they can't do much at all at this stage in the game. They may not come out and say it in so many words, but that isn't even necessary anymore either. The non-political side of the table, in the shape of the European Central Bank, has made a clear enough statement already.

The ECB went back into the bond markets yesterday, but where everyone expected them to buy Italian and Spanish debt, since both these countries see interest rates on their debt skyrocket, the ECB bought only Irish and Portuguese paper.

And while this may be temporary, and the bank might start buying Italy and Spain bonds soon, first: that's not too likely given the circumstances, second: it's wouldn't make one iota of real difference, and third: the statement has been made regardless.

There are a lot of 'experts' in the press today who don't understand this, or won't. Which strikes me as odd, since the dice have come up as they have, and it's no use debating the outcome.

From the Leika Kihara and Pedro Nicolaci Da Costa piece cited above:
Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's.

Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action "mysterious." "It sent the wrong message,"
he said.

Ilargi: The message may have been "wrong" and "mysterious" to Mr. Perli, or maybe he's just saying that, but I think it's crystal clear, and yes, even unusually brave for the institution, for any such institution, really.

Ambrose Evans Pritchard has his own views, and quotes Willem Buiter to boot:
The ECB throws Italy and Spain to the wolves
The European Central Bank has abandoned Italy and Spain to their tortured fate.

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control. [..]

Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued.

Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system.

"The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.[..]

"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said. He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run. "It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said. [..]


Ilargi: No, Willem Buiter. "The warped logic of intervening in two countries that don't need it is NOT as strange as it gets.". It is a loud and clear signal to the world that the ECB can not and will not try to save Italy (or Spain). Because it doesn't have the financial wherewithal to do so, let alone the political support.

As for: "The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults", no again. The ECB, unlike you, apparently, Mr. Buiter, understands it cannot save Italy and Spain.

Making the European Financial Stability Facility almost 6 times bigger (€440 billion to €2.5 trillion) than it isn't even yet, but is at least supposed to become, is a dead on arrival idea. Germany won't accept that, Holland won't, Finland won't.

Mr Trichet said the ECB's governing council was divided over bond purchases but gave no further details. German sources said Bundesbank chief Jens Weidmann voted against intervention, repeating his well-known view that further "collectivisation of risks" poses a threat to monetary stability. German-led hawks say the ECB lacks treaty authority to keep amassing a portfolio of bonds, is on a slippery slope towards debt monetisation and is being drawn deeper into tasks that belong to fiscal authorities.

ECB officials are aware token purchases of Spanish and Italian bonds would soon be tested by the markets, pulling the bank ever deeper into a monetary swamp. The two countries' tradable public debt is more than €2 trillion. The ECB has purchased almost a fifth of the combined debt of Greece, Ireland, and Portugal yet still failed to stem the crises in these countries. Any intervention in Italy and Spain would have to be on the sort of overwhelming scale undertaken by the US Federal Reserve.

"Italy is the third-biggest bond market in the world: the idea that a bit of ECB buying can make any long-term difference is very misplaced," said Marc Ostwald from Monument Securities. Mr Ostwald said the ECB appeared to have bought some Irish bonds today. "This is their way of giving Ireland a pat on the back for delivering on austerity, to show that Ireland really starts to divorce itself from others in crisis."

Ilargi: Mr. Ostwald has one thing right: " [..] the idea that a bit of ECB [bond] buying can make any long-term difference is very misplaced." indeed (that's what the ECB is letting us know). But he's wrong on the next point: Buying Irish bonds is not "their way of giving Ireland a pat on the back for delivering on austerity", it's instead - and quite plainly- their way of telling the markets that the ECB will not try and save Italy and Spain.

The reason why, apart from the fact that there is no European facility endowed with sufficient financial or political means to save those two, is certainly also plainly in the sheer size of the debt and the risks that come with it. "Italy is the third-biggest bond market in the world..” Also, as per Charles Forelle in the Wall Street Journal, "its economy is 50% larger and its debt volume two-and-a-half times as big as Spain's". And "just this month, Italy must repay €36 billion in government debt. That is roughly what Greece will redeem this entire year." As well as: "The IMF estimates that Italy's gross financing needs—the amount of money it must borrow to repay maturing debt and cover deficits—will run between €340 billion and €380 billion annually over the next five years.

A chunk of that is short-term debt that Italy would likely still be able to roll over—Greece continues to sell short-term debt despite its bailout—but medium and long-term debt redemptions next year alone are around €200 billion. Italy's budget deficit will be around €50 billion."


The Economist has another nice tidbit on Italy:
However bad the economic crisis in southern Europe may be for investors, it is proving lethal for the area’s political leaders. In March José Sócrates, Portugal’s beleaguered prime minister, resigned. Soon afterwards his Spanish counterpart, José Luis Rodríguez Zapatero, announced his intention to step down. In June George Papandreou, Greece’s prime minister, came close to ejection during a fierce debate over an austerity package.

So as he stood up to make the first of two eagerly awaited speeches to parliament on August 3rd, Italy’s prime minister, Silvio Berlusconi, may have had an uneasy feeling he was one in a line of dominoes. If so, there was nothing in the style or content of his address to suggest it. Nor was there much to indicate that he appreciated the magnitude of the crisis facing the euro or the case for drastic action to tackle it.

Many analysts argue that the euro’s difficulties are beyond resolution by any one member. But Italy is crucial. It is the biggest country on the euro zone’s troubled southern flank, and its €1.8 trillion ($2.6 trillion) borrowings dwarf those of any other country in the single currency."

Ilargi: British think tank CEBR (Centre for Economics and Business Research) is about as clear as can be, reports the BBC:
Italy 'to default' but Spain may 'just' escape
Debt-laden Italy is likely to default, but Spain might just avoid it[..]

With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both. It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth. However, it said, "there is a real chance that Spain may avoid default".

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth. But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish.

[..] In a report published on Thursday, the CEBR calculated that Italy's debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant. "Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018," said Doug McWilliams, the CEBR's chief executive.

The conditions in Spain are better because its debt is much lower. Even under the "bad" scenario, Madrid's debt ratio would climb to no higher than 75% of national output. "Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion," Mr McWilliams said. "Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said.

If the ECB refuses to even try and rescue Italy, and a major economic think tank bluntly states that it cannot be saved no matter what, I'm thinking that people like Roberto Perli and Willem Buiter have simply not caught up with reality. Not that I see Buiter admit to anything like it, mind you. People like him can argue until the end of time that if only, if only, if people would just have listened to them, things would have been much better.

It's like Paul Krugman or Robert Reich in the US: economists are people who cling to faith-based arguments, who in this case believe that if Europe or America would spend all of their children's money into a black hole of debt, those children would greatly benefit. It's all just conjecture, conveniently omitting facts like a few hundred trillion dollars in debt here and there. "If only we would spend, then we would certainly grow!". No, there is no such certainty.

What is certain is that the Economist list of European politicians in election trouble, José Sócrates, José Luis Rodríguez Zapatero and George Papandreou, will grow rapidly, and increasingly so. This would lead to additional problems in solving issues: whichever "leader" you talk to in a given country, may be gone tomorrow. Argentina in its early 2000's crisis had 5 different presidents in 2 months, or something along those lines.

That is the sort of volatility we will see come to Europe, in particular the Mediterranean, going forward. It'll be chaotic, volatile, and it will lead to a lot of societal unrest. But none of it will make the financial problems go away.

And that brings us to another theme I touched on in The Next Bank Bailout Bloodbath is Here, and arguably the most important one of all. Derivatives. Credit default swaps on PIIGS debt. Yes, there will be credit events, and so, yes, counterparties will demand payments. And since the majority of swaps have been issued by American institutions, these will either go belly-up or either the American government or the Federal Reserve must step in.

However, given the numbers -JPMorganChase's derivatives exposure is estimated at about $90 trillion- the Fed will in the end be as helpless and useless in this situation as the ECB is with regards to Italy.

If financials keep on losing stock value the way they have in the past few days, we are well on our way to bank holidays in some countries (Italian trading was temporarily halted yesterday). And where there are bank holidays, bank runs are not far behind: if people see the stock prices of their banks evaporate, why would they keep their money in them?

Yes, you can enjoy the relative calm provided by the US jobs report that wasn't as bad as feared, for a few hours today. But the U3 rate is still 9.1%. And no economy with that many jobless people will show substantial growth; it won't even be able to stand still to recover. And this bank rot won't go away by itself anymore. BofA and Citi are already losing 3% and 4% respectively again at 11 am EDT (UPDATE: make that 5.5% and 6.5% at 11.35 am. Yikes!) [UPDATE 2: each some 8% at noon].

The debt must be flushed, and we're not doing it. Here's hoping that the ECB reality check will wake up a few more people before present day policies cause entire societies to descend into chaos. But here's also thinking it's probably too late for that.










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Italy 'to default' but Spain may 'just' escape
by BBC

Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.

With the countries weighed down by debt, the think tank modelled "good" and "bad" economic scenarios for both. It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth. However, it said, "there is a real chance that Spain may avoid default".

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth. But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish. On Wednesday, Italian Prime Minister Silvio Berlusconi addressed parliament, saying the economy was "strong" and the nation's banks "solvent".

But many economists believe that the eurozone's third largest economy risks being engulfed in the debt crisis. In a report published on Thursday, the CEBR calculated that Italy's debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant. "Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018," said Doug McWilliams, the CEBR's chief executive.

The conditions in Spain are better because its debt is much lower. Even under the "bad" scenario, Madrid's debt ratio would climb to no higher than 75% of national output. "Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion," Mr McWilliams said. "Realistically, Italy is bound to default, but Spain may just get away without having to do so," he said.




ECB Bond Purchases Are High-Stakes Gamble
by Simon Nixon and Richard Barley - Wall Street Journal

The crisis must be bad: The European Central Bank has resumed its mothballed bond-buying program. After lying dormant for months, the ECB's Securities Markets Program sputtered into life Thursday to buy Irish and Portuguese bonds, but not Italian and Spanish bonds, which lie at the eye of the current storm and whose yields actually rose. But this latest capitulation drags the central bank into potentially dangerous territory.

The clamor for the ECB to buy bonds was inevitable once yields on Spanish and Italian government 10-year debt rose above 6%. The SMP was designed to intervene where dysfunctional markets threatened the normal monetary-policy transmission mechanism. That is clearly the case now. Higher yields have already caused bank funding to dry up, raising the specter of a credit crunch in the euro-zone periphery.

But the latest rise in yields isn't entirely irrational but a logical response to the decision to inflict losses on Greek bondholders. As a result, euro-zone government bonds now carry explicit credit risk. That is a major difference from a year ago and leaves the ECB, furious at what it considers to have been a "stab in the back," with a major problem. For the ECB to put its balance sheet in danger by buying bonds at risk of restructuring crosses the line into territory that rightly belongs to democratically accountable governments.

The ECB's explanation for its change of heart is unconvincing: It appears to accept the euro-zone leaders' assurances that Greece is a unique situation and that other states will honor their obligations—although it is worth noting that the bond-purchase decision wasn't unanimous. It also insists this is just an interim solution: The ECB wants euro-zone leaders to implement swiftly the decisions taken July 21 to make the European Financial Stability Facility responsible for secondary-market bond purchases.

But the ECB has received no indemnities from governments to cover losses on its latest purchases, nor has it received any guarantee that bonds will be transferred to the EFSF. That is a big risk; it is taking on trust that governments will deliver on their July 21 commitments, even though that deal carries major execution risks and fell far short of what was needed to end the crisis. In particular, euro-zone leaders failed to increase the size of the EFSF or move to joint and severally guarantee its bonds.

The market clearly doesn't share the ECB's faith in politicians, betting a euro collapse remains a possibility. ECB leaders should expect to be held personally accountable if this gamble fails and they end up saddling taxpayers with further losses.




China, Japan urge global talks on economic crisis
by Leika Kihara and Pedro Nicolaci Da Costa - Reuters

China and Japan called for global cooperation on Friday after a financial market rout signaled fear that Europe's debt crisis could spin out of control and the U.S. economy may slide into another recession.

The comments from Washington's two biggest foreign creditors pointed to growing concern of contagion as Asian stock markets tumbled following Wall Street's steep dive a day earlier. European markets hit a 14-month low in early trading. French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday, Sarkozy's office said in a statement.

In Japan, Finance Minister Yoshihiko Noda said global policymakers needed to confront currency distortions, the debt crises and concerns about the U.S. economy. "I agree that these subjects should be discussed," he told reporters a day after Japan intervened to sell yen. "Each problem is important, but how to prioritize these issues is something to discuss from here on in."

Japan sold yen on Thursday to try to cap the currency's rise, which puts its exporters at a competitive disadvantage. There was market talk that it had intervened again on Friday, although the currency bounced back quickly, which suggests Tokyo was not in the market. The yen has become a popular safe-haven bet as concerns about the United States and Europe grow. China Foreign Minister Yang Jiechi said U.S. debt risks were escalating and countries should step up cooperation on global economic risks. Yang, who is visiting Poland, called on the United States to adopt "responsible" monetary policies and protect the dollar investments of other nations.

The U.S. Federal Reserve holds its next policy-setting meeting on Tuesday, and economists say there is little more it can do to try to spur growth. A flurry of weak economic data and Europe's debt woes have fed fears of a fresh recession, triggering Thursday's sell-off on Wall Street, which was the worst since the global financial crisis. Some $2.1 trillion in market value was wiped off the MSCI All Country World Index this week as of Thursday's close, Thomson Reuters Datastream showed, and that total looked set to rise on Friday as Asian and European stocks fell. IHS Global Insight said there was now a 40 percent chance the United States could slip into recession.

Cash is King
The market rout extended into Asia on Friday, where markets skidded about 5 percent. Chinese lender China Everbright Bank Co Ltd delayed a planned Hong Kong share offering of up to $6 billion, sources told Reuters.

Japan and Switzerland are trying to reduce the allure of their markets as safe havens and after gold has more than doubled in price since the global financial crisis, many investors are having second thoughts about seeking refuge in the precious metal. With investment options running out, funds are flooding into cash. Bank of New York Mellon Corp said it had been overwhelmed with deposits, prompting it to charge some big customers a fee.

Investors slashed positions after the European Central Bank failed to include Italy and Spain in a fresh round of bond buying, even though yields on their debt shot above 6 percent, the highest level since the euro was launched over a decade ago. ECB President Jean-Claude Trichet said there was not full support in the central bank for the action, underscoring deep divisions within Europe over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek bailouts.

Investors worry that Italy and Spain, the euro area's third- and fourth-biggest economies, could be next. Sarkozy said France, Germany and Spain had talked to Trichet. U.S. officials from the Federal Reserve, the U.S. Treasury and the White House declined to comment on whether they were holding any discussions with European or Asian officials.

Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's. Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action "mysterious." "It sent the wrong message," he said.

Belying a sense of crisis, many of Europe's policymakers are still on summer vacation, although EU Economic and Monetary Affairs Commissioner Olli Rehn broke away from his holiday to return to Brussels. He plans a news conference on Friday.

Italian Economy Minister Giulio Tremonti voiced frustration at the ECB's response. When he talked to Asian investors, they had told him: "If your central bank doesn't buy your bonds, why should we buy them?"

Longer term, some sort of supranational fiscal authority was needed, transferring some of the debt burden of troubled countries to the region as a whole, analysts said. That option is not seen as politically palatable to Germany and France now. Analysts said they would look to see if European leaders are willing to expand its emergency financial stability fund to an amount that would put a floor under the market panic. They say the fund, currently 440 billion euros, would need to be doubled or tripled to cover economies as big as Italy and Spain.

U.S. Problems Compound Uncertainty
In the United States, a similar sense of political paralysis reigns. Just days after a bitterly fought, last-minute deal to raise the country's debt ceiling and avoid default, realization has sunk in that many elements of the $2.1 trillion deficit reduction plan are short term and not locked in place. Doubt has spread through markets that Congress will stick to implementing it in full after the November 2012 elections.

This, combined with a bout of poor economic data, points to a heightened risk of another slump. Lawrence Summers, a senior adviser to the U.S. president until last year, argued in a Reuters column that there is a one in three chance of recession in the United States.

U.S. employment numbers will be critical to market sentiment. Forecasts are for a tepid 85,000 jobs added in July, but a weak number or even contraction would boost concern that the United States is heading into recession. The U.S. jobless rate has risen for three consecutive months, and another increase would send a strong recession signal, Goldman Sachs said. Many economists say chances are slim that Congress would endorse a further round of fiscal stimulus now that it is focusing on fiscal spending cuts.

"I don't see a well functioning government that can do something," said Jeff Frankel, economics professor at Harvard University and former White House economic advisor under Bill Clinton. "If everything is blocked politically, especially fiscal policy, there's nothing much you can do." Options for the Fed are also severely restricted. Policymakers appear reluctant to embark on another round of bond purchases, particularly given how controversial the last program proved to be.

