Sunday, November 30, 2008

Debt Rattle, November 30 2008: How to Build a Lifeboat

National Photo Co. Mack Sennett Girl 1919.
Actress Marvel Rea, one of film producer Mack Sennett's well-rounded "bathing girls"

Stoneleigh: Yesterday we talked about why we are facing deflation and today I wanted to review and explain the suggestions we have made previously for dealing with a deflationary scenario. In short, this is the list we have run periodically since we started TAE (with one addition at the end):

1) Hold no debt (for most people this means renting)
2) Hold cash and cash equivalents (short term treasuries) under your own control
3) Don't trust the banking system, deposit insurance or no deposit insurance
4) Sell equities, real estate, most bonds, commodities, collectibles (or short if you can afford to gamble)
5) Gain some control over the necessities of your own existence if you can afford it
6) Be prepared to work with others as that will give you far greater scope for resilience and security
7) If you have done all that and still have spare resources, consider precious metals as an insurance policy
8) Be worth more to your employer than he is paying you
9) Look after your health!

1) The reason that getting rid of debt is priority #1 is that during deflation, real interest rates will be punishingly high even if nominal rates are low. That is because the real rate (adjusted for changes in the money supply) is the nominal rate minus inflation, which can be positive or negative. During inflationary times, this means that the real rate of interest is lower than the nominal rate, and can even be negative as it was during parts of then 1970s and again in the middle of our own decade. People have taken on huge amounts of debt because they were effectively being paid to borrow, but periods of negative real interest rates are a trap. They lure people into too much debt that they may not be able to service if real rates rise even a little. Most people are thoroughly enmeshed in that trap now as real rates are set to rise substantially.

When inflation is negative (i.e. deflation), the real rate of interest is the nominal rate minus negative inflation. In other words, the real rate is higher than the nominal rate, possibly significantly higher. Even if the nominal rate is zero, the real rate can be high enough to stifle economic activity, as Japan discover during their long sojourn in the liquidity trap. Standard money supply measures don't necessarily capture the scope of the problem as they don't adequately account for on-going credit destruction, when credit has come to represent such a large percentage of the effective money supply.

The difficulty from the point of view of debtors can be compounded by the risk that nominal interest rates will not stay low for years, as they did in Japan, but may shoot up as the international debt financing model comes under stress. For instance, on-going bailouts may cause international lenders to balk at purchasing long term treasuries for fear of their effect on the value of the dollar, even though those bailouts are not increasing liquidity thanks to hoarding behaviour by banks. We are not there yet, but the probability of this scenario rises as we move forward with current policies. The effect would be to send nominal interest rates into the double digits, and real interest rates would be even higher. The chances of being able to service existing debts under those circumstances are not good, especially as unemployment will be rising very quickly.

There is no safe level of debt to hold, including mortgages. For those who are not able to own a home outright, most would be much better off selling and renting, as real estate becomes illiquid faster than almost anything else in a depression. By the time you realize that you need to sell because you can no longer pay the mortgage, it may be too late. Renting is essentially paying someone else a fee to take the property price risk for you, which is a very good bet during a real estate crash. It would also allow you address point #2 - having access to liquidity.

2) Holding cash and cash equivalents (i.e. short term treasuries) is vital as purchasing power will be in short supply. Cash is king in a deflation. Access to credit is already decreasing and will eventually disappear for ordinary people. Mass access to credit has been a product of an historic credit expansion that expanded the supply of pockets to pick to an unprecedented extent, feeding off widespread debt slavery in the process. As you can't count on the availability of credit for much longer, you will need savings in liquid form that you can always access.

When interest rates spike, not only will debt become a millstone round your neck, but a debt-junkie government forced to pay very high rates will be in the same position. As a result government spending will have to be cut drastically, withdrawing the social safety net just as it is most needed. In practical terms, this means being on your own in a pay-as-you-go world. You do NOT want to face this eventuality with no money.

3) Keeping the savings you need in the banking system is problematic. The banking system is deeply mired in the crisis in the derivatives market. Huge percentages of their assets are not marked-to-market, but marked-to-make-believe using their own unverifiable models. The market price would be pennies on the dollar for many of these 'assets' at this point, and poised to get worse rapidly as the forced assets sales that are coming will lower prices further. The losses will eventually dwarf anything we have seen so far, pushing more institutions into mergers or bankruptcy, and mergers are becoming more difficult as the pool of potential partners shrinks.

If we do see a rash of bank failures, each of which weakens the position of others as the sale of their assets and unwinding of their derivative positions can re-price similar 'assets' held by other parties, then deposit insurance will not be worth the paper it's written on. When everything is guaranteed, nothing is, as the government cannot guarantee value. Savings held in these institutions are at much higher risk than commonly thought due to the systemic threats posed by a derivatives meltdown and spreading crisis of confidence. Fractional reserve banking depends on depositors not wanting their money back all at once, in fact with reserve requirements so whittled away in recent years, it depends on no more than a fraction of 1% of depositors wanting their money back at once. This is a huge vulnerability and the government deposit guarantee is a bluff waiting to be called.

4) The general rule of thumb in a deflation is to sell everything that isn't nailed down and then sell whatever everything else is nailed to, for the reasons that assets prices will fall further than most people imagine to be possible, and the liquidity gained by selling (hopefully) solves the debt and accessible savings problems (provided you don't lose the proceeds in a bank run). Assets prices will fall because everywhere people will be trying to cash out, by selling not what they'd like to, but what they can. This means that all manner of assets will be offered for sale at once, and at a time when there are few buyers, this will push prices down to pennies on the dollar for many assets.

For those few who still have liquidity, it will be a time when there are many choices available very cheaply. In other words, if you manage to look after the proceeds from the sale of your former assets, you should be able to buy them back later from much less money. Of course flashing your wealth around at that point could be highly inadvisable from a personal safety perspective, and you may find that you'd rather hang on to your money anyway, since it will be getting harder and harder to earn any more of it. During the Great Depression, some of the best farms in the country were foreclosed up on and received no bids at auction, not because they had no value, but because those few with money were hanging on to it for dear life.

Being entirely liquid has its own risks, which is why I wouldn't sell assets that insulate you from economic disruption if you didn't buy them on margin (ie with borrowed money that you may not be able to pay back) and if you have enough liquidity already that you can afford to keep them. For instance, a well equipped homestead owned free and clear is a valuable thing indeed, whatever its nominal price. It is totally different from investment real estate owned on margin, where the point of the exercise is property price speculation at a time when doing so is disastrous.

One important point to note with regard to commodities is that commodities have already fallen along way since I first published the above list of suggestions. At that time, selling commodities was a very good idea, but now, since commodities are already down a very long way, it may depend on the commodity in question. If you only own commodities in paper form then selling is still a good idea in my opinion, as there are generally more paper claims than there are commodities, and excess claims will be extinguished. At some point soon I will write an intro on my view of energy specifically, since energy is the master resource. In short, we are seeing a demand collapse now, but eventually we will see a supply collapse, and it is difficult to predict which will be falling fastest at which times.