Still, Fed Chairman Ben Bernanke has noted other options, such as bolstering its assurance that rates will stay low for an extended period. Nonetheless, few expect such efforts to have much of an impact, particularly since the economy's chief problem at the moment appears to be a lack of jobs, not credit. "The Fed has mentioned what their menu of tools is for easing, the problem there is several of them really have no significant macro economic benefit," said Michael Gapen, senior economist at Barclays Capital.




The West's horrible fiscal choice
by Ambrose Evans-Pritchard - Telegraph

The US, Britain, and Europe are together embarking on a sudden and severe tightening of fiscal policy, in unison, before economic recovery has reached safe take-off speed. The experiment was last tried in the 1930s.

The theoretical model behind the austerity push – known as an "expansionary fiscal contraction" – is based on the work of German theorists, and more recently on studies by Harvard professor Alberto Alesina and a group of brave scholars willing to defy the canonical doctrine of post-war Keynesian economics. The Alesina view has been embraced by the European Central Bank and the budget cutters of the Eurogroup, but has enraged America's professoriat and set off a heated argument across the world.

Former US Treasury Secretary Larry Summers said there is now a one-third chance of a full-blown recession next year in the US. Nobel leaureate Paul Krugman said obscurantists had run amok. "What we're witnessing here is a catastrophe on multiple levels. We are doing a terrible thing. We are repeating all the mistakes of the 1930s, doing our best shot at recreating the Great Depression," he said.

Fear that a synchronized squeeze in half the global economy may go horribly wrong has seeped into market psychology, explaining why the $2.4 trillion (£1.5 trillion) debt deal agreed in Washington has failed to spark a relief rally. Wall Street is a step ahead, bracing for cuts in an economy that has already slipped to stall speed. Angst over faltering recovery explains why Italian and Spanish bonds have suddenly buckled. The European Commission said the spike in Latin spreads is "clearly unwarranted" given that Rome and Madrid are sticking to their austerity plans, but this misses the point.

Investors no longer see austerity as a solution if cuts go beyond the therapeutic dose and tip Italy and Spain back into recession, playing havoc with fragile debt dynamics. The US is expected to tighten by 2pc of GDP next year, including the expiry of payroll tax cuts and the phase-out of President Barack Obama's stimulus plan. Britain is tightening by 1.7pc this year and almost as much next year. Harsher versions are under way in Ireland and Club Med. Greece is retrenching by 16pc over three years. Canada, France and Germany will all tighten in 2012.

The International Monetary Fund said the combined effect is double the last sychronized squeeze in 1980. It comes as China is curbing credit to cool its property boom. The Alesina school cites a string of cases where fiscal cuts led to robust recovery, and a few booms. Their work cannot be dismissed lightly and exposes the limits of New Keynesian models, which often clash with historical reality and human behaviour.

The textbook cases are: Italy (1970s); Ireland, Denmark and Sweden (1980s); Canada, Spain and the UK (1990s). There were some flops, too: Finland (1970s), Australia, Belgium and Greece (1980s), and Italy (1990s). Context is crucial. Dr Alesina says one clear message comes through from the stack of evidence: "Tax increases are much worse for the economy than spending cuts."

A study by Goran Hjelm from Sweden's Institute of Economic Research said the formula only really works when countries can let their currencies slide and export their way out of trouble. This is not possible for Spain and Italy within EMU, nor for the combined West at the same time. "We can't all devalue together and export to Mars," said Jamie Dannhauser from Lombard Street Research.

Bank of England Governor Mervyn King has called for a "grand bargain" of the world's major players to ensure that the burden of rectifying global imbalances does not fall on debtors alone, which feeds a vicious circle. "The need to act in the collective interest has yet to be recognised. Unless it is, it will be only a matter of time before one or more countries resort to protectionsism. That could, as in the 1930s, lead to a disastrous collapse in activity around the world," he said.

Fiscal contractions work best in small countries where state spending gobbles up half of GDP and where confidence has already collapsed. Getting a grip creates a huge sense of relief. Bond yields fall far enough to offet fiscal pain.

This hardly applies to the AAA bloc today: Gilt yields are trading at post-war lows of 2.73pc, while 10-year US Treasuries are 2.57pc, German Bunds are 2.4pc and Japan's JGBs are 1pc. Central banks can do little to offset budget cuts when rates are already near zero, though £200bn of quantitative easing has cushioned the blow in the UK.

Britain had its own intriguing story during the Great Depression in 1932 when it passed a draconian budget, yet recovered well. The trick was to slash rates, devalue by a quarter and retreat behind imperial tariffs. But by then the international system had already collapsed.

Of course, rich nations may not have the luxury of spending their way out of trouble any longer. The Bank for International Settlements warned last year that fiscal woes are already near "boiling point" as demographics go from bad to worse and average public debt surpasses 100pc of GDP. "Current fiscal policy is unsustainable in every country. Drastic improvements will be necessary to prevent debt ratios from exploding," it said.

The indebted West is in a frightening bind: damned if it does, and equally damned if it doesn't.




Fears euro system will collapse in debt
by UPI

Fears mounted Thursday the system sustaining Europe's debt crisis would collapse amid alarm Italy and Spain were sliding into debt that couldn't be bailed out. Italy and Spain -- the eurozone's third- and fourth-largest economies and the world's seventh- and 10th-largest -- opened the bond markets Thursday with borrowing rates near the 7 percent threshold that triggered bailout talks with Greece, Ireland and Portugal.

French and Belgian bonds opened after seeing volatile trading Wednesday. European Commission President Jose Manuel Barroso released a statement late in the day saying, "The tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis." The euro area, or eurozone, includes the 17 European Union countries that use the euro as their common currency and sole legal tender.

Barroso called Italy and Spain's near-unprecedentedly high interest rates and weakening bond prices "a cause of deep concern." European banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls. Barroso urged governments to signal "resolve to address the sovereign debt crisis with the means commensurate with the gravity of the situation."

Embattled Italian Prime Minister Silvio Berlusconi delivered an emergency address to Parliament late Wednesday, defiantly warning speculators they were wrong to bet against Italy. He rejected renewed calls for his resignation and vowed Italy would make no more budget cuts or new austerity plans, calling economic growth the country's best defense. "We have sound economic fundamentals," he said.

Italy's $2.2 trillion debt burden is more than that of the United States, compared with the size of its economic output, but its annual budget deficit is 4 percent, The Washington Post reported. Before Berlusconi spoke, Italian Finance Minister Giulio Tremonti, with whom Berlusconi has engaged in public battle, huddled with Jean-Claude Juncker, president of the Euro Group of eurozone finance ministers, in Luxembourg to discuss Italy's intensifying debt crisis.

Spanish Prime Minister Jose Luis Rodriguez Zapatero rushed back to Madrid Wednesday within hours of beginning his August vacation -- after postponing it Tuesday -- for emergency meetings with Spanish and European leaders about Spain's increasingly desperate situation. Spain was to sell as much as $5 billion in short-term sovereign bonds Thursday, and the European Central Bank was to meet in Frankfurt to discuss the crisis.

Switzerland's central bank stunned markets Wednesday with a surprise attempt to devalue its popular safe-haven franc because it said it was "massively overvalued." The Swiss National Bank cut target interest rates to "as close to zero as possible" and said it would inject $65 billion into the Swiss money supply in an attempt to halt the franc's relentless appreciation against both the U.S. dollar and euro. Switzerland is not a member of the European Union.

Gold hit another record high of $1,663.40 a troy ounce. A full-blown Italian and Spanish debt crisis would hit large European banks hardest, the Post said, but could also dry up interbank lending worldwide. U.S. banks and investment funds are also more exposed to Italy and Spain than they are to Greece. Direct and indirect U.S. holdings in Italian and Spanish debt amounts to about $450 billion, the Post said.




The ECB throws Italy and Spain to the wolves
by Ambrose Evans-Pritchard - Telegraph

The European Central Bank has abandoned Italy and Spain to their tortured fate.

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control. Bank shares crashed in Madrid and Milan, with Intesa Sanpaolo down 10pc and Italy's MIB index reduced to its knees with a one-day fall of 5.2pc. Share trading was suspended at a string of bourses across Europe. Yields on 10-day US debt fell to zero in a replay of panic flight to safety seen during the onset of the Lehman-AIG crisis three years ago.

Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued. Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system. "The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.

Italian yields spiked to 6.21pc yesterday after a relief rally wilted. Spanish yields hit 6.3pc. The debt of both countries is hovering near 400 basis points over German Bunds, 50 points shy of the level used by central clearing house LCH.Clearnet to trigger margin calls. This was the point where the debt crises of Greece, Ireland and Portugal crossed the line of no return. Spain has cancelled further debt auctions in August.

"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said. He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run. "It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said.

While Spain's leader, Jose Luis Zapatero, has suspended his holiday and Italy's Silvio Berlusconi has pledged fresh crisis measures, German Chancellor Angela Merkel is on holiday in Austria and seemingly in no mood to revisit the summit battles of late July. Jose Manuel Barroso, the European Commission's chief, has called for "a rapid reassessment" of the EFSF in order to deal with contagion and a mounting systemic threat. "It is clear that we are no longer managing a crisis just in the euro-area periphery," he said.

Key eurozone officials met yesterday to discuss raising the fund's firepower to €1 trillion, perhaps using a manoeuvre that skirts legal restrictions, although Germany's finance ministry shot down the proposal as pointless coming so soon after the July summit. Bail-out fatigue is becoming ever clearer in Germany, Holland, and Finland, where tempers are fraying.

Mr Trichet said the ECB's governing council was divided over bond purchases but gave no further details. German sources said Bundesbank chief Jens Weidmann voted against intervention, repeating his well-known view that further "collectivisation of risks" poses a threat to monetary stability. German-led hawks say the ECB lacks treaty authority to keep amassing a portfolio of bonds, is on a slippery slope towards debt monetisation and is being drawn deeper into tasks that belong to fiscal authorities.

ECB officials are aware token purchases of Spanish and Italian bonds would soon be tested by the markets, pulling the bank ever deeper into a monetary swamp. The two countries' tradable public debt is more than €2 trillion. The ECB has purchased almost a fifth of the combined debt of Greece, Ireland, and Portugal yet still failed to stem the crises in these countries. Any intervention in Italy and Spain would have to be on the sort of overwhelming scale undertaken by the US Federal Reserve.

"Italy is the third-biggest bond market in the world: the idea that a bit of ECB buying can make any long-term difference is very misplaced," said Marc Ostwald from Monument Securities. Mr Ostwald said the ECB appeared to have bought some Irish bonds today. "This is their way of giving Ireland a pat on the back for delivering on austerity, to show that Ireland really starts to divorce itself from others in crisis."

The ECB increased liquidity for banks, offering unlimited funds for six months to prevent the money markets freezing up. The bank also left interest rates unchanged at 1.5pc and signalled an end to its rate-rise cycle.




European banks’ job cuts highlight gaps in cost controls
by Simon Kennedy - MarketWatch

40,000 positions are targeted; Swiss firms hit by soaring franc

A running tally of planned job cuts by European banks reached around 40,000 Tuesday, little more than halfway though earnings season, as firms that failed to control costs or were over-optimistic about growth make the deepest cuts.

Barclays PLC was the latest to confirm job losses Tuesday, saying it’s already cut 1,400 jobs and indicating the figure could rise to around 3,000 by the end of the year. The announcement came as the bank reported a 38% drop in net profit to 1.5 billion pounds ($2.45 billion), partly due to compensation it’s paying to customers who were sold inappropriate insurance.

The Barclays cuts take the total announced by banks reporting in the last week to 35,000. On top of that, UBS AG also confirmed it would slash jobs, with media reports in Switzerland pegging the number of losses at around 5,000. The total doesn’t include a further 15,000 job cuts announced by Lloyds Banking Group PLC at the end of June.

Strong franc hurting Swiss banks
UBS and Credit Suisse, which is cutting around 2,000 jobs, are facing an uphill battle against the soaring Swiss franc because they have such a big cost base in Switzerland, but receive a lot of their revenue in dollars and euros.

On top of that UBS CEO Oswald Gruebel made a significant effort to rebuild the firm’s fixed-income trading business in the wake of the crisis, but is now cutting back in areas where it’s not making money, said Christopher Wheeler, an analyst at Mediobanca. “Ozzie is a trader and he’s taking a trader's view by cutting his positions,” said Wheeler. HSBC Holdings PLC will cut around 30,000 positions by 2013, reflecting the fact that the bank “massively over-expanded in retail banking,” Wheeler added.

Soaring costs at HSBC have been a significant worry for investors for some time, leading the bank to announce in May that it will withdraw from markets where it can’t achieve the right scale. Societe Generale analyst James Invine said in a note to clients that costs are still “a mountain to climb” for HSBC and that much of the growth is due to wage inflation in its faster-growing markets. “That is a cost about which it can do very little, particularly given Asia’s strategic importance for the group,” Invine said.

The Barclays cuts are a mix of trimming a bloated looking corporate banking arm and slimming down European retail banking, as well as trimming its Barclays Capital investment banking arm after some pretty aggressive expansion, said Wheeler. Barclays was the bank that snapped up the U.S. operations of Lehman Brothers Holdings, including around 10,000 staff, after the U.S. firm collapsed in 2008.

“In bull markets, you can hide a lot,” he said. “But when you get into these sort of markets you have to address it, because, it sticks out like a sore thumb.”




Obama's 'Pivot' To Jobs: The Deja Vu Reel
by Ben Craw - Huffington Post




Now that the debate over raising the nation's debt ceiling has been temporarily resolved, the White House has pledged, once again, to "pivot" to jobs.

If the promise is giving you a sense of déjà vu, you're not alone.

In his very first address to Congress in February of 2009, President Barack Obama promised an agenda focused on job creation. Following every major subsequent event of his presidency -- be it a concerted campaign like health care reform or, much more frequently, an unwelcome crisis -- he has been forced to reiterate that he will now focus on jobs. Just how many times has he made the jobs promise? Scroll up for a look back.




Policy Makers' Creeping Nightmare: Italy
by Charles Forelle - Wall Street Journal

Just a few months ago, European policymakers were scrambling to erect barricades protecting Spain from the marauding sovereign-debt crisis. But now, suddenly, it is Italy in the crosshairs—deeply transforming Europe's problem and putting policymakers in full retreat.

What was a battle to avoid a costly bailout has now become a push to avoid a doomsday scenario. "The line has shifted from Spain to after Spain," said Carsten Brzeski, senior economist at ING in Brussels.

Analysts say the euro zone's rescue fund, if it is expanded as planned to €440 billion ($622 million), is likely big enough to provide aid to Spain—though not for very long. But Italy, with an economy 50% larger and a debt volume two-and-a-half times as big as Spain's, is far too large for the current fund to save. A frantic summertime scramble is now on. The European Commission's president, José Manuel Barroso, fired off an agitated letter, released on Thursday, to the 17 euro-zone leaders criticizing them for "undisciplined communication" and an overcomplicated and incomplete rescue plan.

In Rome on Thursday, Prime Minister Silvio Berlusconi met with unions and business leaders and said the government would devise a "pact" to revive Italy's stalled economy. In response to rising evidence that the Italian government's access to global financial markets was fading, senior Italian officials said on Thursday the state had more than €60 billion on hand, more than the amount of long-term debt it must redeem for the rest of the year. Italy's debt obligations are also spread far enough into the future that it would take years of high-rate borrowing to nudge up the average interest rate it now pays.

But investors nonetheless continued their relentless pummeling of Italy. Yields on its 10-year government bonds rose above 6.2% Thursday, a half percentage point higher than they were a week ago, and the Milan stock market fell more than 5%. Italy's heavy debt has long been a nagging worry. At 120% of gross domestic product, it is second only to Greece's in the euro zone. But while Italy has shown greater fiscal rectitude than Greece, there are at least three reasons it has drawn such rapid scrutiny.

First, the U.S. debt-ceiling drama refocused investors on the risks of precariously indebted nations. With the debt ceiling lifted, investors have flooded out of risky assets and into typical havens such as U.S. Treasurys and Swiss francs. Mr. Brzeski, of ING, notes that part of the widening of the gap between Italian and German bonds is due to an increase in yields investors are demanding to hold Italian paper. But part also is coming from a stronger German bund. That, he says, implies a "shifting of portfolios"—big investors such as pension funds and insurance companies are pulling out of Italy and going into Germany. With the global outlook uncertain, they are unlikely to quickly return.

Second, recent weak economic data across Europe have exacerbated Italy's own economic woes. Its prospects for growth are already weak; the International Monetary Fund forecasts average real GDP growth of around 1.3% through 2016. Italy has lost ground in exports, said Douglas McWilliams, chief executive of the Center for Economics and Business Research, a London economics consulting firm. He said low growth will make it difficult for the Italian government to amass enough revenue to keep debt under control if it must borrow from the markets at elevated rates for a long period. "With very little growth it is bloody hard to get out of a debt squeeze," said Mr. McWilliams, who predicts better growth for Spain than Italy.