5) If you already have no debt and have liquidity on hand, I would strongly suggest that you try to gain some control over the essentials of your own existence. We live in a just-in-time economy with little inventory on hand. Economic disruption, as we are already seeing thanks to the problems with letters of credit for shipments, could therefore result in empty shelves more quickly than you might imagine. Unfortunately, rumours of shortages can cause shortages whether or not the rumour is entirely true, as people tend to panic buy all at once. If you want to stock up, then I suggest you beat the rush and do it while it's still relatively easy. You need to try to ensure supplies of food and water and the means to keep yourselves warm (or cool as the case may be). Storage of all kinds of basic supplies is a good idea if you can manage it - medicines, first aid supplies, batteries, hand tools, wind-up radios, solar cookers, a Coleman stove and liquid fuel for it, soap etc.

At the moment, there are many things you can obtain with the internet and a credit card, but that will not be the case in the future. Water filters are a good example, as the quality of water available to you is likely to deteriorate. You can buy the kind of filters that aid agencies use oversees for all of about $250, with extra filter elements for a few tens of dollars at sites such as Lehmans Non-Electric Catalogue or the Country Living Grain Mill site.

6) Most people will not be able to get very far down this list on their own, which is why we suggest working with others as much as possible and pooling resources if you can bring yourself to do so. Together you can achieve far greater preparedness than you could hope to do alone, plus you will be building social capital that will stand you in good stead later on.

7) If you have already taken care of the basics, then you may want to put at least some of whatever excess you still have into precious metals (in physical form). Although the price of metals should still have further to fall, since distressed sales have not yet had an effect on price, obtaining them could get more difficult. Buying them now would amount to paying a premium price for an insurance policy, which may make sense for some and not for others. Metals will hold their value over the long term as they have for thousands of years, but you may have to sit on them for a very long time, so don't by them with money you might need access to over the next few years.

Metal ownership may well be made illegal, as it was during the Great Depression, when gold was confiscated from safety deposit boxes without compensation. That doesn't stop you owning it, but it does make ownership far more complicated, and makes trading it for anything you might need even more so. You could easily attract the wrong kind of attention and that could have unpleasant consequences. In short, gold is no panacea. Other options may be far more practical and useful, although there is an argument for having a certain amount of portable wealth in concentrated form if you should have to move suddenly.

8) Being worth more to your employer than he is paying you is a good idea at a time when unemployment is set to rise dramatically. This is not the time to push for a raise that would make you an expensive option for a cash-strapped boss, and in fact you may have to accept pay cuts in order to keep your job. During inflationary times, people can suffer cuts to their purchasing power year after year, but they don't complain because they don't notice that their wage increases are not keeping up with inflation. However, deflation brings the whole issue into the harsh light of day.

People would have to take pay and benefit cuts for their purchasing power to stay the same, thanks to the increasing value of cash, but keeping people's purchasing power the same will not be an option for most employers, who will be struggling themselves. In other words, expect large cuts to pay and benefits. As unions will never accept this, for obvious reasons, since their membership has its own fixed costs, there will be war in the labour markets, at great cost to all. You need to reduce your structural dependence on earning anything like the amount of money you earn now, and don't expect benefits such as pensions to be paid as promised.

9) Your health is the most important thing you can have, and most citizens of developed societies are nowhere near fit and healthy enough. Already medical bills are the most common reason for bankruptcy in the US, and while you can't protect yourself against every form of medical eventuality, you can at least improve your fitness. You will be be living in a world where hard physical work will be much more prevalent than it is now, and most people are ill-equipped to cope. The solution Ilargi and I have chosen, as we have mentioned before, is the P90X home fitness programme. While it wouldn't be the right choice for everyone, if I can do it, as I have for 11 months already, then most people can. For others, there are gentler options available, but everyone should consider doing something to make themselves as healthy and robust as possible.

We here at TAE wish you the best of luck at this difficult time. We will all need it.

Holiday shoppers are spending
Holiday shoppers continued their trek to malls and big-box stores Saturday, amid early indications of slightly higher Black Friday sales to kick off the season.
The nation's retailers were watching anxiously, having already suffered significant declines this year thanks to the weakening U.S. economy. But the first nationwide returns were positive for merchants.

ShopperTrak RCT, a retail industry research firm, said total Black Friday sales rose 3% this year, to about $10.6 billion nationwide. Bill Martin, the firm's co-founder, said that given the headwinds facing the nation's merchants - a troubled economy, the traditional weakness in a presidential election year and the aftermath of the summer's record gas prices - the first day was pretty positive. "Under these circumstances, to start off the season in this fashion is truly amazing and is a testament to the resiliency of the American consumer, and undeniably proves a willingness to spend," Martin said in a statement.

He credited deep discounting for a lot of the sales increases, which were fairly consistent across the nation - up 3.4% in the South, 3% in the Midwest, 2.7% in the West and 2.6% in the Northeast. "While this is an encouraging start for retailers, there's no guarantee these deep discounts will continue after Black Friday weekend, which could slow spending," said Martin. "Additionally, consumers have just 27 days to shop this year as opposed to 32 in 2007, which may catch some procrastinating consumers off guard, leading to lower sales levels."

Taubman Centers, which operates 24 shopping centers in 11 states, said transactions at its facilities were slightly higher than last year on average. Among Taubman's facilities are the Beverly Center in Los Angeles, Woodfield Mall outside Chicago, and the Stamford Town Center in Connecticut. Taubman said electronics, apparel and moderately priced jewelry appeared to be the big sellers at its stores, with several malls specifically reporting demand for women's Ugg boots.

Going into the holiday weekend, analysts were not optimistic, even with the Black Friday crowds. "Shoppers definitely have a mission this year," said Marshal Cohen, chief retail analyst for NPD Group. "They are serious about finding the best deals. They are very budget conscious, they've done their research and then they'll go home." Cohen projects a 3% drop, his first-ever decline forecast, in total holiday sales. Another analyst, America's Research Group chairman Britt Beemer, estimates sales for November and December combined will slip 1%.

"[Shoppers] know exactly what they want, where to shop for it and who has the best deals," said Beemer, who doesn't expect people will deviate from their shopping lists. That's a problem for merchants who depend just as much on the impulse buy as they do on consumers' shopping lists to get them off to a flying start during the Thanksgiving weekend.

Department store operator J.C. Penney said Saturday it will not issue any Black Friday or full weekend sales results, waiting instead until it puts out its November sales report on Thursday. "In light of the challenging and volatile economic climate, and shifts in this year's retail calendar, we don't believe that reporting sales data for any one day (or weekend), including Black Friday, would provide a meaningful barometer of our business," the company said in a statement.

The season got off to a tragic start with fatal incidents in New York and California. Police said that a 34 year-old temporary employee was trampled to death at the opening of a Wal-Mart store in Valley Stream, N.Y. They said thousands broke through the doors of the store, knocking over as many as a dozen people in the rush for some of the highly touted bargains at the discounter. "Our thoughts and prayers go out to the families of those impacted," Hank Mullany, Wal-Mart's president for the Northeast, said in a statement. He said the company is cooperating with a police investigation into the incident.

In Palm Desert, Calif., police said two men were shot to death at a Toys R Us store. "Our understanding is that this act seems to have been the result of a personal dispute between the individuals involved," said Toys R Us spokeswoman Kathleen Waugh, in a written statement. NPD's Cohen said the two incidents would have little impact on shopping. "Both incidents are terrible and could have a bit of residual effect, where some more people might migrate their holiday shopping online," he said. "But even if it affects 4% of holiday shoppers [this year] that's still an aggressive estimate."