Third, problems in Italy would hand the euro zone a far greater crisis than the one it is facing now. In just this month, Italy must repay €36 billion in government debt. That is roughly what Greece will redeem this entire year. A summit of euro-zone leaders on July 21 set in motion a second bailout for Greece and promised new preemptive powers for the bloc's bailout fund. But those powers haven't yet been put in place, and the changes require approval in national parliaments in a process that is tedious and could run into the fall.

What's more, the summit's leaders didn't add to the €440 billion fund, an amount inadequate to protect Italy. The IMF estimates that Italy's gross financing needs—the amount of money it must borrow to repay maturing debt and cover deficits—will run between €340 billion and €380 billion annually over the next five years.

A chunk of that is short-term debt that Italy would likely still be able to roll over—Greece continues to sell short-term debt despite its bailout—but medium and long-term debt redemptions next year alone are around €200 billion. Italy's budget deficit will be around €50 billion.

The bailout fund has already committed €44 billion to Ireland and Portugal, and it is expected to take over the euro zone's remaining portion of the first Greek bailout—around €33 billion—and provide the lion's share of the €109 billion in public money in the second Greek bailout. That would leave it with not much more than a year's funding for Italy.




Italy and the euro - Rabbit in headlights
by Economist

However bad the economic crisis in southern Europe may be for investors, it is proving lethal for the area’s political leaders. In March José Sócrates, Portugal’s beleaguered prime minister, resigned. Soon afterwards his Spanish counterpart, José Luis Rodríguez Zapatero, announced his intention to step down. In June George Papandreou, Greece’s prime minister, came close to ejection during a fierce debate over an austerity package.

So as he stood up to make the first of two eagerly awaited speeches to parliament on August 3rd, Italy’s prime minister, Silvio Berlusconi, may have had an uneasy feeling he was one in a line of dominoes. If so, there was nothing in the style or content of his address to suggest it. Nor was there much to indicate that he appreciated the magnitude of the crisis facing the euro or the case for drastic action to tackle it.

Many analysts argue that the euro’s difficulties are beyond resolution by any one member. But Italy is crucial. It is the biggest country on the euro zone’s troubled southern flank, and its €1.8 trillion ($2.6 trillion) borrowings dwarf those of any other country in the single currency.

Mr Berlusconi’s lacklustre, almost blithe speech looked like a missed opportunity to influence the course of events. He was speaking after the Milan bourse had fallen for four straight days and Italy’s borrowing costs had reached euro-era records. Hours before Mr Berlusconi’s address, the yield on Italy’s benchmark ten-year treasury bonds hit 6.25%, before slipping back fractionally. Giulio Tremonti, the finance minister, was summoned to Luxembourg for an emergency meeting with Jean-Claude Juncker, head of the euro group of finance ministers.

Not that Italy was alone. The day before, Spain’s borrowing rates too had hit record highs (see article). Both Italy and Spain face the threat of a self-fulfilling fear in the markets that they are fated to suffer a Greek-style financial emergency.

A special euro-zone summit last month briefly calmed investors’ nerves after Italy had been first contaminated by the spreading crisis. But doubts have persisted as to the effectiveness of a €48 billion package of budget-reduction measures rushed through the Italian parliament in mid-July. A renewed bout of concern over the two biggest southern euro-states began gathering momentum on July 29th, when Moody’s, a ratings agency, warned that it might downgrade Spanish debt. The yield on Spain’s bonds started to climb, tracked closely by the return on Italian debt.

Both countries’ borrowing costs have edged close to the 7% mark that heralded bail-outs for Greece, Ireland and Portugal. But even if Spain could—just—be handled, Italy is almost certainly too big to be rescued, and its presence on the international debt markets is daunting. Even though an unusually high proportion of Italy’s treasury bonds and bills are in the hands of Italians, foreigners still hold around €700 billion-worth of the things.

With alarm rising, José Manuel Barroso, head of the European Commission, issued a statement urging national leaders to get a grip. But Italy’s billionaire prime minister was content to tell his fellow deputies: "You are listening to an entrepreneur who has three companies on the stock exchange and who is therefore on the financial battlefield, aware every day of what happens in the markets." Investors were making a big mistake, he hinted: Italy’s economic fundamentals were healthy; its banks were sound (and their shares undervalued, he added).

Mr Berlusconi neither promised to stiffen the austerity package approved last month, nor to bring forward unpopular measures that will otherwise be left to the next government to apply. His most radical proposal was for an overhaul of labour law (if the unions and employers can be persuaded to agree).

Although investors clearly fear the spreading of market contagion, they also have concerns over political stability. During his address to parliament Mr Berlusconi again vowed to remain in office until 2013. Yet there is ample evidence that he is part of the problem.

The same can now be said of Mr Tremonti, whose emphasis on fiscal rigour was until recently seen by investors as crucial to any solution. The finance minister remains vulnerable to a scandal involving a former adviser accused of influence-trafficking. Marco Milanese, who is also a deputy, made available to his boss a flat in one of the most fashionable parts of central Rome. Mr Tremonti claims to have paid him rent, but in cash—an awkward explanation for the man charged with ensuring that Italians pay their taxes.

More important is Mr Berlusconi’s own vulnerability, which is increasing as supporters begin to fret over his waning popularity. His credibility is shrinking: the July austerity package was long on tax increases he had often promised to eschew. And he seems apathetic: before his appearance in parliament this week he had said next to nothing about Italy’s financial crisis in nearly a month.

Mr Berlusconi’s main ally, Umberto Bossi of the Northern League, whose votes keep the prime minister in power, was noticeably absent from the chamber during his speech. One of Mr Bossi’s most senior lieutenants, Roberto Maroni, the interior minister, was there. But, intriguingly, he chose to sit among his party colleagues, and not with the rest of the cabinet.




The U.S. Economy Feels the Pull of Gravity
by Peter Coy - BusinessWeek

Slow growth may do more than just signal trouble; it may cause it



Economics isn’t rocket science, but the U.S. economy is a little like a rocket. If it has enough thrust, it can escape the tug of economic gravity. Not enough, and it just might go into a tailspin. Economists at the Federal Reserve and elsewhere are studying whether today’s slow growth is a precursor to an outright recession—and if so, why.

It’s widely accepted that a slowly growing economy is more likely to tip into recession, for the obvious reason that it’s already too close to the line; any shock can knock it into negative territory. And today’s slow growth is at least in part a symptom of underlying problems such as consumer indebtedness, high energy prices, and the jitters induced by debt ceiling brinkmanship.

What’s harder to prove is the hypothesis that slowness is not just a symptom of trouble but a cause of it. In other words, some economists say, if the economy grows too weakly, that slowness itself could create conditions that lead to a recession. Why? Maybe the sluggishness undermines consumer and business confidence. Maybe investors lose faith in the recovery so stock prices, already down 9 percent from their April high, plummet.

Or maybe lenders get nervous about borrowers’ ability to repay loans and start withdrawing credit. Any such reaction could cause the very downturn that’s feared. "When the growth rate gets low enough, certain factors may kick in, nonlinearly," says Menzie Chinn, an economist at the University of Wisconsin at Madison and co-author of a new book, Lost Decades.

The debt deal that President Barack Obama signed on Aug. 2 sets up the economy for what might be called a Christmas crisis: If the congressional super committee that’s supposed to negotiate more cuts doesn’t reach an agreement by Dec. 23, some big spending reductions take effect automatically, sapping demand from an economy that’s already starved for it.

Macroeconomic Advisers, a St. Louis-based forecasting service, said on Aug. 1 that the combination of agreed-upon spending caps and cuts required by the fallback mechanism—if it’s triggered—could sap 0.8 percentage points from economic growth in fiscal 2013, which begins in October 2012.

"This economy is really balanced on the edge," Harvard University economist Martin Feldstein said in a Bloomberg TV interview on Aug. 2. "There’s now a 50 percent chance that we could slide into a new recession." Even Federal Reserve Chairman Ben Bernanke has referred in speeches to the risk of an economic stall—another aerospace metaphor. In a stall, a plane loses lift and starts plunging toward the ground.

Federal Reserve staff economist Jeremy Nalewaik in April published a paper, "Predicting Recessions Using Stall Speeds," that identified 1 percent growth or less in the economy "as a moderately useful warning sign that the economy is in danger of falling into a recession." The economy grew at annual rates of just 0.4 percent in the first quarter and 1.3 percent in the second. Nalewaik hasn’t announced what the indicator is saying now about the likelihood of a recession.

The confidence of consumers and businesses will help determine whether slow growth tips over into no growth, says Chris Varvares, senior managing director of Macroeconomic Advisers. "If businesses think things are good, they’ll continue to hire and invest," he says. "But if they’re very uncertain about the future, the initial slowdown could lead them to put things on hold. If enough firms are doing that, you’ve got a down cycle."

The problem is that confidence is indeed shaky, increasing the risk that any fresh shock to the system could be enough to push the economy into recession. Business optimism is "softish," says Varvares: Capital goods orders, excluding defense and aircraft, are growing at an annual rate of 3.5 percent over the past three months before adjustment for inflation, down from 5.6 percent over the past year as a whole. The Institute for Supply Management’s factory index fell to 50.9 in July, just above the 50 mark that divides expansion from contraction.

A plunge of this magnitude foreshadowed all six recessions in the past five decades, with only one "head fake," in 1984, according to economist David A. Rosenberg of Gluskin Sheff & Associates.

Consumers aren’t responding well, either. Retail sales excluding gasoline, building materials, and vehicles grew just 2 percent per year over the past three months, down from a 6 percent rate in the past half-year, Varvares notes. The Bloomberg Consumer Comfort Index is stuck near the lows of the 2007-09 recession. Consumer spending unexpectedly dropped in June for the first time in almost two years.

Unfortunately, lack of confidence in the economy’s prospects could become a self-fulfilling prophecy. This rocket is carrying a heavy payload.




Japan intervenes to force down yen
by Lindsay Whipp - FT

Japan intervened in the currency markets on Thursday to slow the rapid rise of the yen, in the latest response by policymakers to deal with the worsening outlook for the global economy.

The Bank of Japan also announced an additional Y10,000bn to its Y40,000bn asset-purchase programme, to limit the damage of the country’s rising currency on the export-driven recovery in the wake of the devastating earthquake and nuclear disaster earlier this year.

The intervention by the BoJ, which sent the yen lower sharply against the dollar and the euro on Thursday, came just a day after Switzerland’s national bank intervened to weaken the Swiss franc and said it would increase the supply of the Swiss currency to money markets to stem the rapid rise of the franc.

Both the yen and Swiss franc have risen sharply in recent months as concerns about the future of the euro have weakened the single currency and the protracted debt talks in the US have weighed on the dollar. Japan’s central bank cut short its policy board meeting scheduled to finish on Friday to make its announcement. However, the additional Y10,000bn was in line with market expectations.

"There is a possibility that... developments in overseas economies and the ensuing fluctuations in the foreign exchange and financial markets may have adverse effects on business sentiment, and consequently on economic activity in Japan," the central bank wrote in a statement.

Yoshihiko Noda, Japan’s finance minister, has been increasingly threatening to intervene in the currency market all week but this is the first time since the G7-backed co-ordinated intervention soon after the earthquake that the Ministry of Finance has given the go ahead to the BoJ to sell yen. Mr Noda told reporters on Thursday that the yen’s recent moves had been too one-sided and that he had been in contact with both US and European authorities, pointing to unilateral intervention.

It was not known how much the BoJ spent on Thursday’s unilateral action but market estimates put the figure at around Y1,000bn. As a result the yen sank 3 per cent after the intervention to Y79.44 against the dollar, from Y77.06 overnight in New York. Against the euro the yen was down by the same amount to Y113.62 from Y110.05 on Wednesday.

In the equity market, the Nikkei 225 index reversed early morning declines to close 0.2 per cent higher at 9,659.18. The yield on 10-year Japanese government bonds, which briefly dropped below 1 per cent, was at 1.03 per cent, down from 100.74 on Wednesday. The increase in the asset-purchase programme limit was unanimously approved by the BoJ board, as was maintaining the overnight call rate at 0-0.1 per cent. The central bank will increase purchases of a variety of assets including government bonds and treasury discount bills, corporate bonds and ETFs.

Some analysts are sceptical whether the combination of Tokyo’s yen intervention and additional easing by the BoJ will have the desired effect of holding down the yen. With the outlook for the US economy worsening downward pressure is likely to remain on the dollar. Recent US economic data have showed slowing activity in the world’s largest economy and Japan’s second largest export market.

Employment data due out of the US on Friday is likely to add to fears about the slowdown and increase presure on the Federal Reserve to consider a third round of quantitative easing.

"Considering that Japanese authorities are well aware of this environment, today’s action suggests that the MoF intends to take action repeatedly, reducing the near-term chance of dollar/yen falling below the all-time low of 76.25," wrote Masafumi Yamamoto, a currency strategist at Barclays Capital in Tokyo, in a note to clients.

The maximum potential amount of yen-selling intervention is about Y39,000bn, which is "sufficient for repeated large-sized daily interventions for a month", he said, assuming about Y2,000bn of selling per trading day.




U.S. incomes fell sharply in 2009
by Mike Segar and David Cay Johnston - Reuters

U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday.

The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009.

Average income in 2009 fell to $54,283, down $3,516, or 6.1 percent in real terms compared with 2008, the first Internal Revenue Service analysis of 2009 tax returns showed. Compared with 2007, average income was down $8,588 or 13.7 percent.

Average income in 2009 was at its lowest level since 1997 when it was $54,265 in 2009 dollars, just $18 less than in 2009. The data come from annual Statistics of Income tables that were updated Wednesday. The average tax rate was 11.4 percent, up from 10.5 percent in 2007, the Internal Revenue Service data showed.

No income tax was paid by 1,470 of the 235,413 taxpayers earning $1 million or more in 2009, compared with the 959 taxpayers with million-dollar-plus incomes who paid no income taxes in 2007.

Total adjusted gross income reported on tax returns, measured in 2009 dollars, was $7.626 trillion, down from $8.233 trillion in 2008 and $8.989 trillion in 2007. Total adjusted gross income was up only slightly from the $7.475 trillion reported in 2001, when there were 10 million fewer taxpayers. Adjusted gross income is the amount on the last line of the front page of a Form 1040 tax return.

The data from tax returns showed a startling drop in the total number of taxpayers reporting any wages. A taxpayer, as defined by the IRS, can be an individual or a married couple. The data showed almost 4.2 million fewer taxpayers reported wages in 2009 than in 2007, with about 116.7 million taxpayers reporting wages and salaries in 2009 -- down from about 120.8 million in 2007. Average wages fell, too, sliding $1,106 to $48,917 from $50,023 in 2007.

Fewer Tax Returns
The number of tax returns filed fell to 140.5 million, down almost 2 million compared with 2007, as millions of Americans went from working to having no earned income or so little that they did not have to file a tax return. The number of Americans reporting incomes of $10 million or more also plunged even more than the steep drop in income for the population as a whole.

Just 8,274 taxpayers reported income of $10 million or more in 2009, down 55 percent from 18,394 in 2007. Compared with 2007, total real income of these top earners in 2009 fell 58.6 percent to $240.1 billion, but average income slipped just 8.1 percent to $29 million. While the number of people who earned enough income to file a tax return fell, the share of those filing who paid no income tax rose to 41.7 percent of tax returns, up from 36.4 percent in 2009. The average income of those filing but paying no tax was $14,483.

The share of households filing a tax return but paying no income tax results from two key factors:
  • One is the drop in incomes because a married couple does not pay income tax until they make at least $18,300, and families with two children pay no income tax until they make more than $40,000 under policies started in 1997 and since expanded at the behest of Congressional Republicans, many of whom complain that too many households do not pay income taxes.

  • The second reason was that in 2009, nearly all working taxpayers received the temporary Making Work Pay Tax Credit sponsored by President Obama, which saved as much as $400 ($800 for married couples) in federal income taxes in 2009. The credit continued in 2010, but then ended.




Central Banks Run Short of Policy Options
by Richard Barley - Wall Street Journal

This is the stuff of financial nightmares: debt levels still far too high, growth stalled and fiscal policy now in retreat in many Western economies. All eyes are now on the one group of policy makers still able to act to prevent a disastrous drop in demand and slide into deflation. But what is a central banker to do to dispel the demons?

The challenge is to sustain nominal growth at levels that allow for orderly debt reduction. That means higher inflation, given that potential real GDP growth is likely lower than precrisis levels. But with interest rates close to zero in most developed countries, central banks will have to dig deep into their bag of unconventional policy tricks.

The Swiss National Bank is already grappling with the problem. Confronted with a surging Swiss franc that is hurting the economy and increasing the risk of deflation, the SNB on Wednesday slashed interest rates effectively to zero, cutting the target range for three-month Libor to 0%-0.25% from 0%-0.75%, and flooded the money market with cash. That bought only small respite for the franc.

The Federal Reserve and the Bank of England have already tried large-scale purchases of government bonds. It isn't clear that further purchases of Treasurys or gilts will prove sufficient, particularly given that yields are already extremely low and can hardly be driven much lower. A survey of attendees at Fathom Consulting's Monetary Policy Forum this week showed that half think the Bank of England should buy something other than gilts if it undertakes more quantitative easing. Some suggest central banks could buy bank capital securities, mortgages or equities.

Meanwhile, Fed Chairman Ben Bernanke has already run through many of the options outlined in his 2002 speech on preventing deflation; among the remaining tools are direct loans to banks, caps on long-term bond yields or even purchases of foreign assets.

For the European Central Bank, the task is harder, given its pure inflation-busting mandate. True, it has room to cut rates, currently at 1.5%. It could also reintroduce six- or 12-month liquidity facilities for banks facing funding difficulties.

There has also been speculation that the ECB might dust off its bond-purchase program. But the bar for this is set high; the ECB is angry that euro-zone governments imposed losses on Greek bondholders, introducing explicit credit risk to sovereign debt. The ECB might balk at the scale of purchases required to shift Italian and Spanish yields. But it will be months before the beefed-up European Financial Stability Facility can buy bonds.

Of course, such policies alone won't ignite higher growth. And they risk triggering another bout of commodity inflation that squeezes consumers. But they are one way of trying to shore up confidence while debt is paid down. If the economy continues to slow, central banks are unlikely simply to stand by and watch.




Signs of Stress on the Rise Across Europe
by David Enrich and Carrick Mollenkamp - Wall Street Journal

The European sovereign-debt crisis placed new strains on the Continent's banks on Wednesday amid signs that some lenders are finding it harder and more expensive to fund themselves. The cash crunch for some European Union banks underscores the challenges that central bankers and regulators face in preventing the bloc's economic and debt problems from seeping into the bank-funding markets.

The barometers that central banks and analysts use to monitor stress aren't showing extremely heightened levels. But certain gauges are flashing warning signals: Bank funding from the European Central Bank increased and European banks and corporations have had to turn to the currency markets for dollar funding, instead of borrowing from one another or selling debt. In countries like Spain and Italy, banks face the added difficulty of having to deal with a recent sharp drop in the values of government bonds that form the mainstays of their balance sheets.

In a report last month, the Committee on the Global Financial System, a central-bank oversight panel, said that an increase in "sovereign risk adversely affects banks' funding costs through several channels, due to the pervasive role of government debt in the financial system." A drop in the value of government debt, the panel said, could weaken bank balance sheets and make it more difficult to obtain funding or use the debt as collateral.

Many European banks have responded to the latest difficulties by hoarding cash. In one proxy of bank anxiety, banks are stashing money at the European Central Bank's ultrasafe but low-interest-rate overnight deposit facility, effectively taking funds out of the banking system. Nearly €105 billion ($149 billion) was parked at the facility on Tuesday, the highest level since February, compared with €86.6 billion a day earlier.

At the same time, banks appear to rely more and more on the ECB for short-term funds, another signs of stress. The ECB's one-week refinancing facility saw borrowings rise to €172 billion from €164 billion. While the increase might seem small, it is significant because at this time of the month demand for borrowings generally would decline, said Irena Sekulska, a fixed-income strategist at Nomura International PLC.

"This takeup was really surprising," she said, calling it a worrisome development. "It could reflect that some euro-zone banks can't fund in dollars." Other analysts pointed to the increase in ECB borrowings as a factor rattling investors on Wednesday.

To further complicate matters, many banks are reporting earnings this week, and investors don't like what they are seeing. In Italy, one of the country's biggest banks, UniCredit SpA, faced numerous questions from analysts about the bank's short-term loans and whether disruptions in the funding market pose a threat. Executives acknowledged the market turmoil was having an impact, but downplayed its severity. "Liquidity…is available in the market. It's very, very short [term], but available," one senior executive said.

Short-term funds typically are less stable and more expensive than longer-term commitments, one of the reasons why banks and regulators try to limit their reliance on short-dated funds. In France, Société Générale SA spooked investors Wednesday when it reported lackluster second-quarter results, with profits down 31%, and backed away from its previous profit targets. The bank cited the turmoil caused by the financial crisis in Greece, where it owns a local bank. Société Générale's shares plunged 9%.

While European financial institutions have continued to borrow using repurchase agreements, or repos, it has become difficult for them to borrow by issuing bonds. "We have seen very little issuance for two months now even from the biggest Spanish banks and Italian banks," said Nikolaos Panigirtzoglou, J.P. Morgan Chase & Co.'s European head of global asset allocation and alternative investments. "In a way, that's a concerning sign."

In the currency markets, the cost for European banks and corporations to obtain dollars in return for euros has increased in recent days, though it remains far below the crisis level seen in 2008. The cost is underpinned by a global bank-borrowing gauge called the London interbank offered rate, or Libor.

The cost to exchange euros for dollars, and then unwind that trade in three months through a derivatives transaction, hit 0.63 percentage point above three-month dollar Libor this week and fell slightly to 0.56 percentage point above Libor on Wednesday. That is an increase from the beginning of the year when the cost calculation was about 0.10 to 0.15 percentage point. The cost in 2008 hit a two-percentage-point level.

The cost effectively measures foreign demand for dollars. Jim Caron, global head of interest-rate strategy at Morgan Stanley, said the increase is a sign that European banks and companies are having to find new avenues for dollars given that U.S. money-market funds are less willing to fund them through the market for short-term loans known as commercial paper. "Banks have many avenues through which to obtain short-term funds, and when one or more of these sources begins to run dry, the others become squeezed further," Mr. Caron said in a report this week.

The funding pressures come amid a large stockpiling of dollar reserves at foreign banks in what had been viewed as an accumulation of liquidity. The U.S. branches of foreign banks have nearly tripled their dollar holdings, from $374 billion at the beginning of the year to more than $1 trillion in late July.

The stockpiling of cash could be a sign of worry among European banks of troubles they fear could come. U.S. regulators are watching the European situation, especially because of the exposure of U.S. money-market funds to European banks.

If U.S. dollar funds become scarce for foreign banks, they potentially could use a swaps program between the Federal Reserve and the ECB as a source of funding. Under this program, the Fed makes U.S. dollar loans to the ECB, which can in turn lend dollars to European banks that need dollars. The program was used heavily during the financial crisis, but as of July 27 it had been untapped.




For Strong and Weak, Debt Pressures Rattle Europe
by Liz Alderman - New York Times

The almighty dollar used to be the world’s safest refuge in times of trouble. But what do you do when you are worried about the dollar, as many people are now?

Come to Switzerland. An avalanche of dollars and euros has been tumbling into this Alpine outpost at record rates, as investors see the franc as a haven from the twin debt crises in the United States and Europe. And the Swiss are not happy about it.

On Wednesday, the typically silent Swiss central bank declared the currency "massively overvalued" against the dollar and euro, and unexpectedly cut interest rates in an attempt to weaken the franc. The franc retreated slightly but is still too strong, as far as the Swiss are concerned. "The franc is like the new gold," said a Geneva banker who would give only his first name, Dmitri, insisting on the discretion that is the hallmark of this reserved nation. "It’s crazy and it’s all anyone is talking about, in the morning, at lunch, at dinner parties."

It was certainly Topic A at the noon lunch hour recently in Geneva, where Dmitri and other dark-suited bankers had emerged from the doors of Credit Suisse, UBS, Goldman Sachs and many other wealthy banks to perch near the broad expanse of Lake Geneva to chew on grilled fish and the issues of the day.

Switzerland is vaunted as a country that attracts money for its secretive bank accounts and the less savory business of tax evasion. But it is also the home of "le franc fort," a muscular currency long seen as second perhaps only to the dollar because this nation — unlike some others — tends to have its finances in order. Now the Swiss franc is  second no more.

Despite the passage at long last of a Washington deal to lift America’s debt ceiling, the dollar recently plunged to record lows against the Swiss franc on fears the American economy will slow further. Even after the Swiss central bank’s announcement, the dollar was trading at 77 Swiss centimes, down about a third from the level of a year ago.

The euro has fared little better. As Europe succumbed to its own debt troubles last year, the franc took off against the euro. Now, as the latest European bailout for Greece fails to shield big countries like Italy and Spain from the credit contagion, the franc remains strong against the euro. Despite the Swiss central bank’s Wednesday move, a euro will buy 1.10 Swiss francs — far less than the 1.38 francs that a euro was worth a year ago.

With the rest of the world so untidy, Switzerland looks pristine. Despite a generous safety net, this tiny nation does not have other onerous expenses, like a big military. Its current account surplus is an enviable 15 percent of gross domestic product, and it has low debt. The economy grew 2.6 percent last year; unemployment is around 3 percent. Still, while it is easy for Switzerland to lure other people’s money, there may be such a thing as too much of it. Even for the Swiss.

The Swiss central bank sought to tamp down demand on Wednesday by narrowing its target band for a key rate, the 3-month Libor, to 0.00-0.25 percent from 0.00-0.75 percent to fight the franc’s appreciation. Authorities declared they "won’t tolerate" a "tightening of monetary conditions," and would take further steps as necessary to curb the franc’s rise. The cost of fine Swiss-made goods, from watches to precision machinery, has gone from eye-popping to eye-watering, and Swiss companies are warning of peril.

"This is bad for the Swiss economy," said Thomas Christen, the chief executive of Lucerne-based Reed Electronics, who has started buying cheaper materials to offset his costs. Everything from a cup of coffee to a Swiss Alpine ski vacation has been priced to the stretching point or beyond reach for many tourists. Mark Tompkins and Serena Koenig of Boston were stunned during a recent visit. "A mixed drink at an average bar," Mr. Tompkins said, "was 18 to 20 Swiss francs" — $23 to $25 — "so two rounds of drinks for four people was crazy expensive."

In downtown Geneva, where a phalanx of regal storefronts glitter with diamonds and gold, Jean Loichot said his business from Americans and Europeans had slowed to a trickle. "In 32 years, I never saw it like this," said Mr. Loichot, whose boutique, Jean Loichot & Cie, specializes in TAG Heuer watches. "And in a few months, it’s going to be worse."

Even one of his longtime European clients, a millionaire with a private jet, recently said he would hold off buying a costly watch until the franc’s value becomes more reasonable. "People have money," Mr. Loichot said as a metallic silver Ferrari and a black Bentley purred past. "They’re just not buying."

Swiss people, on the other hand, are snapping up lots of things — though not necessarily to the benefit of their nation’s economy. On the weekends, Swiss families drive into France to load up on wine, food and other goods at hypermarkets where they can buy with the strong franc. "The parking lots are filled with Swiss license plates," said Keith Rockwell, a spokesman for the World Trade Organization who has witnessed Switzerland’s ebbs and flows for more than a decade.

Meanwhile local supermarkets like Coop, whose shelves are stuffed with products made outside Switzerland, are practically empty because shopping is cheaper elsewhere. Worried, the store recently asked the government to investigate why importers were not passing on the savings they were making from buying euro-priced goods. Newspapers regularly lament "le franc fort," and warn that worse is on the way. Last month, when the Tribune de Genève asked readers in an online poll whether the situation had become "alarming," a majority clicked yes.

"We are in the stratosphere at this point," Yves Bonzon, the chief investment officer of Pictet & Cie, a private Geneva-based wealth management bank, said of the currency. He estimates the hit to the economy is the same as if the Swiss central bank had jacked up interest rates to 7 percent from 1 percent.

When the franc first started to surge during the global financial crisis, the Swiss central bank, which manages the currency, fell into a mild panic. It blew 19 billion francs between 2009 and last year in a failed strategy to keep the currency in line. (The bank lost an additional 10.8 billion francs on foreign exchange holdings in the first six months of this year.)

On Wednesday, the bank steered clear of intervention but indicated it was ready to do more. "There seems to be a consensus that probably the Swiss franc should be more like 1.30 or 1.40 toward the euro," rather than near parity, Walter Meier, the spokesman for the central bank said last week. "But history has shown that these periods of valuation can remain for quite a long time."

While there has always been a silent Swiss schadenfreude about not joining the European Union, some politicians here have even called lately for pegging the franc to the euro. Still, no one really seems to have ideas for action, aside from hoping that Europe and the United States get their houses in order. "That would be the most desirable scenario, but we don’t build hope on that," Mr. Meier said. "You just have to be prepared for the worst, and if it gets better, you’ll take it."




Large Banks in Europe Struggle With Weak Bonds
by Landon Thomas Jr. - New York Times

Ever since the European debt crisis began, the risk of contagion — of problems spreading from smaller countries to bigger ones, like Italy and Spain — has worried government officials and investors.

Now, another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain. The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short.

The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear. Now there are signs that these concerns are, in turn, starting to making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

Since Europe’s second major rescue package was announced last month — aimed as much at calming fears over Spain and Italy as providing funds to Greece — the yields on Spanish and Italian bonds have hit more than 6 percent, sharply higher than they were paying on new borrowings just a couple of months ago. In doing so they have entered what analysts refer to as the "danger zone" for 10-year bond yields, with the cost of government borrowing so high that investors become unnerved, as was the case with bailed-out Greece, Portugal and Ireland.

Bearing the immediate brunt of this development are regional banking heavyweights such as UniCredit in Italy and Santander and BBVA in Spain, which traditionally have been reliable financing machines to their home governments and as a result are now saddled with large bond holdings that are losing value by the day. Many of these banks hold domestic bond portfolios that exceed their capital levels.

According to a report issued on Wednesday by Sanford Bernstein, a research firm, UniCredit’s exposure to mostly Italian bonds is 121 percent of its core capital ratio. For Intesa, a less-diversified competitor, that figure rises to 175 percent. For Spain, the ratios are no less daunting: a startling 193 percent for BBVA, Spain’s second-largest bank, and a less alarming 76 percent for the global banking giant Santander.

As a result, the markets have begun to focus on a number of warning signs that some European banks are finding it harder to meet their funding needs, especially in dollars. They are borrowing larger amounts directly from the European Central Bank in its weekly lending operations, suggesting they can’t find all the money they need from the private sector to keep themselves going.

Some analysts said perhaps most worrying was that the rate it costs European banks to borrow dollars in the open foreign exchange market, by swapping their holdings of euros, has shot up twofold in the past few days — still far below the levels seen in 2008 when the market virtually froze but the highest since May 2010 when the European debt crisis first started to intensify.

Recent write-offs by French banks over their own Greek bond holdings have compounded fears over the health of Europe’s banks. "I don’t think anyone wants to be long European banks right now," said Simon White, an analyst and partner at Variant Perception, a London-based research firm.

UniCredit, Italy’s largest lender, reported better-than-expected second-quarter earnings on Wednesday and in a conference call, the bank’s chief executive said it had completed 83 percent of its borrowing needs for the year. Nevertheless, that profit snapshot does not fully take into account the steep rise in Italian government bonds, from about 4.6 percent in early June to just over 6 percent now, which means that the value of those bonds has fallen.

Even more worrying is the fact that the European Financial Stability Facility, Europe’s so-called bazooka rescue fund that it endowed last month with the powers to recapitalize weak banks, will not be able to offer any such aid for at least two months. According to a stability fund official, staff members there are working night and day to recast the entity, but do not expect to be finished until the end of August. At that point, it must be approved by the parliaments of the 17 countries that use the euro currency. Only then could it go to the market and raise funds to help a bank in need. That may well be too late.

As investors flee Spanish and Italian government bonds, these huge bond holdings have become a significant millstone on their countries’ banks — curbing their ability to lend and, consequently, heightening the prospect of a double-dip recession in Italy and Spain, two of the euro zone’s slowest-growing economies.

Despite their best efforts to deleverage, all these banks have loans that significantly exceed their deposits. That makes them dependent on the good lending graces of their banking peers in Europe and the United States. This is one of the reasons American money market funds had more that 40 percent of their assets invested in European banks.

Standard banking practice has been for these banks to put up as collateral their home market government bonds, which in the past were seen as liquid, risk-free investments — much like United States Treasuries.

If, as was the case with Ireland and Greece, lenders stop accepting these bonds or start demanding more of the bonds to reflect their lower value, these banks may no longer be able to access the day-to-day financing that is their life blood. This is what happened during the crisis in the fall of 2008, when banks stopped lending to one another, causing markets to seize up — and leading the government to bail them out or risk the weakest banks failing.

"You could have a C.F.O. of a lending bank say, ‘Look, I just do not want to take this credit risk,’ " said Marcello Zanardo, a European Bank analyst at Sanford Bernstein. "We are not there yet — but it is not impossible to get there."

What is worrying many bank analysts — and surely the banks themselves — is that, in an investor panic, one might get there sooner rather than later. One possibility is that LCH.Clearnet, the London clearing entity that in a transaction between two banks or other counterparties assumes the risk if the trade fails, may begin to demand more collateral if these securities continue to lose value.

That would mean that an Italian or Spanish bank putting up a government bond to back a short-term loan or repurchase agreement would see that bond marked down by its clearer, forcing it to put up more bonds — or accept less cash to fund its operations. According to LCH, once the spread between, say, a Spanish or Italian government bond and a benchmark AAA bond index surpasses 4.5 percent, the issuer is liable for a trimming. At that point, the borrower is forced to put up more government bonds as security, and if the spread continues to widen is ultimately forced out of the market.