Stores opened early on Black Friday - in fact, some were even open on Thanksgiving itself - as retailers tried to ignite the holiday shopping period, which can account for as much as 50% or more of sellers' annual profits and sales. The day is dubbed "Black Friday" because of its importance in determining a store's profitability for the year. Most merchants have had an extremely difficult sales year as Americans seriously retrenched on their shopping habits in light of a worsening economy.

What's more, a record slump in consumer spending has already forced leading store chains such as Circuit City and Sharper Image into bankruptcy. Given this scenario, the National Retail Federation (NRF) forecast holiday sales to rise just 2.2% this year, which would make it the weakest sales gain in six years. Still, lines snaked around the block at Toys R Us' flagship store in New York's Times Square before its 5 a.m. open on Black Friday.

"I didn't think it would be this [crowded], with the economy the way it was, but I guess Toys 'R' Us was offering the best deals, so this is where everyone came," said shopper Nicole Williams, 29, of New York City at the toy merchant's flagship store in Times Square. Gerald Storch, CEO of Toys R Us, said people were in line at 9 p.m. Thursday outside the Times Square store. "I am excited and optimistic about today and the rest of the holiday season," Storch said.

One interesting trend, Storch pointed out, was that shoppers weren't necessarily buying lower-priced toys. Storch said some of the fastest-selling toys in the first hour after the store opened were the $60 Elmo Live and the $139.99 Spike the Ultra Dinosaur from Fisher-Price. "I'm not that surprised that parents are spending money on their kids, and they want to buy a good, quality toy," he said. "Parents tell us that they will cut back on themselves, but not on Christmas gifts for their kids."

"Given the current economic environment, [the company] understands the issues facing our customers, and we are committed to offering the season's most affordable gifts," said Ken Hicks, president and chief merchandising officer for J.C. Penney. However, retail analysts say merchants have to keep the shopping momentum over the weekend.

This will be a real challenge. While consumers are cutting back on how much they spend on gifts, the NRF estimates that Black Friday and the Thanksgiving weekend will also likely see fewer Americans hitting stores. The trade group said about 128 million people will commence their gift buying this Friday, Saturday or Sunday after Thanksgiving, down from 135 million last year. Beemer was unconvinced that retailers will see a decent start to the holiday season. "It will be a disappointment," he said.

GM Board Reviewing Wagoner’s Plan to Save Automaker
Bloomberg) -- General Motors Corp.’s board is meeting in Detroit to discuss a rescue plan to present to Congress in two days that may determine if Chief Executive Officer Rick Wagoner can save the company and keep his job. Directors started reviewing the proposal at noon today and will continue tomorrow, people familiar with the plans said. GM will prepare a 10- to 12-page public document and a private, more detailed plan of about 80 pages with background material, the people said. GM said Nov. 7 it may be short by year’s end of the $11 billion minimum in cash needed to pay monthly bills.

GM shares have gained on investor optimism that a plan to slash debt, cut labor costs and possibly eliminate half the automaker’s U.S. brands may help win as much as $12 billion to stay in business during the steepest industry slowdown in at least a decade. The stock rose the most in a two-day period in at least 28 years in New York trading at the end of last week, and climbed five out of six days.

“We envision the current Congress will authorize a short- term bridge loan that carries” GM, Ford Motor Co. and Chrysler LLC to the start of President-elect Barack Obama’s administration in January, Himanshu Patel, a New York-based analyst at JPMorgan Chase & Co., said in a note to investors on Nov. 25. He rates GM and Ford shares “neutral.” GM wants to cut its $43 billion in debt, even after getting the government loans, to ensure its future viability, people familiar with the plan said last week. The automaker will ask current debt holders to exchange current bonds for lower value debt that may also include equity, the people said.

The company also may seek an end to provisions that pay union employees not to work when their plants are shut down, the people said. GM is trying to close plants and slow production to adapt to auto sales that may fall to 11.7 million cars and trucks next year from 16.1 million last year. The largest U.S. automaker also may ask to delay a $7 billion payment to a union retiree health fund, drop more brands and rework an accord with GMAC LLC to prove it can survive and repay the government, said the people, who asked not to be named because details haven’t been presented to Congress. Lawmakers grilled Wagoner during two days of testimony Nov. 18 and Nov. 19 before deadlocking over whether to let the automakers tap $25 billion in low-interest borrowing.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid agreed to a second lame-duck congressional session and instructed Wagoner and fellow CEOs Alan Mulally of Ford and Robert Nardelli of Chrysler to prepare specifics on how they’ll navigate past the crisis. Pelosi and Reid told the automakers in a Nov. 21 letter that they must provide “a forthright, documented assessment” of their operating cash positions, short-term liquidity needs “and how they will meet the financing needs associated with the plan to ensure the companies’ long-term viability.”

While Republican critics such as Senator Richard Shelby from Alabama have said the auto chiefs were “arrogant” two weeks ago and that management changes might be needed, neither the government nor GM’s board has yet signaled Wagoner will need to leave to get an agreement, people familiar with those discussions said. After burning through $6.9 billion in cash last quarter, GM said Nov. 7 that it had $16.2 billion as of Sept. 30, raising the prospect of falling short by year’s. GM has said a bankruptcy filing would be a “disaster.”

The automaker, already marketing its Hummer unit to prospective buyers, is also studying whether to sell or close the Pontiac, Saab and Saturn brands, people familiar with those plans said last week. GM also sells models under Chevrolet, Cadillac, Buick and GMC brands. GM gained 43 cents, or 9 percent, to $5.24 on Nov. 28 in New York Stock Exchange composite trading. Dearborn, Michigan- based Ford rose 54 cents, or 25 percent, to $2.69. This year, GM has declined 79 percent and Ford dropped 60 percent. GM’s 8.375 percent bonds due in 2033 rose 4 cents to 23 cents on the dollar Nov. 28 to yield 36 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has fallen from 36.5 cents at the end of October and 81 cents at the end of last year, Trace data show.

Fed's emergency loan program increases activity
The Federal Reserve boosted its lending to commercial banks and investment firms over the past week, indicating that a severe credit crisis was still squeezing the financial system. The Fed released a report Friday saying commercial banks averaged $93.6 billion in daily borrowing for the week ending Wednesday. That was up from an average of $91.6 billion for the week ending Nov. 19.

The report also said investment firms borrowed an average of $52.4 billion from the Fed's emergency loan program over the week ending Wednesday, up from an average of $50.2 billion the previous week. The Fed said its net holdings of business loans known as commercial paper over the week ending Wednesday averaged $282.2 billion, an increase of $16.5 billion from the previous week.

Financial firms are borrowing from the Fed because they are having trouble raising money through normal channels as the financial system endures its worst crisis since the Great Depression. Banks are hoarding cash rather than making loans out of fear that they won't be repaid. The Fed and the Treasury have been flooding the financial system with money in hopes that banks can return lending operations to more normal levels.

The central bank on Oct. 27 began buying commercial paper, the short-term debt that companies use to pay everyday expenses. It was one of a series of moves the Fed has made to try to unfreeze credit markets. The Fed's goal is to raise demand in this area as a way to boost the availability of commercial paper, which has been seriously constrained since the financial crisis hit with force in September. The report said insurance giant American International Group's loan from the Fed averaged $79.6 billion for the week ending Wednesday. That was down by $5.6 billion from the average the previous week.

The reduction reflected a modification of the government's support program for AIG earlier this month. Under that change, Treasury stepped in with a $40 billion purchase of stock in AIG, using money from the government's $700 billion financial system rescue package. The increased support from Treasury allowed the Fed to reduce slightly the size of its total loans to AIG.