But in some cases, demands for more collateral are already being imposed. According to one London-based banker, who declined to be identified, LCH has already begun to require large Spanish banks to put up more bonds to cover transactions.

Such was the case earlier with Greek, Irish and Portuguese banks. Exiled from the interbank market — in which banks lend to each other — they were forced to turn to the European Central Bank to satisfy their pressing requirements. So far, Italian and Spanish banks have made minimal use of the central bank’s emergency financing facility. If this trend continues, Merrill Lynch wrote in a report on Wednesday, it "would have a very significant impact not only on Spanish spreads but also on the level of interbank stress. Resulting in full contagion within the euro zone."




The coming crises of governments
by Robert Barro - FT

The global crises of financial and housing markets are now being superseded by new crises of governments. The fiscal challenges for the weaker members of the eurozone are early warnings, as are analogous problems in American state governments weighed down by unfunded pension and healthcare liabilities. Without action, this new crisis of state competence could soon become just as damaging as its recent financial predecessor.

This week’s US debt deal, along with the prospect of debate on fiscal solutions in the run-up to the 2012 elections, provides some room for optimism. But America’s fiscal problems have deep roots. The recession of 2007-09 stemmed from the unprecedented bust in the housing market, driven by reduced lending standards and propelled by congressional pressures on private lenders and the reckless expansions of Fannie Mae and Freddie Mac. It is, however, important to recognise that this mistake is now understood and will not be repeated.

In the aftermath of the debt ceiling agreement there will be calls for further stimulus for America’s economy. This would be a grave mistake. In the financial turmoil of 2008, bail-outs by the US and other governments were unfortunate, but necessary. However, the subsequent $800bn American stimulus package was largely a waste of money that sharply enlarged the fiscal hole now facing our economy.

President Barack Obama’s administration has consistently overestimated the benefits of stimulus, by using an unrealistically high spending multiplier. According to this Keynesian logic, government expenditure is more than a free lunch. This idea, if correct, would be more brilliant than the creation of triple A paper out of garbage. In any event, the elimination of the temporary spending is now contractionary and, more importantly, the resulting expansion of public debt eventually requires higher taxes, retarding growth.

I agree that budget deficits were appropriate during the great recession and, for that reason, the kind of balanced-budget rule currently proposed by some Republicans should be avoided. However, since government spending is warranted only if it passes the usual hurdles of social rates of return, the fiscal deficit should have concentrated on tax reductions, especially those that emphasised falls in marginal tax rates, which encourage investment and growth.

Despite relief at the debt-ceiling agreement, America’s fiscal situation remains deeply problematic. Any attempt to head off a crisis of government competence must begin with serious long-term reform. Reductions in the long-term path of entitlement outlays have to be put on the table, with increases in ages of eligibility a part of any solution.

We also need sharp reductions in spending programmes initiated or expanded by Mr Obama and his extravagant predecessor, George W. Bush. Given the inevitable growth of the main entitlement programmes, especially healthcare, increases in long-term federal revenue must be part of an overall reform.

So what, specifically, can be done? An effective future tax package would begin by setting US corporate and estate tax rates permanently to zero, given these taxes are inefficient and generate little revenue. Next, it would gradually phase out major "tax-expenditure" items, such as tax preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits.

The structure of marginal income-tax rates should then be lowered. Marginal rates should particularly not increase where they are already high, such as at upper incomes. The bulk of any extra revenue needed to make up the difference should then be raised via a broad-based, flat-rate expenditure tax, such as a value added tax. A rate of 10 per cent, with few exemptions, would raise about 5 per cent of gross domestic product.

Of course, such a new tax would be a two-edged sword: a highly efficient tax, but politically dangerous. To paraphrase Larry Summers from long ago, we don’t have VAT in the US because Democrats think it is regressive, and Republicans think it is a money machine. We will get VAT when Democrats realise it is a money machine, and Republicans realise it is regressive. Obviously, I worry about the money machine property, but I see no serious alternative for raising the revenue needed for an overall next-stage reform package.

The raucous debt-ceiling debate represents a good start in forging a serious long-term fiscal plan. Substantial additional progress will be needed, sadly much of which will probably have to await the outcome of the next US election. Yet progress must be made – or the impending crises of governments, signalled by possible downgrades of US debt, will make the 2008-09 recession look mild.




Spanish Bond Yields Surge in €3.31 Billion Auction of Sovereign Debt
by Angeline Benoit and Todd White - Bloomberg

Spain sold 3.31 billion euros ($4.7 billion) of bonds at higher interest rates after the yield on the country’s 10-year bond approached the 7 percent mark that heralded the bailouts of Greece, Portugal and Ireland.

The Treasury sold 2.2 billion euros of April 2014 bonds at an average yield of 4.813 percent, compared with 4.291 percent when it sold similar debt on July 7, the Bank of Spain said. It also auctioned 1.1 billion euros of January 2015 bonds to yield 4.984 percent. The Madrid-based Treasury sold about 95 percent of the maximum 3.5 billion euros targeted in the debt offer.

The yield on Spain’s benchmark 10-year bond, which hit an intraday euro-era record high of 6.46 percent on Aug. 2, fell today before the sale and stayed lower afterward. "The auction went better than expected," said Cagdas Aksu, a fixed-income analyst at Barclays Capital in London. "The volumes sold are very reasonable." Demand for the three-year bonds was 2.14 times the amount sold, compared with 2.29 times in July.

The Spanish benchmark bond’s yield has jumped as much as about 70 basis points since a euro-region leaders’ summit on July 21 failed to convince investors the spreading European debt crisis can be halted by a so-called selective default for Greece.

Market Reaction
Today the bond opened at 6.265 percent, falling to 6.11 percent before the auction and trading unchanged afterward as of noon local time. Analysts said the Spanish sale was reflecting a jittery European market. "The yields are higher but that has to do with what’s going on in Europe in general," Aksu said. "Markets are on the cautious side and it’s not specific to just Spain."

Today’s sale will likely be Spain’s only bond auction this month. The country still needs to sell about 38 billion euros in debt by the end of the year and has completed 60 percent of its 2011 financing, less than the euro-area average of 67 percent, according to a report by UniCredit SpA. "It is positive to show Spain’s capacity to raise funding," Finance Minister Elena Salgado told reporters in Madrid late yesterday, after an emergency meeting with Prime Minister Jose Luis Rodriguez Zapatero to discuss the worsening fiscal crisis.

Salgado said she doesn’t expect borrowing costs to remain so high during the whole month and attributed the current turmoil to thin volume because of the vacation season, the U.S. standoff on the government’s borrowing limit and unresolved concerns after the European summit on Greece.

‘Danger Zone’
The International Monetary Fund said on July 29 that Spain remained in the "danger zone," on the same day that Zapatero announced plans to hold early elections in November, bringing forward the date of the vote from March as Europe’s debt crisis drove the country’s borrowing costs higher. Zapatero announced his decision after Moody’s Investors Service put Spain’s Aa2 rating on review for a possible cut on July 29, citing "funding pressures."

Moody’s said the precedent established by the Greek bailout signaled a "clear shift" in risks for bondholders, and that one of the main drivers of its decision is the "increased vulnerability of the Spanish government’s finances to market stress."




Deal Slices Workers' Pensions in Detroit
by Matthew Dolan - Wall Street Journal

City officials said a pension deal approved Tuesday by a union representing police officers, taken together with a arbitrator's ruling in the spring, would save about $100 million in the next five years. Detroit's drive to reduce its pension obligations had been closely watched as cities and states across the U.S. wrestle with the idea of cutting benefits for current public employees.

The agreement approved Tuesday calls for freezing the wages of rank-and-file police officers. It largely mirrors an arbitrator's ruling in April under which 1,500 higher ranking police and firefighters would no longer get a cost-of-living adjustment to their benefits and would see a cut in the rate at which they earn benefits. The arbitrator's ruling set a precedent and pushed the city and the union for the rank-and-file police officers into collective bargaining for an agreement ratified by the Detroit Police Officers Union on Tuesday. A lawyer for the union didn't release the vote tally.

The agreement didn't significantly increase their members' health-care costs or cut benefits, said the union's attorney Donato Iorio. Detroit spent about 25% of its $1.2 billion general fund this year on pensions for union and nonunion employees.

With two retirees for every employee, the city paid $200 million this year toward pensions for its 22,000 retirees and 11,000 current workers. Mayor Dave Bing argued Detroit could no longer afford its pension system as it was structured. In the last four years, as the work force was reduced by more than 10%, pension and health-care costs grew by 40%.

The mayor called for a new system of defined contributions similar to a 401(k) for new employees, while seeking pension concessions from current employees and the funds that manage the benefits. Benefits for those who already retired aren't affected. The officers affected by the agreement approved Tuesday have been without a contract since June 2009 and the newly ratified contract expires in June 2012.

"It shows that we are executing our plan to return the city to fiscal stability by reducing pension costs and doing so through hard work and tough negotiations," Mr. Bing said in a statement Tuesday afternoon.




When Havens Fight Back
by Hiroko Tabuchi - New York Times

As global investors flee the dollar and euro for refuge in stronger currencies, those havens have started to send out a message: enough.

Demand for currencies like the Japanese yen and Swiss franc, seen as relatively safe assets to hold in turbulent times, have surged in recent weeks, driving up their value as investors have dumped dollars and euros as a result of debt worries in the United States and Europe. Declaring the yen’s rise to be a threat to the economy, Japan’s Ministry of Finance moved on Thursday to reverse the trend, a day after the typically sedentary Swiss bank unexpectedly cut interest rates in an effort to weaken the franc.

A strong currency might sound like a validation of investor confidence in the performance of an economy. But for trade-dependent Japan and Switzerland, a sudden jump in the value of their currencies can wreak havoc by making their exports uncompetitive. By intervening, though, Japan and Switzerland risk criticism that they are inciting what some market players call "currency wars," where countries compete to devalue their currencies.

Both countries also devalued their currencies last year. South Korea and Brazil intervened in foreign exchange markets earlier this year. And China has long purchased dollar- and yen-denominated assets in an effort to keep its renminbi weak enough to sustain its export economy.

"In a dream world where the Ministry of Finance and Bank of Japan could dictate exchange rates, they certainly won’t mind to see the yen weaken to 85-90 yen against the dollar," Takuji Okubo, chief economist in Tokyo for Société Générale, wrote in a note to clients. "However, with all the developed economies in the world suffering, trying to grow through a weaker currency is likely to encounter resistance."

But Japan right now sees itself having little choice. "The recent rise in the yen in currency markets has been one-sided and unbalanced," the finance minister, Yoshiko Noda, said on Thursday as he announced the start of the intervention. "If this trend were to continue, it would harm the Japanese economy, even as we do all we can to recover from our natural disasters."

On Thursday, Japanese authorities delivered a one-two punch. First, the Finance Ministry said it had begun selling yen and buying dollars. Then the Bank of Japan announced that it had further expanded its program to buy government and corporate bonds, a form of monetary easing aimed at increasing liquidity and helping to dilute the value of the yen.

The yen weakened steadily throughout the day, from 77.15 yen to the dollar to about 80 yen on Thursday evening in Tokyo. This week, the yen came close to a record high of near 76.25 yen to the dollar. At midday Thursday in New York, the yen was trading at 78.96 to the dollar. "We judged that rises in the yen have economic costs, including the risk of damaging corporate sentiment and encouraging companies to shift production overseas," the governor of the Bank of Japan, Masaaki Shirakawa, said at a news conference.

Japan, which had taken a laissez-faire approach to currency policy from about the middle of the last decade, has over the last year become more willing to intervene. Last Sept. 15, with concerns over the American economy mounting, it spent 2.1 trillion yen in its biggest one-day intervention ever.

On March 18, a week after an earthquake, tsunami and subsequent nuclear crisis, the Group of 7 industrialized economies came to Japan’s aid by staging a joint intervention, coordinating efforts to sell the Japanese yen on global currency markets. Traders had attributed the yen’s surge to Japanese companies repatriating funds to finance recovery back home.

But since then, the dollar has again slumped against the yen, falling 5 percent in the last month as investors wary of the debt impasse in the United States fled to other currencies. Even after lawmakers in Washington struck a deal on Tuesday to avert a default or downgrade of United States debt, fresh concerns over the economy again weighed on the dollar.

Japan did not disclose the size of its intervention on Thursday, but traders estimated that the government had spent more than a trillion yen on the maneuver, according to Reuters. Asian central banks, Japanese retail investors and exporters bought into the dollar’s rally, helping to buoy the American currency, Reuters said. The central bank followed with its announcement that it would seek to raise liquidity by increasing its asset purchase program, including Japanese government and corporate bonds, to 15 trillion yen from 10 trillion yen announced previously.

The bank said it would also expand its credit facility — its pool of funds available to buy up assets from banks and other businesses — to 35 trillion yen, from 30 trillion yen. The bank also kept its benchmark interest rate near zero. Still, the effect of moves to influence foreign exchange markets, especially by a single country, has often been short-lived. Japan acted alone in the intervention, though Tokyo was in touch with other countries over the maneuver, Mr. Noda said.

What Japanese policy makers could aim for, Mr. Okubo of Société Générale said, was to hold the yen at the current level in the hope that the American economy showed "some kind of strength soon." Japan has been desperate to shore up its fragile recovery. Even as companies have raced to repair damaged factories and resume production, they have been hit by a surge in the yen that threatens their business overseas.

The March disaster struck an economy that, despite its strong currency, was even more fragile than that of the United States. The Japanese economy has shrunk in two of the last three years, and its debt is twice the size of its economy. Japan’s sovereign debt rating, AA-, is three notches below that of the United States. On the other hand, most of Japan’s debt is held domestically, and the country runs a current account surplus — factors that help to make the yen a haven currency for investors in times of turmoil on global markets.

The recent rise in the yen is, to a large extent, the continuation of a trend that began several years ago with the global economic crisis, which caused investors to flee to the yen. Since the start of the crisis, the yen has strengthened by 30 percent against the dollar.

The muscular yen has been squeezing profits among Japanese exporters, making their cars and electronics more expensive overseas, and eroding the value of overseas earnings when converted into yen. Toyota, Honda and other exporters all recently blamed the strong yen, in part, for their sharply lower earnings in the latest quarter.

And so the nation’s exporters welcomed Thursday’s intervention. "It was a really aggressive appreciation," Kazuo Hirai, executive deputy president at Sony, said of the yen’s recent moves. "The fact that the government decided to intervene was a good thing for Japanese industry as a whole."




China crashes into a middle class revolt
by David Pilling - FT

When a student asked Sigmund Freud about the meaning of his cigar-smoking habit, the Austrian psychoanalyst is said to have replied: "Sometimes a cigar is just a cigar." By the same token, sometimes a train crash is just a train crash. But the recent high-speed rail accident in China is not one of those.

For many Chinese, the crash and its subsequent mishandling – including what looked to some like an attempt to bury the evidence – have been a revelation. An outpouring of anger has exposed a profound cynicism about how China is governed.

The death of at least 40 people on a high-speed rail line that had become a totem of China’s sleek progress towards wealth, modernity and national prestige is symbolic on many levels. If the trains are not safe, what of the banking system or the management of the economy itself? The tragedy has become a public relations disaster for a Communist party leadership dominated by engineers and technocrats. Just as Mao Zedong sought to create an industrial revolution by force of will in the Great Leap Forward, so China’s present leaders seem to think they can leapfrog technology through modernising zeal alone.

China’s high-speed rail network, built in less than a decade, is the world’s longest. Its trains were supposed to travel at speeds that would put Japanese technology to shame. Instead, the crash has exposed hubris, incompetence and corruption in a single, tragic crunching of metal. Perhaps not since Tiananmen Square more than 20 years ago has the Communist party looked so naked in the face of public contempt.

Certainly, previous scandals have exposed the rotten governance lurking beneath economic success. In the past few years alone, Chinese people have seen their children crushed by poorly constructed schools and poisoned with tainted milk. Both tragedies resulted from corruption and lack of regulatory control that the state subsequently sought to cover up by suppressing press stories and imprisoning the parents of affected children. The train crash is different in at least two respects.

First, high-speed rail was explicitly a national project. The leadership took great pride in China’s ability to "digest" and "improve on" foreign technology. Officials had already laid out ambitious plans to sell the Chinese system to Malaysia, Brazil, the UK and the US.

The national endorsement has made it difficult to pin the problems on local officials. Even before the fatal crash, the government sacked the rail minister on suspicion of corruption. A subsequent decision to lower the maximum speed from 350km per hour to 300km was a tacit admission of dangerous technological over-reach. We don’t yet know the reason for the crash. But pushing the system beyond its technical capacity and cutting corners to free up slush money are plausible factors.

Second, many of the crash victims must have come from China’s new wealthy elites given the, much-criticised, high price of tickets. When school buildings collapsed in Sichuan in the 2008 earthquake, the victims tended to be the children of poorer families. Melamine-tainted baby formula affected a broader cross-section of people. But wealthy urbanites would have had the knowledge and money to buy foreign formula if they chose. That made it slightly easier to quash the story, particularly in an Olympic year when the country was in celebratory mood – or else!

Partly because the victims of this tragedy are members of the new middle class, it has been impossible to keep a lid on the story. Users of Weibo, a Twitter-like microblogging site, have produced an outpouring of contemptuous comment. One posted photos of the rail minister’s fancy watch collection, an indication of his less than modest lifestyle. Weibo alone boasts 140m users, mostly from the urban middle class that the Communist party is supposed to have co-opted into its modernising project.

A middle class revolt is particularly dangerous for the Chinese leadership. It undermines a recent truism of Chinese analysis, sometimes referred to as the Beijing consensus. This contends, among other things, that people don’t worry too much about democracy, freedom of expression and free markets so long as they have a technocratic leadership capable of delivering economic progress.

The cult of GDPism appears no longer to hold. China grew at 10.3 per cent last year, and should clear at least 9 per cent this year. But while taxi drivers riot in Hangzhou over low wages, the revolt over the train crash has been over the more abstract concept of governance. China’s middle class wants a leadership that can contain corruption, ensure safety and not put pride above engineering principles. It wants, in the arresting words of a commentary in the People’s Daily – of all places – economic growth that is not "smeared in blood".

The anger appears to breathe life into an old argument, all but abandoned in the face of China’s relentless economic progress, that a rising middle class will demand more accountability of its leaders. If that turns out to be true, then, alongside the people who tragically lost their lives on the tracks outside Wenzhou, the Beijing consensus itself may also have perished.




Italy probing rating agencies
by AP

Italian prosecutors are investigating two leading credit rating agencies after consumer groups complained about turbulence on financial markets, officials said Thursday. Recent reports and rating decisions issued by Moody's and Standard & Poors amount to a "failure" of judgment regarding Italy's government finances, prosecutor Carlo Maria Capristo told Italian broadcaster Sky TG24 TV.

Investigators seized documents in offices of both firms, prosecutors said during a televised news conference. The probe began months ago, spurred by contentions from Italian consumer groups that unjustifiably pessimistic rating reports were causing Italian stocks to tank. Three analysts from S&P and one from Moody's are under investigation, Italian news agency ANSA reported.

The ratings agencies "have lost all credibility," Elio Lannutti, head of the Adusbef consumer group told Sky TV. Moody's said in a statement it is cooperating with authorities. "Moody's takes its responsibilities surrounding the dissemination of market sensitive information very seriously," it added.

Standard & Poors said the accusations were unfounded. "S&P considers the allegations being investigated are without any merit. We will vigorously defend our actions, our reputation and that of our analysts," said a statement from the ratings agency. Calls to offices of Trani prosecutors and police went unanswered Thursday evening. The Italian stock market watchdog, Consob, declined to comment on the investigation.

Thursday saw strong turbulence on Italy's main stock exchange in Milan, where the FTSE MIB benchmark index ended down 5.16 percent amid fears that the eurozone's debt crisis might eventually spread to Italy. Trading had begun with a rise, of 1.2 percent, a day after Premier Silvio Berlusconi - in a much awaited speech to lawmakers - proclaimed Italy's economic foundations "solid." He also maintained that the recently approved austerity measures were sufficient to help rein in public debt.




US of Austerity: What $570 Billion Cuts Will Do to Our Water, Air, the Jobless, Children, the Elderly, and the Poor
by Andy Kroll - Mother Jones

The debt ceiling deal simultaneously slashes programs crucial to our country's functioning and opens the door to more devastating- and mandatory - cuts. The debt ceiling deal hammered out by President Barack Obama and congressional leaders and passed in the House on Monday afternoon makes deep, painful, and lasting cuts throughout the federal government's budget. What's on the chopping block? The numbers tell the tale.
 
The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what's called "nondefense discretionary spending." That's budget-speak for the pile of money the government invests in the nation's safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more. 

The White House's plan would slash this type of spending nearly in half, from about 3.3 percent of America's GDP to as low as 1.7 percent, the lowest in nearly half a century, says Ethan Pollack, a senior policy analyst at the left-leaning Economic Policy Institute. Pollack's calculations suggest the cuts in Obama's plan are almost as deep as those in Rep. Paul Ryan's slash-and-burn budget, which shrunk non-defense discretionary spending down to just 1.5 percent of GDP. The president has claimed that the debt deal will allow America to continue making "job-creating investments in things like education and research." But on crucial public investment, Obama's and Ryan's plans are next-door neighbors. "There's no way to square this plan with the president's 'Winning the Future' agenda,"Pollack says. "That agenda ends."

Environmental protection offers one useful window onto the damage this deal might inflict. The president has boasted that his deal with the GOP will usher in an era featuring "the lowest level of annual domestic spending since Dwight Eisenhower was president." But Melinda Pierce, a lobbyist with the Sierra Club, says the plan could choke off funding needed to enforce the bedrock environmental-protection laws on the books, including as the Clean Water and Clean Air Acts. "Remember, the Eisenhower era was before we passed the Clean Water Act and the Clean Air Act," Pierce says. "There just won't physically be the funds available to protect drinking water and to ensure there's clean air to breathe."

Ben Schreiber, a tax analyst with Friends of the Earth, a national environmental advocacy group, says the Obama-GOP debt ceiling deal could also drive a stake through the heart of investments in wind, solar, and other clean-energy technologies. "The clean-energy revolution becomes a casualty of these cuts," Schreiber says. He adds that the Environmental Protection Agency also sends money to the states for their own environmental protection efforts, which could suffer after such a drastic cutback in domestic spending. At the same time, he says, corporate subsidies for oil and gas companies, worth an estimated $30 billion over ten years, are untouched in the latest debt ceiling proposal. "Polluters are getting off scot-free," he says. "We're basically turning the environment over to the industry."

Jobs programs could also go under the knife. Rick McHugh, a staff attorney at the National Employment Law Project, points to two endangered programs: the Workforce Investment Act, which funds job training programs for young, adult, and dislocated workers, and the Trade Adjustment Assistance program, which provides benefits and training to workers whose jobs were lost due to outsourcing. McHugh says both programs are necessary at a time when 14 million Americans are out of work.

McHugh adds that the bill does not include an extension of federal funding for unemployment benefits, which is set to expire at the end of the year. All told, he fears that already weak job market could be dealt a massive body blow by the Obama-GOP debt deal. "To have this big of an austerity proposal in Washington is disconcerting and misguided," he says.

When it comes to public funding for education, the picture is more mixed. The White House's proposal protects Pell grants for low-income college students, a big victory for education advocates. But protecting Pell funding meant eliminating an interest-rate subsidy for graduate students and a perk that lowered interest rates for graduates who made their loan payments on time. Amy Wilkins, the vice president for government affairs and communications at the Education Trust, says funding for K-12 public schools, Head Start, special education, and more are vulnerable too.

Education, environmental protection, and jobs programs are just the start. An array of social safety net programs—the Women, Infants, and Children nutrition program, food stamps, housing assistance for low-income individuals, foster-care money, and basic income-security programs—could lose funding under the debt ceiling plan. So, too, could critical infrastructure investments in better bridges, roads, and rail transportation.

Nor is this the final round of cuts. The Obama-GOP deal also sets up a bipartisan deficit reduction committee that must identify, by the end of 2011, an additional $1.5 trillion in cuts to be spread over 10 years. If the committee fails to reach an agreement or Congress fails to enact its recommendations, across-the-board cuts totaling as much as $1.2 trillion will occur anyway. In the end, nondefense discretionary spending could see billions more in cuts on top of the initial $570 billion. Social Security and Medicaid would be protected from deep cuts, but Medicare could be cut by hundreds of billions of dollars if, for instance, the committee decides to raise the eligibility age for the program.

What's not in the deal could hurt too. In particular, EPI's analysis estimates that not extending federal unemployment benefits and the payroll tax cut, combined with the deal's array of cuts, will result in 1.8 million fewer jobs and a loss of $241 billion in economic output in 2012. "It's going to suck a good deal of demand out of the economy," EPI's Pollack says. "It's going to be devastating."




Flawed Investing is Depleting Pension Assets
by Daniel Solin - US NEWS

The management of pension fund assets is big business. Every broker, hedge fund manager, private equity fund manager, and mutual fund manager wants a piece of this mega-trillion dollar action. High priced consultants stand ready to advise pension administrators which fund managers to include and exclude in their portfolios.

Government employees, both active and retired, depend on the ability of pension plans to generate sufficient returns to fund their retirement. With all the resources available to them, you would think this wouldn’t be a problem. You would be wrong.

One study looked at the selection and termination of investment management firms by plan sponsors including public and corporate pension plans, unions, foundations, and endowments. It examined 8,755 hiring decisions by approximately 3,700 plan sponsors over a 10-year period from 1994 to 2003. The managers hired were responsible for an aggregate of $737 billion in assets, while the fired managers handled $117 billion. Clearly, the plan sponsors had their pick of the finest fund managers available.

One of the criteria used to select these managers was their past performance. Three years before hiring they beat their benchmarks by an impressive 2.91 percent per year. For the three years post-hiring, these investment stars underperformed their benchmark by an average of 0.47 percent per year.

The hiring and firing cycle continued. Underperformers were fired. But here’s the twist. After being fired, the excess returns of the fired managers on average were better than their replacements. The lesson is clear: Past performance is not predictive of future performance. Here’s a simpler way to put big bucks in the pockets of pension plan beneficiaries:
  • Fire all plan consultants who try to pick funds that will beat the markets.
  • Eliminate all actively managed funds (where the fund manager attempts to beat a designated benchmark), hedge funds, and private equity funds from pension plan portfolios.
  • Limit investments to a globally diversified portfolio with an allocation of approximately 60 percent stocks and REITS and 40 percent bonds, using only passively managed funds from firms like Dimensional Fund Advisors and Vanguard.

The Florida Retirement System is an excellent example of the significant impact these changes could make. According to a recent article in the St. Petersburg Times, Florida pays 148 employees who supervise about 190 private fund managers and a bevy of consultants, researchers, auditors, and lawyers. But what would happen if this huge infrastructure was dismantled and the Florida plan switched to a 100 percent index-based portfolio, which, presumably, could be run by a couple of internal staffers?

A study by Index Funds Advisors looked at the decade ending December 31, 2010, during which the Florida Retirement System’s assets had grown to $124.2 billion, with an annualized net return of 4.6 percent. [Full disclosure: I am a senior vice president of Index Funds Advisors]. The analysis compared these returns to simulated and annually rebalanced portfolios of index or passively managed funds from Dimensional Fund Advisors, Vanguard, and a set of industry benchmarks which had approximately the same amount of risk as those in the Florida plan. Index funds are low cost investments that track fixed rules or various benchmarks, regardless of market conditions.

The study assumed a beginning value of $79.2 billion, based on the annualized net returns of the plan assets over the past ten years. The simulated index portfolios had an ending value of about $165 billion using Dimensional’s passively managed funds and about $142 billion using Vanguard’s funds. The net difference to plan participants could have been $40 billion with the Dimensional portfolio and $17.8 billion with the Vanguard portfolio.

When the study compared the returns of the Florida plan to 26 years of simulated index data generated by Index Funds Advisors from January, 1985 to December, 2010, the results were more staggering. Plan beneficiaries could have missed out on as much as $50 billion. You can see the sources of this data and disclaimers here.

The ramifications of this study, which has been expanded to almost all 50 states, are profound. It appears the fees paid to active consultants and active fund managers significantly detracted from returns that might have been achieved with low-cost passive consultants and managers who follow consistent rules, regardless of market conditions.










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294 comments:

«Oldest   ‹Older   201 – 294 of 294
Anonymous said...

who cares if a BFC bank launders $378 billion in drug money and run the planes for the drug cartels and nobody goes to jail...

http://www.guardian.co.uk/world/2011/apr/03/us-bank-mexico-drug-gangs

Who cares if the government is giving guns to the drug cartels when 30k people have been murdered along the border in the last 4-5 years.

http://www.youtube.com/watch?v=Qvk_WICNMLc

Who cares if the response is to FIRE THE WHISTLE BLOWER!

http://www.youtube.com/watch?v=CPcn101VEis

Who cares if the police face plant helpless victims and lie on their report...

http://www.rawstory.com/rawreplay/2011/05/two-d-c-transit-cops-tackle-man-in-wheelchair/

http://www.nydailynews.com/news/national/2011/05/23/2011-05-23_video_shows_man_fall_out_of_wheelchair_during_scuffle_with_dc_cops.html

Who cares if the military is growing the heroin.

http://www.youtube.com/watch?v=N_gOaPeSCME

Who cares if BFC Pharma knowingly murders people selling tainted Factor 8 and nobody get charged criminally...

http://www.youtube.com/watch?v=wg-52mHIjhs

Who cares if the police likely murdered a small, unarmed homeless man in Fullerton and the likely murderers didn't even get suspended and the department won't release the tape of the killing?

http://www.stormfront.org/forum/t820355/

People with HUMANITY care.

The system **IS** corruption and it flows FROM THE TOP.

Yeah, I care. I don't want 20-40k parents a day staring into their starving children's eyes for the last time while their nation's are looted.

They are impoverished by debt-money tyranny, they don't have any property and they aren't allowed to develop.

Why? Because criminals run the system.

The world is a dangerous place to live; not because of the people who are evil, but because of the people who don't do anything about it.
~Albert Einstein

Anonymous said...

@Ash,

Bill Gross is Mr. BFC bond man, no? He's very happy about the down grade because he says he sees it as a sign of "discipline" that will be enforced on the American government to cut spending.

http://www.zerohedge.com/news/bill-gross-tells-truth-sp-finally-got-it-right-they-are-enforcing-some-discipline-my-hat-them

My view is that BFC is all about bonds.

@el g, Given SA's intellectually vacuous ad hominem logical fallacy response and his complete lack of putting anything of value forth, i concur with your conclusion.

@Board,

Is the muni market next up?

seychelles said...

LG said

watch it unfold in living color and try to connect the dots.

I stopped wasting time, mind and money on cable years ago. Will follow the numbers on Google business news and rely on TAE GOG team for interpretive insights.

seychelles said...

Latest Mish says


If you want to try something really radical (yet perfectly sensible), here is an idea that is also guaranteed to help: get rid of the Fed and its perpetual bubble-blowing, moral-hazard, bail-out-the-bondholder policies.

Like looking at the hole at the end of your old sock and thinking, I really should have trimmed that toenail sooner.
Too little, too late.

ben said...

ash,

red flush in europe. beets from last night or something more ominous?

scandia said...

When I hear the ECB promising to buy bonds of failing economies I wonder why " austerity " when they have the means at hand to save Italy,Spain,Ireland, Greece,Portugal,Belgium...Are they sitting on a hoard or are they lying? Whatever it is it is not nice to withhold the rescue until peoples are beggared for several generations to come. No, not, nice at all...

ben said...

LG. it may not have been SA's best performance in rebutting skilo's tendentious reading of history with an imposssible 18th-century accounting for peak oil -- if that's what you were taking issue with -- but fwiw s/he's getting at the same thing you were when you disagreed with IMN regarding post-agricultural malaise: that it's the system that matters more than the people.

--

regarding fears of a black planet, i take solace in the notion that i don't think that outcome is in the eight families' playbook. i have overheard it said that payback's a bitch, although i'm not exactly sure what that means. i've found that the best thing to do if a black crosses my path is to just play dead. i stop, drop, but i don't roll, unless i'm on a slope.

Jack said...

We know who the OWNERS of the 18 banks are.
We know who that all the politicians are criminals and they are stealing right in front of us.
They are getting cought red handed.
We cant change anything.

Ashvin said...

Bloomberg says ECB to monetize about $1.3T of Italian & Spanish bonds; has decided to go ahead and fully trash its balance sheet to keep the ponzi going, a la Fed. There is no chance this works for long, unless the Fed somehow gets involved beyond the standard swap lines (guarantees bonds?). Equity futures still down hard and PMs still up big, but who knows what's going to happen after the open.

SecularAnimist said...

"You have a point. Who cares about a conspiracy to eventually create the biggest credit bubble and bust operation in human history, contrary to black letter law, and the billions who will suffer because of the actions of these conspirators?""

The system is in a state of nonstop conspiracy. Capitalism has been 400 years of land theft, dispossession, death and destruction and you are talking about a housing bubble. Come on. Now we are degrading the ability of the planet's to support the population with bad behaviors pushed by capitalism.

And you want to talk secret housing bubble's.

Your lost

p01 said...

@ben
That would be fear of a blank planet. White & Black blank planet.

SecularAnimist said...

""I don't engage you because I regard you as dishonest, and you are just not as much fun as Cheryl.""

Actually, to rehash. Your silent treatment of me started when were discussing population demographics. It became apparent you knew very little about subject matter and turned into a 2 year old for me exposing this.