The Fed unveiled two new programs Tuesday in a further effort to get consumer credit flowing again. It said it would begin buying mortgage-backed securities from mortgage giants such as Fannie Mae and Freddie Mac. And it announced a program to lend to financial firms that buy securities backed by various types of consumer debt, from credit cards to auto and student loans.

Citigroup to sell Japan trust banking unit
Citigroup Inc. plans to sell its Japanese trust banking unit as the ailing U.S. banking giant struggles to survive the global financial crisis, media reports said Sunday. Citigroup plans to begin tender offers next week to determine the buyer of NikkoCiti Trust and Banking Corp., its trust banking operation in Japan, for about 40 billion yen ($416.7 million), the Nikkei business newspaper reported.

Several major Japanese trust banks, including Mitsubishi UFJ Trust & Banking Corp., Sumitomo Trust & Banking Co. and Mizuho Trust & Banking Co., are expected to place their bids, the Nikkei said, without citing sources. Officials at Nikko Citigroup and NikkoCiti Trust were not available for comment Sunday. Citigroup also plans to cut jobs through early retirements at its Japanese brokerage unit Nikko Cordial Securities Inc., and to further trim its Japan operations, the Nikkei said.

Citigroup is among U.S. banks hardest hit by the downturn in the credit and mortgage markets. The bank has been rushing to wind down its assets backed by risky debt. Citigroup said earlier this month it planned to cut 53,000 jobs, on top of 22,000 cuts previously announced. It also sold off its retail banking unit in Germany.

Foreign central banks' U.S. debt holdings fell
Foreign central bank holdings of U.S. debt fell last week, Federal Reserve data showed on Friday. The Fed said its holdings of Treasury and agency debt kept for overseas central banks fell $7.48 billion in the week ended Nov 26, to stand at a total of $2.492 trillion. The breakdown of custody holdings showed overseas central banks increased their Treasury debt holdings by $5.81 billion to stand at a total $1.620 trillion.

The foreign institutions reduced their holdings of securities from government-sponsored agencies like Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac by $13.29 billion to their holdings, to stand at a total $871.76 billion. Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries.

Eurozone jobless total at two-year high
Eurozone unemployment has seen its biggest monthly jump in 15 years, mirroring a sharp drop in inflation and strengthening the case for another big cut in European Central Bank interest rates next week.

Joblessness in the 15-country region soared by 225,000 in October, adding to evidence that the recent oil price shock, which sent inflation soaring, has given way to a deep and protracted recession. At 7.7 per cent, October’s eurozone unemployment rate was the highest for almost two years.
Eurozone annual inflation, meanwhile, slumped from 3.2 per cent in October to 2.1 per cent this month, the lowest since August 2007, according to separate figures released on Friday by Eurostat, the European Union’s statistical office. It was the biggest monthly fall in inflation since the launch of the euro almost a decade ago.

Eurozone inflation peaked at 4 per cent in July, the same month as the ECB raised its main interest rate by a quarter percentage point to 4.25 per cent. Since the collapse of Lehman Brothers in mid-September the central bank has hurriedly reversed its strategy, slashing official borrowing costs by half a percentage point in early October and again this month.

Inflation rates could drop below zero in some months next year as oil price increases drop out of annual comparisons. However, ECB policymakers see scant chance of deflation – a generalised and long-lasting fall in prices that wreaks serious economic damage – partly because of the relative-rigidity of the region’s wage and price setting structures. But the rapid pace of the economic downturn, which has seen a near-collapse in business confidence, has strengthened the case for a bolder cut in borrowing costs next week. The ECB has not sought to stop financial markets pricing in a three-quarter percentage point cut in its main rate to 2.5 per cent next Thursday.

The eurozone was already in recession – defined as two quarters of falling gross domestic product – at the end of September and revised ECB forecasts, to be released next week, are likely to show GDP falling overall in 2009. “As a raging financial storm impairs the transmission of any monetary stimulus, rates need to be cut more aggressively than usual to have an appreciable impact,” argued Holger Schmieding, at Bank of America.

Recent rises in unemployment have been particularly stark in Spain, where the rate hit 12.8 per cent in October, up from 12.1 per cent in September and 8.5 per cent a year before. But France is also seeing steady increases.

Still, Jean-Claude Trichet, ECB president, is likely next week to argue the outlook is surrounded by exceptional uncertainty. Eurozone lending to business has remained robust, according to ECB data earlier this week, which suggested that even if companies were borrowing to survive rather than to invest, a potentially-disastrous “credit-crunch” had been averted so far.

Borrowing by business grew at an annual rate of 11.9 per cent in October. The German labour market remained broadly flat in October, although economists fear unemployment will soon also start rising.

Lord Mandelson warns credit-starved companies over EU state aid
The Government will have to take account of European rules on state aid before deciding whether to formulate rescue packages for businesses and industries which are being starved of bank credit, Lord Mandelson, the Business Secretary, warned last night. Speaking to The Sunday Telegraph, Lord Mandelson said that his department was assembling a "route-map" that was helping to assess which sectors were priorities for investment.

A preliminary paper on the issue had been submitted by Lord Mandelson to Labour's National Economic Council last week, he said. "I made the point that there has to be a screening process to distinguish between those [industries] which are viable and those which are not," he said. "But we also need to take account of our own resources and European state aid rules."

Lord Mandelson's comments follow a week in which he held discussions with senior representatives of industries including Britain's ailing car manufacturing sector. He said the Government had not yet decided what assistance, if any, it would offer the industry. The Business Secretary and other Cabinet ministers have criticised the country's leading banks – including those in which the Government is taking a stake – about their attitude to lending as companies face an acute lending squeeze.

Lord Mandelson said that banks had become too conservative with their lending policies although he insisted the Government was keen to avoid resorting to legal action against them. "We are having a robust dialogue with the banks [about the terms of their lending to businesses], and we are focusing on those that have a clear long-term future and a major contribution to make to our industrial base; those that are in major growth sectors of the economy, which are science-based, have strong R&D capabilities and new technologies as their characteristics, which we need to take a long-term view about," said Lord Mandelson.

The dire state of the economy is leading many economists to expect the Bank of England's Monetary Policy Committee to sanction a further cut in interest rates this week, potentially taking them down to their lowest level since the 1950s. They anticipate that the Government's £20bn pre-Budget report giveaway could set Britain on course for a long period of historically low interest rates, starting with another significant cut when the MPC makes its December decision on Thursday. "The upshot is that, while the fiscal boost in the pre-Budget report might help to support the economy a little over the next year or so, the prospect of an enormous fiscal tightening over the following years points to the need for a prolonged period of very loose monetary policy," said Jonathan Loynes, chief European economist at Capital Economics.

In Brazil, Credit to Farmers Dries Up
The global credit crunch is slowing Brazil's roaring agricultural sector -- at a time when more food, not less, is needed around the world. A steep drop in global crop prices and rising costs of farm supplies, combined with tighter credit, are causing the slowdown in one of the world's fastest-growing breadbaskets.

Many Brazilian farmers had hoped a booming grain market would help them dig out of debt and become more competitive with American farmers, long the global leaders in farm productivity. But now, strapped for cash, Brazilians are reducing the size of their crops and even forgoing debt payments. The farm-belt slowdown could drag on the Brazilian economy, which had been boosted by robust agricultural exports to China and other emerging economies.

In the past several years, amid surging global demand for grain, farmers plowed up land at a feverish pace to plant soybeans, and roads were carved into the countryside to move the goods. Climbing grain prices through the first half of 2008 accelerated the growth. Now, growers are finding it harder to get loans sufficient to cover the rising costs of fertilizer, pesticides and seed. For those borrowings, growers rely heavily on a handful of multinational grain companies, including Archer-Daniels-Midland Co., Bunge Ltd. and Cargill Inc.

Unlike in the U.S., where farmers depend on loans from private banks and the government, Brazilian farmers get as much as 40% of their financing from agriculture companies. That could drop to as low as 25% this year, according to M.V. Pratini de Moraes, a former Brazil agriculture secretary. As the volatile commodities market and the global financial crisis have increased the risk and expense of doing business in Brazil, big grain companies are reining in lending. "Every company is trying to secure as much cash as it can [to withstand] the longer-term effects of the credit crisis," says Stefano Rettore, general manager at CHS Brazil, a major grain-trading company. "That's leaving less cash available to finance Brazilian agriculture."

The squeeze is expected to contribute to a 2% drop in Brazilian soybean production for the 2008-2009 crop year, according to the U.S. Agriculture Department. Steve Cachia, a commodities analyst at Brazilian consultancy Cerealpar, says next year's crop could be smaller than this year's if credit continues to tighten. Farm-equipment maker Deere & Co., of Moline, Ill., forecast Wednesday that farm-equipment sales in South America will fall as much as 20% next year, partly due to "the difficult credit situation in Brazil," said Susan Karlix, Deere's manager of investor communications, on an investor call.

Bunge, one of the world's largest soybean processors, has cut advance cash payments to Brazilian farmers 70% since the end of last year, according to company filings. Bunge, like other companies, makes advance cash payments and loans to farmers in exchange for future delivery of grain. "Basically, we are being more selective," said Stewart Lindsay, a Bunge spokesman, "so as to better manage our working capital on a global level and to be prudent in terms of risk in what has proven to be a volatile price environment."

ADM, of Decatur, Ill., and Cargill, of Minneapolis, say they have increased the overall amount of credit available to Brazilian farmers. Still, farmers say the loans aren't enough to cover their rising costs. Private financing for farmers has fueled a rapid growth in agriculture and infrastructure in Brazil's central-west region over the past decade, helping the country become one of the world's largest agricultural producers. Today, Brazil is the second-biggest producer of soybeans after the U.S. and accounts for a quarter of world soybean production.

Brazilian farmers have accumulated large amounts of debt over the years following a spate of poor crops and unfavorable exchange rates in the early 2000s. That debt load is making it harder for many farmers to take out new loans. The total cost to produce the three main crops in the state of Mato Grosso -- soybeans, corn and cotton -- is expected to increase 42% this year over last, says Michael Cordonnier, president of Soybean & Corn Advisor, a consulting firm in Illinois.

Now many farmers are rationing fertilizer and other supplies to save money. That could translate into lower yields. Farmers also are forgoing debt payments to free up cash. More than 100 pieces of farm machinery such as tractors and combine-harvesters have been repossessed by banks in recent days in Mato Grosso, Brazil's top soy-producing state, says Glauber Silveira, president of the Mato Grosso Soy Growers Association, known as Aprosoja.

Poultry producer posts $800 million loss
Embattled chicken producer Pilgrim's Pride Inc. expects to post a loss of more than $800 million in its fiscal fourth quarter and plans to continue talks with its lenders to restructure its debt. The company said Friday in a regulatory filing it was delaying filing its annual report for fiscal 2008 with the Securities and Exchange Commission due to ongoing talks with its lenders regarding temporary waivers and "related financial uncertainties."

The Pittsburg, Texas-based company had said Wednesday it reached an agreement with lenders to extend its credit lines until Monday. Pilgrim's Pride has already extended its temporary credit line twice since September, when it first said it wouldn't meet obligations for current loans. It has a $25.7 million interest payment due next week.

In the filing, Pilgrim's Pride put its loss for the quarter ended Sept. 27 at $802 million, or $10.83 per share, on sales of $2.17 billion. The loss includes a charge of $501.4 million, or $6.77 per share, primarily related to the impairment of goodwill at Gold Kist Inc., which Pilgrim's Pride acquired for $1.3 billion in early 2007. Additionally, the company is posting an income tax valuation allowance of $35 million, or 47 cents per share, against its net operating losses.

Excluding these items, the company would have lost $265.6 million, or $3.59 per share. That compared with a year-earlier profit of $33.2 million, or 50 cents per share, on sales of $2.11 billion. The company also said it expects to post fourth-quarter losses on feed ingredient derivative contracts of about $96.9 million, or $1.31 per share.

Pilgrim's Pride, like other food producers, has been hamstrung by soaring costs for animal feed - made with expensive corn and soybeans - and an oversupply of chicken that has lowered retail prices, making it impossible for producers to offset the higher costs. On average, analyst surveyed by Thomson Reuters forecast a quarterly loss of $2.06 per share on revenue of $2.05 billion. The estimates typically exclude nonrecurring items.

Looking ahead, Pilgrim's Pride anticipates recognizing losses on feed ingredient derivative contracts for the first quarter of fiscal 2009 of $13.4 million, or 18 cents per share, for feed ingredient derivative contracts that remained open at Sept. 27. The contracts were closed last month.

Cheap is the new black for retail
Americans may be descending on the malls today to hunt for bargains. But this is still expected to be a blue Christmas for many retailers and a gloomy end to what's turning out to be a dismal 2008. Nonetheless, some consumer stocks are actually thriving this year. Not surprisingly, almost all of the retailers that are in the black through Black Friday are benefiting from the weak economy because they tend to focus on thrifty shoppers. (And who isn't trying to be more frugal these days?)

Shares of Wal-Mart Stores have gained nearly 20% so far this year. That makes it not just the best-performing stock in the Dow in 2008 -- it's the only one of the Dow 30 that's up this year. The discount retailer is expected to post an 8% gain in sales and 10% increase in profits -- incredibly impressive in this economic environment. Big Lots a closeout retailer of bargain-priced merchandise, is also doing well as consumers pull back. The stock is up 10% this year and earnings per share are expected to increase 35%.

But the companies that are really taking off this year are the ones that offer consumers the most bang for their buck -- literally. Shares of the dollar store discount chains have been among the best-performers in the market in 2008. Dollar Tree has soared about 60% so far. Shares of Family Dollar Stores are up 50% while 99 Cents Only Stores has gained more than 35%.

Are these stocks still worth buying though? That's less certain. On the one hand, many are predicting that the economic malaise will linger into the early part of 2009. That means these companies are likely to rack up sales and profits increases that will outpace the rest of the retail industry. Wal-Mart, for example, is expected to report an earnings per share increase of 8% in its next fiscal year. Analysts are forecasting a 10% jump in profits for Dollar Tree next year.

But investors are already anticipating this sluggishness to continue and have priced that into the stocks of many of these discounters. So several now actually trade at luxury-like valuations when compared to other retailers. Wal-Mart, Family Dollar and Dollar Tree all trade at more than 16 times earnings estimates for this fiscal year, compared to an average price-to-earnings ratio of just below 13 for the retailing sector.