Another part of your immature lashing out was calling me a "disinfo" agent, working, I guess, for the NWO or something.

So, yeah, not really missing your engagement.

seychelles said...

From IBNLive Tottenham coverage this AM

"Social media and other methods have been used to organise these level of greed and criminality,".....

Predictably, we can see one place the crosshairs are aligning. How long until
"they" pull the trigger? Go GOGs!

jal said...

Attention ! Attention!

THIS IS A TEST! This is a test!

We are testing the ability of the algo programs!

We are testing the robusity of the circuit breakers.

You will be temporarily disconnected from your regular programming.

jal

p01 said...

@Secular Animist

Actually your denial of the inevitable population bubble pop proves your cognitive dissonance in understanding bubbles in general. They are the primary driving forces on this planet, as far as all evidence (biological, economical, and structural) suggests. Yet some deny it.

SecularAnimist said...

""Actually your denial of the inevitable population bubble pop proves your cognitive dissonance in understanding bubbles in general. ""

And your misunderstanding of population dynamics and general carrying capacity in relation to resource/energy utilization, drives your misanthropy.

D. Benton Smith said...

Word on the street is that the ECB is indeed buying up Spanish and Italian bonds.

In light of what Ilargi has said about their financial capacity to do so then I say it's time someone checked to see who's minding the cash register. Good time to balance up the cash on hand versus sales receipts to see if they stack up.

Are these legitimate ( and I use that term loosely ) sales ? Or is somebody failing to leave proper IOU's for merchandise leaving the store ?

What a great time to pull off a truly BRAZEN heist, by calling it done when no money actually changes hands. Nothing like the BIG lie, heh?

I really should seek professional help about these paranoid delusions. Oh! wait! That's not a delusion, it's the morning headlines! Or is it ? Maybe I'm imaging the headlines !

Oh, dear, now I AM confused.

bosuncookie said...

DBS, you crack me up! Carry on!

SecularAnimist said...

""as far as all evidence (biological, economical, and structural) suggests.""

All evidence suggest we over consume at a rate of, at least, 10-1. This is structural and systemically induced through a myriad of factors.

The population hand wringing crowd has, as simplistic systemic understanding as the NWO hand wringing crowd.

p01 said...

@Secular Animist
At least I have come to terms with the facts. You can call me whatever you like, it does not change the facts.
The world is the way it is because of exponential growth. And it will crash wherever bubbles are formed. Until there's no more anything to build bubbles with.
Now I'll go back to ignoring you, thank you very much.

SecularAnimist said...

"The world is the way it is because of exponential growth."


Yup, that and the NWO.


The most interesting thing about the population hand wringing brigade is they rarely if ever understand modern population demographic studies nor have a critique of systemic gross resource waste built into the world system.

So as we ship pointless consumer products ridiculous distances to wind up in landfills within a few months - they scream "resource shorfall! Billions must die!" It's a mathematic fact!"

Talk about worthless

p01 said...

Watch the implosion live here.

SecularAnimist said...

Not to mention the mass psychological disorders caused by consumerism, that actually make people mentally and physically ill - adding to the resource waste with the massively wasteful medical industrial complex. Or you could easily frame it is a car overpopulation. Or that the top 20% drive the majority of our resource overuse and environmental degradation.

But, your hatred of humanity skips over all that and frames it as too many humans.

What we have is a massive systemic malfunction that probably will precipitate a massive behavior malfunction.

If anything, it's a window of opportunity to rid the world of the massive waste, bad behavior and illness generator called capitalism our planetary pathology.

Greenpa said...

finally; the VIX is starting to move. Up 15% so far today. Hasn't moved like that in a long time.

Jack said...

I told the person to sell all and he didnt have faith in what I said.
He believed his stock broker.

Mister Roboto said...

DJIA: OUCH! Down 300 points in just over an hour (assuming that trading starts at 9AM EDT)!

SecularAnimist said...

Skilo

""Stockholm Syndrome is over rated.""

You obviously don't understand what this is OR have no comprehension of what my posts are about.

This is an amazing display of projection.

Jack said...

We could loose over a 1,000 points today.

Jack said...

Is the same thing going to happen to gold because that is one big bubble

Ashvin said...

Market update: Cheryl is getting crushed into fine dust. US bonds still acting as the tried and true safe haven, along with PMs (gold up a whopping 3%). A little extreme for investors facing huge margin calls, IMO. S&P is on a downgrading spree, about to hit financial companies, with BOA already down 9%+. ECB's "drastic measures" didn't calm Euro markets, as people realize such massive monetization is unrealistic, ineffective and a massive devaluation of the currency all at the same time. If and when will Germany cave, expand the EFSF and rush its implementation to sometime this month? I feel like that could go either way right now. Talk about a systematic predicament expressing itself in full force. Where's the money going? Not to pension funds, mutual funds, retirees, savers, workers, students or anyone else in the bottom 99%. The exception is "savers" in gold, who are probably riding as high as ever right now, but how long will that last? We'll see.

bluebird said...

@Jack - My family has always believed their professional financial planners than me. :(

jal said...

Everything is normal.

Some commentators hijack the comment section every time that their fear mechanism is activated. They bury their heads in their “expertise knowledge” to avoid discussing and facing reality.

This is a temporary disconnect which will not require lobectomy.

Change should not be avoided and feared, it should be recognized and accepted.

jal

Jack said...

Hi bluebird
The family members are there to help each other, but they are not thininkg like that.It bothers me that they can be so stupid.

Anonymous said...

>>The system is in a state of nonstop conspiracy. Capitalism has been 400 years of land theft, dispossession, death and destruction and you are talking about a housing bubble.<<

No I'm not - I'm talking about the largest illegally created credit bubble and bust operation in human history.

Stop lying.

>>Come on. Now we are degrading the ability of the planet's to support the population with bad behaviors pushed by capitalism.<<

Stay on topic - and stop being DISHONEST.

>>And you want to talk secret housing bubble's.<<

LARGEST CREDIT BUBBLE / BUST CYCLE IN HUMAN HISTORY - ALL CREATED BY CRIMINALS AND NOBODY TALKS ABOUT IT - YEAH, IT'S IMPORTANT.

>>Your lost<<

Only in your straw man world.

Logical fallacy OWNS YOU, SA.

You are either completely ignorant of logical fallacy or you truly are dishonest.

Troll away with more logical fallacy, you might as well throw in an appeal to authority...

bosuncookie said...

“The world is the way it is because of exponential growth.”

It seems to me that exponential growth as a cause is way down the line. The interdependent human/planet world is NOW the way it is through, among many other things, a combination of an age-old problem and a relatively new situation just now ending. The relatively new situation just now ending is cheap energy. The age-old problem is the greed, hatred, and delusion that is born of the wonderful, two-edged gift of language and thought leading to self-consciousness.

From the first word learned, language pushes us to see the world as subject and object, me and you, us and them. The true interdependence of our existence with everything gets lost the more we become (inevitably!) embedded in speech and its extensions.

Our failure to understand our interdependence is compounded by our limited capacity to understand the vast complexities and time scales of life. Our powerful/puny brains can only abstract so much from our experience, or even the experience of others through writing, etc. So we come to “know”—every one of us—that change is bad, the physical suffering of life can be avoided, and that this sense-of-self I call “me” is a concrete reality with inherent existence.

These four illusions—from which no one born into language can escape—color how we relate to the world. It is our ignorance of interdependence, our lust for stability, our fear of pain and suffering, and our belief in a self with inherent existence that give rise to all greed, suffering, and delusion.

Can individuals overcome these delusions? Yes. They have for over 2,500 years. Can whole societies overcome these delusions? Much more troublesome, but some examples exist: Ashoka’s empire in India (250 BCE), pre-communist Tibet, perhaps, and to a smaller degree, the Sarvodaya Movement in Sri Lanka. Just a handful, but enough to keep some degree of hope alive. Or at least a memory.

That is why I find arguing over the “causes” of where we find ourselves to be interesting, but ultimately a waste of time. The cause is always the same: greed, hatred, and delusion founded in ignorance of the true nature of existence.

That is why controls, checks and balances, laws, etc. are so important. While we do have the capacity to turn away from our ignorance at every moment, our ignorance is omnipresent unless we address it. Given its omnipresence, those who are less controlled by ignorance and delusion should work diligently and unceasingly for controls that check the ill-effects of our greed, hatred, and delusion.

SecularAnimist said...

Logical fallacy

This and stockholm syndrome you seem to be confused on, which is apparent from you misuse.

Keep spinning those wheels, skilo

How about calling me sophist, that seems to be another one of your crutches you use when you get confused.

Maybe infowars is more your speed for a site to post on. You can get together with the other dolts and scream about the constitution.

bosuncookie said...

More downgrades,
this time Fannie and Freddie.

D. Benton Smith said...

@Ash

you wrote : "Bloomberg says ECB to monetize about $1.3T of Italian & Spanish bonds; has decided to go ahead and fully trash its balance sheet to keep the ponzi going, a la Fed. There is no chance this works for long, unless the Fed somehow gets involved beyond the standard swap lines (guarantees bonds?). "


Yeah, and notice that Bloomberg atttributes that information to five anonymous sources who allegedly have pesonal knowledge of the supposed transactions.

Sounds to me like they are trying to launch a rumor ( which is a lot cheaper than forking over $1.3T.)

If that fails ( extremely likely ) maybe the Fed can bolster the ploy with rumors of their own ( remember the good old days when Greenspan could heat or cool a market by raising an eybrow at the right moment, or choosing a strong adjective over a weaker one .... all without actually DOING anything ?)

I bet Benny Boy would like to have that kind of stature now ... ( but alas, he burned through that kind of capital faster than he burned through the green kind.)

Whatever they do, it does seem axiomatic that they will try to do SOMETHING. I just can not imagine the U.S. sitting on the sidelines as Europe goes down.

How about something really wild and crazy ?

How about using some of those fake T-Bills sitting on their fake balance sheet to buy equally fake Spanish & Italian Bonds ? Sort of like levitating onesself by pulling up mightily on one's bootstraps.

That's not a serious suggestion, just an expression of wry dismay from someone ( me ) who really does NOT know much about the detailed inner workings of such convoluted criminal psychoses.

One thing that I do know, with some confidence:

They don't call 'em Desperados for nothing.

Mister Roboto said...

Newsflash: Flamewar threads are bo-o-o-oring!

p01 said...

The cause is always the same: greed, hatred, and delusion founded in ignorance of the true nature of existence.

I still think those are effects, and the cause is the need for growth at gene level and the fundamental of energy destruction at thermodynamic level.

The think what tipped the scales to faster energy destruction was agriculture.

But I agree it's pointless to discuss it.

seychelles said...

Given its omnipresence, those who are less controlled by ignorance and delusion should work diligently and unceasingly for controls that check the ill-effects of our greed, hatred, and delusion.

There's a big activation energy to overcome, but we're getting there....beaucoup blood in the streets, but not the kind TPTB usually look forward to.

bosuncookie said...

"I still think those are effects, and the cause is the need for growth at gene level and the fundamental of energy destruction at thermodynamic level."

Now you're digging way down! Pretty soon we'll be getting down to "first causes"--a fruitless endeavor if there ever was one. LOL

Seeking for first causes does not come highly recommended for those who wish to dwell in wisdom and compassion! Haha.

Anonymous said...

Bosuncookie @ 10:18 PM

Well said! :)

*

"Despite the ongoing destruction of our environment, I still have a strong feeling of hope for all the creatures on Earth. I have used the wisdom I've gained from studying the chimpanzee for forty years ... " ~ Jane Goodall

SecularAnimist said...

BC, well said. I would have made the same argument from a completely different angle. But simply,we massively misplace cause and effect and hence perpetuate destructive behavior. A prime example of this is the overpopulation crowds misunderstanding of oil and population. A careful examination of the evidence reveals this. Anyway, this is primarily driven from our perception of selves, which is embedded in modern economics. This perception includes a "spiritual ego" that humans are on a separate plane from nature and hence not subject to the same forces as the rest of the biosphere. Second, is competition is the prime mover of life and hence all progress flows. Modern scientific understanding destroys both these premises.

SecularAnimist said...

"and the cause is the need for growth at gene level and the fundamental of energy destruction at thermodynamic level"

Are your genes demanding growth? How are they doing this?

Of course, you are buying into the capitalistic view of human "nature".

Ashvin said...

DBS

"Sounds to me like they are trying to launch a rumor ( which is a lot cheaper than forking over $1.3T.)"

I think the size may have been an over-stated rumor, but the ECB is certainly planning on intervening in some significant and, of course, unprecedented way. Italian and Spanish yields have retraced a bit, I believe, but overall the Euro markets arent't buying the shit they're selling. Evidenced by the fact that Italy had to halt trading once again, and Greece banned short selling once again.

Meanwhile, Bank of America is on the verge of filing for Chapter 11... will it be bailed out? Or, let it go down and one of the other big boys gobble it up for pennies on the dollar, wiping out what's left of shareholders and giving what's left to major creditors. I can't imagine the AIG lawsuit filed last night was a coincidence, which I believe makes it a judgment creditor now.

Anonymous said...

@ P01

Your primitivist views are a bit repulsive. BTW, I am a very healthy 60-year old female who's consumed an organic, wholesome plant-based diet (consisting of beans/legumes, whole grains, nuts and seeds, fruits, vegetables) for more than 16 years. Stop demonizing agriculture! Demonize processed foods, sugar and refined carbodydrates. A high sugar (for example, high fructose corn syrup and sucrose; include alcohol!) and refined carbohydrate diet is a high-fat diet, which causes obesity and destroys hormonal balance.

Yes, I am acquainted with Gary Taubes' work. He certainly neglects to include in his "research" the detrimental role played by sugar and refined carbs in today's mainstream diet.

D. Benton Smith said...

@Ash

Halted trading and banned short selling speaks volumes about what the big boys think of today's prospects... and the day is young.

bosuncookie said...


A.I.G. to Sue Bank of America Over Mortgage Bonds

Jack said...

If trading wasn't halted than the drop was going to be about 1000 points for the day and that is not a big crash percentage wise.
For example if it dropped 4000 points than that would be bad.
Do you think that we will have a major crash like a 4000 points or is it going to go down slowly

Ashvin said...

Jack,

None of the market action over the last week or so has been insignificant percentage wise. At this rate of decline, the S&P would be valued at 0 in about 2 months.

p01 said...

@Ahimsha
I'm not demonizing anything. I think the view that agriculture changed the human game is shared by many here. I'm just pointing the obvious. I really don't know why you got Taubes into the mix, but since you brought this up, yes, it's the so called "ecologists" and "conservationists" that emerged in the 70's that are to blame for many of today's ills. That was the tipping point, where instead of having just more people, we finally had more sick people. Should have rung serious alarm bells, but cognitive dissonance took over as usual. Does not matter at this point, but as the saying goes, the road to hell is paved with good intentions. And "moral" stuff.

SecularAnimist said...

"" Stop demonizing agriculture! Demonize processed foods,""

Thank you! Yes, processed foods are dramatically more energy-intensive and unhealthy than the source feedstocks. Typical of the gross waste built-in to the system.

And refrigerated jets shipping fish from Canada to China for cleaning then back to the states for consumption?! That is beyond waste; that is insane profligacy cooked-up by madmen.

Oh, and we have not even mentioned the HUGE proportion of the nation's food energy/resource budget (and for that matter the world's) that is devoted to the cattle and pig industries -- themselves about 80%-90% unnecessary. Per capita consumption in the U.S./West runs nearly 200 lbs.

There is a common theme with capitalism. Hugely wasteful practices generally are highly profitable and unhealthy(for humans and the environment). You will see more and more once you look for it. Massive unnecessary waste driven by profit making people sick and of course the cultural epidemics of sicknesses spawned by this necessitates more massive waste of resources.

Profit, is the gun to the head of humanity. Not population, or some secret cabal or lack of some resource. If we want to create a sane world this is the systemic source of our madness.

D. Benton Smith said...

I've just re-read everything I could get my hands on regarding the alleged ECB buying of Spanish & Italian bonds.

Weasel words are the language of the day. I'll stick with what Ilargi said; they haven't got the funding ( at this moment anyway ) to pull it off.

But they do have the funds to START, and in the pregnant pause between starting and running out of time & money ( and thus being caught in the bluff ) they are sending Italy urgent and totally unambiguous threats: force draconian austerity down the throats of the Italian people, NOW, or we will cut your throat.

Of course it's their own throat, too, because it's a bluff. They hold few cards, and the only big card is 'mutually assured destruction.'

Germany holds the cards. Will they ( pretty much single handedly ) bail out Italy?

Germany will act in its own "least worst" interests of course. But frankly I am WAY too ignorant to estimate what those "least worst interests" calculations would come to at the bottom line. Maybe nobody does.

Does anyone here on TAE have a best guess on whether Germany benefits most ( or suffers least ) by letting a big chunk of the EU/EC fall into a black hole?

The math ( and by that I mean the thumbnail variety, not the real thing ) looks very complicated to me, largely because so much of German banking viability depends on the USA, which has massive problems of its own.

Whew! What a mess.

If this degree of messiness doesn't break the tangled web, then surely the next level will.

This is shaping up to be quite a revelatory week.

Mister Roboto said...

@Ahimsa, WRT Gary Taubes:

WRONG!

p01 said...

Yep, the hidden agenda starts rearing its ugly head, as I suspected.

More people, more grain, more control. "Secular animism" at work.

SecularAnimist said...

Hey PO1

Only EIGHT PERCENT of world oil output goes to food systems?! Including hugely unnecessary transportation. And that is just a reflection of the extreme energy-inefficiency of the present system, and of industrial agriculture in particular. We could easily bring that down to 4% and lower, quickly. Well-designed permacultural/agroecology systems would bring it down to well under 1%, averaged across the whole globe. Perhaps even 0%.

Yet, the BILLIONS-MUST-DIE crowd is insistent how every drop of global petrol production is essential to forestall mass starvation. Why is that?

seychelles said...

Words to contemplate from today's ZH

we wish to caution investors to be vary careful with liquidation-like selloffs in gold. Should D-Day strike at Paulson, the firm's multi-billion GLD "gold share class" will likely have to be sold very fast to preserve liquidity. When that happens we may see a 20-30% correction in gold in one day.

soundOfSilence said...

So where are you Cheryl?

I was thinking yesterday after you were evidently reading Shakespeare Cliff Notes that ... well you can put lipstick on a pig but the pig is ... still a pig.

Watch and behold the terrible beauty we've created.

You know for the 1st time, and there is a 1st time for everything, you might have said something accurate.

Oppenheimer thought something very similar at the Trinity test.


Ashvin said...

DBS,

"Does anyone here on TAE have a best guess on whether Germany benefits most ( or suffers least ) by letting a big chunk of the EU/EC fall into a black hole?"

As I said earlier, and as you seem to feel also, that one could go either way at this point (i.e. 50/50 in my mind). It comes down to a battle between the German populace, who doesn't want to keep subsidizing bailouts of the Euro periphery that don't really work, and the German politicians, financiers and manufacturers, who want to keep the ponzi scheme going and their exports flowing. A significant revaluation of relative currency values within Europe would be quite devastating to the German export sector. And, of course, German banks don't want to see the global financial system crash. But Italy and Spain, as both being within the top 15 countries by GDP, are not really peripheral to anything. Too Big to Fail and Too Big to Save. "Too weird to live, and too rare to die", as HST would say. My best guess is 50/50. Equity, US bond, CHF/Yen and gold markets seem to be saying, we don't really give a shit what you do right now.

Also, Obama in his talk just said the following: "Nothing is going to change. S&P didn't need to tell us how to keep robbing the US population through the well-established workings of the Treasury market around the world. We are working on significant cuts to defense spending. Psyche! Our policies actually just killed 30 US citizens in Afghanistan, and so we're going to use that as a justification to spend even more money over there. Meanwhile, Medicare beneficiaries beware."

Mister Roboto said...

I don't if anyone else also thinks this because I usually don't read comment threads all the way through, but I'm pretty sure "Cheryl" is doing what is known as taking the piss, AKA parody-trolling. She's just too weirdly over-the-top to be anything else. Not that there aren't really people with that attitude, it's just that such people don't really care at all what we silly doomer-blog readers think!

Ashvin said...

Paraphrase of guy on CNBC just now: "So what do we tell people to do? What should they do? What's happening right now?"

Greenpa said...

"he who panics first, panics best."

The VIX is fun to watch today. Up 32% over yesterday now, and still going.

http://www.marketwatch.com/investing/index/VIX

el gallinazo said...

Just looking at the S&P this hour (2-2:30 NY Time) I suspect the PPT was told to intervene at 1120. We'll see.

Ashvin said...

El G,

That could definitely be the case, since the market circuit breakers stop working after 2:30 as well. At least, that's what I remember reading somewhere. I'm wondering what's going to happen to gold tomorrow if QE3 isn't announced. In a way, it seems the price of gold itself would keep the Fed from announcing anything major.

Ashvin said...

Ah, if the market falls 10%, there is no halt after 2:30. 20% after 2pm, and market closes. 30% and the market closes no matter what time it is.

http://usequities.nyx.com/markets/nyse-equities/circuit-breakers

Lanterne Rouge said...

I spent the first afternoon for 3 months doing some proper work - stacking sacks of wheat and bringing hay bales in. Sweat, dizziness, nausea, felt really good!

Got 7 eggs and two linguice (pork sausage) for my time.

Last time I stay away from manual labour for so long.

Frank said...

@elG It's possible. However according to the chart on ZH, the S&P had just gone into complete freefall.

I think it at least as likely that they intervened when the first derivative got out of control. As long as it drifted down less than percent an hour, OK. A real crash, nope.

Mister Roboto said...
This comment has been removed by the author.
Mister Roboto said...

Wow, the Plunge Protection Team is trying, you can tell, but apparently this is proving too much even for their strength and skill.

Why do I feel like some radio sportscaster, all of a sudden?

Ashvin said...

Mister Roboto,

I know, right. I usually never pay attention to the daily movements in markets, but now it's too hard not to. I was thinking some investors may have decided to unwind shorts into the close in anticipation of potential QE3 tomorrow, but, in stark contrast, the markets are about to close near session lows. I really can't believe some of these CNBC fools that are saying "it looks like another recession is possible". Uh, what?

Anonymous said...

@ Mister Roboto

Thank you for linking to the excellent piece written by Taubes in NYT (April 2011)!

Good to see that Taubes now agrees with Lustig's work. It did take Taubes a while to distinguish between simple/refined carbohydrate and complex carbohydrate.

Here Robert Lustig yells at Gary Taubes about ignoring dangers of fructose sugar (11-27-07).

http://www.youtube.com/watch?v=u7AjU1QHDf8&feature=related

Mister Roboto said...

Ahimsa: I was disappointed that Taubes didn't recognize what a demon's brew HFCS is. Yes diabetes runs in my family, but I'm convinced that I became diabetic as soon as I did because of those restaurant jobs I was working in the 90's where I could drink all the soda I could guzzle down (among other highly lamentable behaviors).

Anonymous said...

Thought some TAErs might find this of interest.

Video - 1.5 hr. talk by Robert Lustig on "Sugar: The Bitter Truth"

(Robert H. Lustig, MD, UCSF Professor of Pediatrics in the Division of Endocrinology, explores the damage caused by sugary foods. He argues that fructose (too much) and fiber (not enough) appear to be cornerstones of the obesity epidemic through their effects on insulin.)

http://www.youtube.com/watch?v=dBnniua6-oM

D. Benton Smith said...

@El G

I reckon you're right about the PPT intervention, and for a brief moment all will breath that temporary sigh of relief so highly touted on the box of every other patent medicine pain reliever.

Trouble is, this time, making the patient comfortable will be a complete waste of time.

The crashing world wide equities market is painful alright, but hardly life threatening, so masking it is pointless.

This time I think we are looking at a gen-u-wine heart attack, in the form of cascading defaults starting in Italy/Spain, immediately spreading to France & Germany, followed by the US instantaneously thereafter.

After that the house of BRIC's might as well be made of straw.

The Administration should not be calling in the Plunge Protection Team. They should be calling the Crash Cart , Code Blue.

The only way to kick the can down the road this time is a straight up, no apologies, unconditional bailout of Italy.

If that must be accomplished in semi-secret, then fine.

Otherwise the consequences are just too grim to contemplate. We could have several VIP patients flat line by Fall, "unless" ( and here I am using that hated word ) they pull off an open chest miracle with Germany within days. They could start by installing a heart.

Doing either of the above openly seems unlikely because the degree of honest admission of fault that such a course would require is simply absent from the Elite's universe. They are adept, however, at operating from behind the curtain and I hope that's what they do now.

The alternative scenario in my "What-If" crystal ball involves Germany ever-so-reluctantly yielding... barely and non-committedly ... to bailing out Italy on the condition of horrendous austerity measures.

Berlusconi , inescapably trapped between a rock and a hard place, would accept the terms and Italy would promptly explode into riots that would set a whole new standard for civil unrest.

The can will be kicked, of course, but weaker this time, and with negligible lasting effect. We will be revisiting this awful Monday within weeks.

Personally, and for the first time since Fall, 2008, I am expecting collapse that will materially effect day to day life even here in my undisclosed location down the road a piece from Podunk, America.

p01 said...

@Ahimsa
I'm sure you shall be very happy, because there will be a lot of fiber in our food very soon. As a matter of fact, there were some cellulose-related comments not long ago.
Very brown and very healthy

@Board
London is literally burning as nightfall sets.
Live.

Ashvin said...

Weird... DOW is down 5.55% today, and the S&P is down, what else, 6.66%. Cheryl, you still staring into the eyes of the Devil himself? Yeah, didn't think so.

Greenpa said...

Ash: "Cheryl, you still staring into the eyes of the Devil himself? Yeah, didn't think so."

Ah, silly you. She-it will be back; I'll bet with the same refrain. And a tiny "oops; just missed it a little, but everyone knows, now the opportunities are that much huger!"

I don't see it as harmless, really. There are a lot of folks reading this who never comment, many looking for direction. They can easily be on the cusp of decision; and of course, her-its employers will make more money, the more fools are encouraged to buy into the crash. It can mean real scum income.

Alfred said...

Fiddlesticks.

Greenpa said...

The VIX numbers are still fluctuating, well after NY markets closed, something I've not observed before. Now up 50% for the day.

Ashvin said...

"Fiddlesticks"

Funny, I have a friend who likes to say that a lot. Coincidentally or not, he works for big finance too. Fortunately, I helped oonvince him to get a good % of his personal portfolio into cash, but, unfortunately, his clients won't be so lucky.

Greenpa,

At a certain point in the terminal phases of this system, the "bulls", shills or otherwise, can't come back. They are purged for an indefinite period of time. They just can't do it.

Anonymous said...

@DBS

I am not German, but have lived there and spend probably more time thinking and reading in German than in English.

As you suspect, I cannot add much in terms of the math, but everyone here has seen the data on German holdings of EU sovereign debt.

My basic reaction to your question about Germany (how it best benefits) is more political. I do not see the Eurobloc holding together, so the question becomes how it breaks apart. If the "lost" states include France, i.e. southern Europe and France, then the political consequences for Germany will be horrible. It will be blamed for destroying the European project which, in this case, would indeed be dead.

If, however, only the "spendthrift" southern states are lost, then the situation will be seen as their fault. Core Europe will remain somewhat intact. An interesting question is who keeps the euro. I would suspect it would be the southern states.

As you say, quite a mess.

Ciao,
FB

p01 said...

Cheryl said...
Fiddlesticks.

Red Candlesticks.

Greenpa said...

Ash ""They are purged for an indefinite period of time. They just can't do it"

Sure, true. Personally, I don't think we're quite there; although it does depend ultimately on the intensity of herd panic. Even the VIX is still rather moderate; it's at 48 right now, but in late 08, it was up around 85.

I wouldn't be surprised either way for tomorrow; there could easily be a little upward movement, or- another major down leg. But eventually- I'd be on there being some "rally!" points, where markets move up 500 points or so, over several days or weeks- which is where the pump and dumpers still make money.

Any good billionaire is intending to lose half their "money" in all this- but they'll be turning the other half into something real; land, airports, power stations, etc. That's where they were going all along; so the lost extra billions doesn't really hurt. Their swimming pools will still be just as big, and just as warm. And they'll still be supporting the local policemen's ball just as strongly.

Ashvin said...

Greenpa,

You're right, its basically impossible to figure out if we are at "the critical threshold" yet. Personally, I'm with DBS that the events around the world right now are all pointing towards us being very close. There is almost nothing that the "pumpers" can do to get another solid dump, except either a massive backdoor intervention by the PPT group or Germany agreeing to a massive bailout of Europe. QE3 may work for a bit, but probably not very long at all. Even the Germany accession wouldn't that long. At least not until the market comes down a lot more (another 20-30%?). Some of the bulls will no doubt keep trying to pump until the bitter end, and they will get a counter-trend rally eventually, but I think more and more of them are abandoning their tactics for good, just like more and more retail investors have shunned the market for good.

Archie said...

re: VIX

This was posted at FT Alphaville late this afternoon.

In regard to VIX futures curve backwardization since 2004 the front two contracts of the VIX futures curve have traded at a discount to spot VIX approximately 25% of the time. Currently the entire VIX futures curve shows inversion and this shape has only occurred 13% of the time since 2004. Negative convexity across the entire curve usually only occurs during systematically important shock events such as the 2008 financial crash, Bear Stearns bankruptcy, 2010 flash crash, and the 2007 credit market meltdown.

It is important to understand the fundamental and structural dynamics underlying VIX futures curve inversions. The traditional explanation is that VIX futures curve backwardization implies the market’s expectation of volatility mean reversion or that the VIX will decline from elevated levels. An alternative explanation is structural, implying that investors who bought VIX futures and options as tail risk insurance are now all rushing to “cash-in” on the payout at the same time, artificially pushing the curve downward.

This may explain the mixed forecasting record of the VIX futures curve in backwardization as the spot VIX has breached the discounted VIX futures price to expiry only 62% of the time since 2004. The average duration of a VIX futures curve backwardization is only 4 days, however when the entire curve in backwardization implying a systematically important event, the curve can exhibit negative convexity for much longer periods including 64 consecutive days of full curve inversion during the 2008 financial crisis.


I think I need a drink!

Greenpa said...

Archie: I think I need some ibuprofen. ow.

Herding noises; there are multiple advisors now making "oh, you should stay in" noises; including some "big name " investors willing to publicly go on record:

http://tinyurl.com/3bveh45

yup, buying bargains. Though they don't seem to say how many million$ they're buying with right now.

And lots of "waaalll, son, if yer in it fer the long run... ain't nothing lak stocks, take ma word fer it."

el gallinazo said...

I am not the most superstitious guy around, but the prominence of 666 with the SPX is getting downright creepy.

Frank, the PPT moving in as the first derivative approaches minus infinity might be a very good call. Good observation.

Re the diet wars, it appears to me to be pretty obvious that there are two pathways to proper health; the Taubes (Atkins) diet and the Dean Ornish. Also obvious that the McDonalds, Big Gulp, fried pigskins diet doesn't cut the mustard. Ahimsa is against the Taubes diet primarily because she views eating our animal friends as barbaric. Also, an over populated world cannot afford the luxury of animal diet inefficiency. Recent work with rats indicates that high fructose diets are bloat city. But our common ancestors go back to the Cretaceous, so it's hard to draw conclusions. But I find it a little confusing because out H-G ancestors ate loads of fruit when they got lucky and, speaking from experience, tropical rats also eat a lot of fruit. I used to blow them out of my papaya trees with a high powered Crossman.

The women here in Mexico all drink loads of soft drinks. Most go into insulin resistance before 30 and get the huge, flabby arms. For some reason, the men appear to be affected much less.

Ilargi said...

New post up.




The Markets Are Not Stupid




.

Weaseldog said...

skilo said... "I don't get it - the "overlords" own the dollars, why would they collapse their own wealth? Why bail out the debtors with HI? I completely disagree that bailing out debtors and eliminating their dollar wealth is good for the "overlords."

Because money isn't wealth.

Property is wealth.

Money is abstract and they can print all they want. No one is printing land or human labor.

Ashvin said...

I have no idea why I said "except a massive intervention by the PPT" above, because the PPT can't really do shit except hold certain lines and mitigate the damage from a sell off. Right now, the "damage" is certain to be large and the "mitigation" is increasingly small. And significant fiscal stimulus has been all but castrated by the S&P downgrade and political "debates", which is another limiting factor for QE as well.

Also, just to be clear Greenpa, when I say "Cheryl", I'm not actually trying to engage him/her/it and his/her/its handler in discussion, but more so make a point for the benefit of those other people you mention who happen to be reading.

Greenpa said...

I have a new catchphrase I'm trying to launch in several places out there- to describe what's been going on in Congress.

Time to call it what it is: Congressional Cannibalism.

:-)

Greenpa said...

Think of the cartoons!

snuffy said...

D Benton Smith,

I read your question a bit differently...
They are showing O-man to be a nut-less wonder?...No?...No seal team ghosting in and laying waste to those who are really calling the shots?..

They are reminding him that at any time one of their hands, one with terminal cancer would get close enough for him to go down in history as the first black president to die in office.

O-man knows this.If he got out of line,the real powers that be would put him down so fast none of his attempts to change the system would take effect.If it could happen to the Kennedys,It could happen to O-man.....and he knows it well..Remember we have had 8 years of the far rightwing calling the shots on who got put where in the security services
This counsel of 13 is bad bad...they are the ones who will sign off on the gutting of entitlement.The one who will screw all of us is Max Bacchus...remember the o-mans obamacare?...He is he architect of that diaster so expect a large knife in the back of the working folk..
Paying attention to the news is depressing..
Bee good,or
Bee careful

snuffy

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