In addition, it's important to remember that investors often do a pretty good job of predicting economic recoveries well before they happen. Even though the next few quarters look bleak, there are growing hopes that the worst of this downturn will be over by late 2009. If that's the case, money may start to move out of hot stocks like these discount retailers and back into other more hard-hit consumer stocks, as well as beaten down banks and tech companies, which could all do well once the economy improves. So buyer beware. Cheap may be chic now. But the discount retailers are so in vogue on Wall Street that these stocks are no longer the "doorbuster" deals they used to be.

Holiday Sales Kick Off With Discounts to Lure U.S. Customers
U.S. retailers that lowered prices as much as 70 percent on the day after Thanksgiving may see sales eroded by steeper price cuts in what may be the worst holiday shopping season in six years. Bargains such as Best Buy Co.’s Toshiba Corp. satellite laptop computer for $379.99, a $270 discount, and Gap Inc.’s buy-one-get-one free holiday sweater offer may leave retailers with slowing sales even as they entice more people to visit stores during the holidays.

Retailers are looking for year-end demand to make up for stagnating sales and waning consumer confidence. The holiday months might account for a third or more of stores’ annual profit, and consumer spending makes up more than two-thirds of the U.S. economy, which is falling deeper into a recession. “The consumer is scared out of their wits and they’re just going to spend less,” Howard Davidowitz, chairman of retail consultant Davidowitz & Associates in New York, said yesterday. “The consumer is now saying ‘Unless something sells at a certain price, I’m done.’”

Individuals may spend an average of $616 on holiday gifts this year, down 29 percent from a year earlier, according to a Gallup Inc. poll. Retailers promoted “doorbuster” deals to attract customers on the Friday after Thanksgiving, said to be when retailers started to make their annual profit. A worker was trampled by customers and killed yesterday at a Wal-Mart Stores Inc. location in Long Island, New York, according to local police and the company. At least four shoppers were hurt at the store in Valley Stream, located about 13 miles (20 kilometers) from New York City, Nassau County Police said in a statement.

November and December sales at stores open at least a year may rise 1 percent, the smallest gain since 2002, according to the International Council of Shopping Centers, a New York-based trade group. Retailers used lower prices at earlier hours to win customers that were starting their holiday shopping with less than four weeks before Christmas.

Kohl’s Corp., the fourth-largest U.S. department store, opened at 4 a.m. Wal-Mart and Macy’s Inc. had a 5 a.m. start. Gap opened some locations on Thanksgiving Day. Wal-Mart, based in Bentonville, Arkansas, has bucked the trend, with its emphasis on low prices winning customers during the economic slump. The retailer is the only Dow Jones Industrial Average company to have risen this year. It’s gained 18 percent, while the 30-member index has tumbled 33 percent.

Discounts on the Friday after Thanksgiving, called Black Friday, pulled in consumers who felt the pinch of the economic slump and higher fuel prices earlier this year. Crowds at the Woodfield Mall in Schaumburg, Illinois, today “gives me optimism that that the 2 percent growth I’m forecasting can be reached” during the holiday period, Jay McIntosh, president of Consumer Foresight LLC, a Chicago-based consulting firm, said today in a Bloomberg Television interview.

Under-30 adults, who may not have been hurt as much as older consumers by stock-market declines, were out shopping, McIntosh said. “Virtually every store I walked by was crowded,” McIntosh said. “The small specialty retail stores were crowded. Last year, they weren’t.” Malls operated by Taubman Centers Inc. saw a similar presence of young shoppers, spokeswoman Karen Mac Donald said. The Fairlane Town Center mall in Dearborn, Michigan, had more early and younger shoppers this year, Mac Donald said in an e- mail. About 75 lined up at the Aeropostale location by 4:30 a.m.

Fitness personality Richard Simmons, wearing red-and-white- striped very short shorts, sneakers and a red muscle shirt with fluffy white Santa trim, bounced around the outside of Macy’s in New York’s Herald Square early yesterday morning, where crowds mobbed every entrance in advance of its opening. Richard Feijoo, 21, and his twin brother Jesus from Brooklyn were waiting at the front of the line at Herald Square and were shopping for themselves.

“It’s low prices, a good store and it’s Black Friday, so we’re here early,” Richard said. “Jeans, Levi’s, only clothes. I go shopping at Macy’s in Brooklyn so I know exactly what I’m looking for. There were 5,000 people waiting to get in, Macy’s Chief Executive Officer Terry Lundgren said in a Bloomberg Television interview. “A lot of folks are walking out with bags,” Lundgren said. “We got them in with great values, and what I really hoped is that they will spend more of whatever they’re going to spend at Macy’s, even if it’s less than last year.”

Americans cut spending by 1 percent last month, the biggest decline since the 2001 recession. After adjusting for inflation, spending was down for the fifth straight month, the longest streak since 1990-1991, according to Commerce Department data.

Toys “R” Us Inc., the largest U.S. toy-store chain, is putting “very aggressive” promotions in place to draw in shoppers, Chief Executive Officer Gerald Storch said in an interview. “We know that value is very important in this economic situation and we’re determined to be aggressive throughout the holiday season in offering that value,” Storch said in a telephone interview.

Chinese exploit western job losses
Out-of-work finance professionals in the UK and US have a new reason for optimism about their employment prospects – especially if they speak Mandarin.
Chinese financial institutions are set to exploit the widespread job losses in western financial centres as a result of the credit crunch by next month embarking on a hunt for financial experts willing to relocate.

The Shanghai Financial Service Office has told state media the city is sending a delegation to New York, Chicago and London to recruit specialists in risk management, asset management, product research and development, macro­economics and policy analysis. The head of human resources at the office said at least 27 financial institutions in Shanghai, China’s commercial and financial hub, had listed more than 170 vacancies specifically targeting foreigners.

The global financial turmoil has led to tens of thousands of job losses in financial services. London and New York have been hit especially hard, while many of those still in employment fear for their future. But the salaries on offer in China are unlikely to meet international standards and a preference for those who understand and speak Mandarin Chinese will probably rule out many potential candidates.

In addition, China’s unique political environment, in which the Communist party exercises ultimate control over all aspects of the financial, legal and commercial systems, means foreign passport-holders are unlikely to be given senior positions in state-run institutions. China Investment Corp, the country’s sovereign wealth fund, launched a global recruitment drive earlier this year but was unable to match salaries on offer in the City or on Wall Street. Shanghai officials said organisations interested in recruiting in the UK and US included the nascent China Financial Futures Exchange, the Pudong financial district government, and state-run securities agencies, insurance companies and banks.

The delegation will also try to recruit an assistant to the president of Shanghai Financial University, a chief economist for the SFU’s International Finance Research Institute and a dean for its International Finance and Insurance School. Academic posts are more likely to be offered to foreigners as such positions are considered less politically sensitive. All senior managers above a certain level at state companies are appointed by the secretive Communist party personnel department.

Economy warning from China leader
China's President Hu Jintao has warned that the global financial crisis could weaken his country's competitiveness. Mr Hu gave his warning at a meeting of the Politburo and his words have been made public by the state media. As growth slows, Mr Hu said that in the coming period China would starkly confront the effects of the international financial crisis.

And he warned that the economic situation was a test of the Communist Party's ability to govern. "External demand has obviously weakened and China's traditional competitive advantage is being gradually weakened," Mr Hu said, according to the official People's Daily newspaper. "Whether the pressures can be turned into a driving force and the challenges turned to opportunities ... is a test of our ability to control a complex situation, and also a test of our party's governing ability," he added.

Recent figures show that the government has cause to be worried. Growth has slowed to 9% - and predictions say that it may drop to 7% or 8% next year. These are dazzling figures for some economies, but there's a widespread belief - even a superstition - in China that growth needs to stay above 7% in order for social stability to be maintained.

This past week the central bank carried out the biggest cut in interest rates in more than a decade. And earlier this month, the government announced a stimulus package of $586bn (£380bn). This is enough, the Communist Party will hope, to get this country through the next year or two.

Russia lets rouble drop twice in one week
The Central Bank of Russia let the rouble weaken by 1 per cent against its euro/dollar basket on Friday, the third time it has allowed the currency to depreciate this month. The rouble is tightly managed against a basket of 55 per cent dollars and 45 per cent euros by the Russian authorities.

Up until August, the rouble had been steadily appreciating, as rising commodity prices boosted mineral-rich Russia’s current account and fiscal surpluses. However, since then the rouble has come under intense pressure as falling oil prices threaten to wipe out the country’s current account surplus and turmoil on financial markets has prompted investors to flee emerging markets.

The Russian authorities have been forced to use the country’s foreign exchange stockpile to defend the rouble from speculative attack. This has seen its currency stockpiles shrink by $150bn, although they still stand at about $450bn according to the latest figures. On November 11, the Russian central bank allowed the rouble to weaken by one per cent, taking it down to 30.71 against its basket. A similar move on Monday allowed the rouble to drop to 31.01, while on Friday the authorities allowed the currency to fall to 31.28.

The Russian central bank has stated that the rouble will be allowed to depreciate, but only gradually. Tatiana Orlova at ING Financial Markets said the small devaluation moves are happening quicker than she expected. One reason for this could be the recent weakness of the dollar against the euro, which could mask the rouble devaluation from ordinary Russians, she said. “This is indeed good timing as due to the relative dollar weakness. Dollar/rouble rates in exchange offices are not rising and thus the population may overlook the move.”

Also, she said the Russian authorities were likely to have been alarmed by the release of October trade data, which showed a collapse in exports that halved the monthly trade surplus. “The current account must be rapidly approaching the red, and the central bank is rushing to weaken the real rouble exchange rate to prompt a correction in imports,” said Ms Orlova.

Analysts said the small, incremental moves in the exchange rate were doing more harm than good. Instead of settling the market, the policy was giving rise to rampant speculation about the size and timing of the central bank’s next move. Lutz Karpowitz at Commerzbank Bank said a significant slide in the rouble could no longer be avoided. “Had the central bank decided on a substantially bigger downward step, there would have been at least the chance that the market would accept the new level,” he said. “All the signs now are that the central bank will have to keep pumping vast amounts of currency reserves into the market to defend the new level.”

Market Burns While Schools Keep Fiddling With Swaps
Swaps live. Yes, states and localities across the nation are paying millions of dollars to get out of the interest-rate swaps and other derivatives that they engaged in during the past decade. Yes, Jefferson County, Alabama, has been toying with the idea of bankruptcy, its finances in ruins because of an infatuation with variable-rate debt and interest-rate swaps. Yes, the federal government is looking into the whole reinvestment-of-bond-proceeds business, which includes guaranteed investment contracts, swaps and derivatives. “Looking into” is probably too mild a term for the high- profile investigation.

And yes, JPMorgan Chase & Co., once one of the biggest purveyors of swaps and derivatives in public finance, said on Sept. 3 that it was getting out of the business. It seems the risks of selling these things to local governments are greater than the rewards. Well, I have news for you. Don’t bury swaps. They’re not dead yet.

What? Is this possible? There are still some municipalities getting involved in swaps and derivatives, judging from rating-company reports. Most seem to be planning or executing exit strategies. Some are deciding what to do about contracts they entered into years ago. Still, that any municipalities are even contemplating their use, at all, is amazing and appalling.

Can’t you folks just say no? I’m sure your bankers are coming in and saying, “Hey, you know what, we can put together a transaction that makes a lot of economic sense right now.” And there are probably some financial advisers who are even saying how much money you can make today by selling an option for a swap to be entered into at some point in the future.

Does the experience of the last nine months or a year mean nothing? Doesn’t it at least give you pause? Shouldn’t you get in touch and talk it over with some of your fellow government finance officers, who have had to unwind their nightmarish involvement in the swaps and derivatives market? Terminating their runaway swaps is costing cities, towns and school districts millions of dollars right now. Many of the public officials involved are ashamed and are trying to keep a lid on it all, I realize, especially because everything about the swaps market is supposed to be a big secret. Surely some of them will talk about it, especially the ones filing lawsuits.

I like to read new-issue ratings reports (it’s an acquired taste) from the companies that grade municipal bonds. I was especially taken with what Moody’s Investors Service said in its analysis of a Pennsylvania school district’s rating earlier this month. This particular district was refinancing some debt and retaining two interest-rate swaps with Royal Bank of Canada.

In 2003, the state of Pennsylvania gave its municipalities the power to use swaps as long as they hired an independent financial adviser to help them figure out the deals. A 2008 story in Bloomberg Markets magazine showed that this was like letting the fox loose in the henhouse. It seems that most of the school districts that were examined paid far too much for their swaps.

That’s easy if you don’t really know what you are doing, and most municipalities don’t, when it comes to these kinds of transactions. The story’s conclusions were so alarming that I suggested the state prepare a comprehensive study detailing just how the state’s school districts have fared with their use of swaps and derivatives since passage of the 2003 law.

Not very well, I suspect. Moody’s nevertheless said in its rating report that it “expects these tools to become common for Pennsylvania school districts for asset and liability management,” adding that there was “little state supervision” of their use. Moody’s continued: “The use of swaps will require credit monitoring given the increasingly complex nature of these instruments. Moody’s will also continue to base its analysis on the amount of exposure and our assessment of district management’s understanding of the complexities and additional risks involved in swaps.”

That’s nice. Moody’s thinks school districts’ use of swaps will become “common.” This is too funny to be a tragedy, too sad to be a farce.

In hard economic times, a ripple effect takes place
Only five customers sat in Tom's Restaurant at 2701 E. 130th St. at lunchtime on a recent weekday. Tom's used to be packed with workers from the nearby Ford plant -- but more than 800 workers were cut in recent weeks, and times are hard. "I've never seen anything like this," said restaurant manager Karla Alevar, 24, refilling a coffee cup. Alevar has already cut hours for her staff, and may have to lay some people off. "I hope it doesn't get any worse.

Tom's sleepy lunchtime is just one sign of a local economy taking a plunge not seen in over a decade. With jobless claims in Illinois at 7.3 percent, national home sales at the lowest level in nearly 18 years, and consumer spending falling at the fastest pace in 28 years, the future looks bleak, even with the government rolling out new bailout programs. Interviews with workers, salesmen, and service providers in Chicago and the suburbs show how one piece of bad news can infect multiple pieces of the economy: Somebody won't buy a car, an auto worker gets laid off, the auto worker can't go shopping, and the businesses she patronizes start to suffer. "It's like dropping a pebble into the water," said Dave Schoenecker, secretary/treasurer of Chicago Local 551 of the autoworkers union. He has been counseling laid-off workers from the Hegewisch plant. "It keeps getting larger and larger. There's nobody's that's not going to be touched by this."

The credit crunch caused by the subprime mortgage lending crisis has caused consumers to cut back both on large purchases, like cars and homes, and small purchases, like restaurant meals and haircuts. Alevar, for example, was looking to buy a Ford, but had trouble getting credit. "Customers are still coming in, but they're not getting the loans they need," said Scott Ellsworth, chief operating officer of Garber Automotive Group, which had to shut down its Midlothian Sunrise Chevrolet dealership Saturday. "They're holding onto their vehicles a little longer." Even people with good credit are seeing such high interest rates they don't want to buy, said Herb Bucknor, a salesman at the Sunrise dealership. "My credit is over 800 -- if they tell me 8 percent interest, I'd tell them to go to hell," said Bucknor, 66, who figures he'll have a "little less wine" at the House of Hughes restaurant now that he's losing his job. Since she was laid off from the Ford plant, Adreain Bibbs, 25, of Chicago, said her lifestyle has "totally changed." "I can't do anything," said Bibbs, who is skipping haircuts and new clothes. "My unemployment [benefits] is not even half my pay."

Fearing a repeat of the Great Depression, the federal government has been willing to pledge trillions to turn the economy around. The Federal Reserve came out with two programs Nov. 25 that would provide up to $800 billion to get more loans flowing in areas like mortgage lending, credit cards, auto loans and small business loans. This is on top of the billions already pledged to help Citigroup, Fannie Mae and Freddie Mac, and other financial organizations. President-elect Barack Obama has said he will work with Congress on a stimulus package to create 2.5 million new jobs over the next two years -- a plan that could cost up to $700 billion.

Meanwhile, the three big American automakers have a Tuesday dealine to submit a bailout plan to Congress. The failure of one or more of the big three could cost 2.5 million jobs in just the first year. The crisis wasn't hard to predict, with housing prices hitting unrealistic highs two years ago, according to Stan Dye, 48, eating his chili at Tom's Restaurant. Dye is a manager for an oil company contractor which recently had to lay off 25 people. Dye thinks that whatever the government tries, it will take at least two years for the economy to recover.

"Nobody's safe," said Dye, noting the thousands of steelworkers in northwest Indiana. "With the automakers getting shut down the way they are, the steel industry is going to go down. Once the steel industry is gone in this area, there's going to be so many people out of work it will be unfathomable."

Fears over end to zero credit as card firms can now tell if you are a 'rate tart'
Millions of credit card users could be denied cheap credit after new rules come in to let card firms share data about their customers, it is feared. So-called "rate tarts", who legitimately move their debts around from card to card to keep down their cost of repayments, could soon find themselves shut out of the best deals, a leading expert has warned. From Monday, the five largest credit card providers have started a voluntary agreement to share more details about each others customers.

Previously, card firms shared data about customers not paying on time, what their limit was and their balance. This helped card firms "score" customers' creditworthiness and allowed them to reject people with a poor credit history. Now Barclaycard, Capital One, GE Money, HBOS and MBNA have promised to share details about whether customers are on a promotional deal – such as a 0 per cent card – and whether a customer pays off the card in full, or just makes the minimum repayment. Martin Lewis, founder of the consumer champion site, has warned that this could allow credit card companies to weed out safe but unprofitable customers, who endlessly switch their debts from one 0 per cent deal to another.

"The new rules are designed to crack down on irresponsible lending, but I would not be surprised if card firms use it to crack down on the millions of customers that in recent years have quite legitimately played the system to bring down their cost of credit." Egg faced a backlash earlier this year after it withdrew credit from 160,000 of its customers, most of whom it later emerged repaid on time but failed to generate enough profits for the company. The fear is that those sort of customers might find it hard to take out a new card. Apacs, the trade body that represents credit card companies, denies that the rules will be used to weed out either rate tarts or unprofitable customers. A spokesman said: "The agreement is that data will not be used for anything other than to help customers who might be getting into trouble."

Unpaid Medical Bills - The Other Credit Crunch
Hospitals and patients alike are struggling with unpaid medical bills. A look at the drastic new measures both sides are taking to survive. Julie Basem was 20, living in New York, and pursuing her dream of becoming a Broadway dancer when a knee injury knocked her off stage. She had insurance, but it barely covered her treatment, and her savings were meager. The bills piled up—some $40,000 worth—and ultimately, bankruptcy became her only option. "Emotionally, it was very hard, because I didn't think that at that age anything was ever going to happen," Basem says. "I didn't really know how to deal with it."

If her story sounds familiar, that's because you've probably seen it on TV: she's part of a series of AARP ads that use real and wrenching bankruptcy stories to shed light on America's medical-debt crisis. The AARP campaign launched in July, but four months later it's resonating more than ever, as the economic meltdown deepens. The mortgage crisis may have dominated the front pages lately, but people strapped for cash are likely to stop paying their medical bills long before their homes go into foreclosure. A rise in this often-unavoidable debt has threatened the health of patients and hospitals alike, and both constituencies are taking drastic new measures to survive.

For many people, the struggle with rising health-care costs has already reached a critical point. More than two in five American adults under 65 had trouble paying their medical bills last year, according to a recent study by the Commonwealth Fund, a New York-based health policy research group. Of those people, 39 percent had used up all their savings, 30 percent had racked up credit-card debt and 29 percent said medical bills left them struggling to pay for basic necessities like food and heat.

Doctors and hospitals are also struggling to survive the health-care credit crunch: they endure some $60 billion in unpaid medical bills each year, according to a report last year from the consulting firm McKinsey & Co. With out-of-pocket health costs rising (the $250 billion price tag in 2005 is expected to exceed $420 billion by 2015), the percentage of unpaid bills will likely increase as we head into a new year and a new economic reality. A report released by the American Hospital Association (AHA) last week shows that over the last three months, elective medical procedures have dropped 6 percent below projected levels, while admissions are down 9 percent. Unpaid care is up by 8 percent.

With their own solvency at stake, hospitals are doing everything in their power to collect on unpaid bills. That, according to the Boston-based advocacy group the National Consumer Law Center, can mean suing patients and their spouses, failing to explain charity care options, offering credit or loans and using collection agencies and the threat of bad credit to coerce patients into settling up. A number of big banks now offer credit cards exclusively for medical procedures—and a growing number of hospitals have started checking patients' credit scores while they sit in the waiting room.

All of those tactics are perfectly legal, as long as hospitals comply with a federal law that requires them to treat anyone who comes in with an emergency—regardless of their ability to pay, says Carol Pryor, a senior policy analyst with the Access Project, a nonprofit health-advocacy organization. But how the law defines an emergency—something that could be potentially life-threatening—can be different from the way many Americans would define it when it comes to their own health. Like, for example, Dearfield, N.H., resident Maria McNamara, who suffers from a degenerative eye condition called retinal dispigmentosa and is uninsured. Her disease caused blindness in one of her eyes, but until recently she could still see and get around with a set of eyeglasses.

A year ago, however, she started losing sight in her other eye, too. Doctors discovered a retinal tear, and she underwent two surgeries at a local hospital to repair it. The hospital waived the $17,000 fee because McNamara and her husband are both retired.

But the surgeries didn't work, and McNamara was referred to a specialist in Boston, where she had two more procedures, totaling some $30,000. When McNamara showed up at Tufts Medical Center for her third surgery appointment, she was told she would only be treated if she paid up front—because she still owed for the prior treatments. Her family held a fundraiser to pay for the procedure, but during the surgery, doctors discovered another tear. Now she needs another procedure. "It's sad, because you work your whole life just trying to stay ahead of the game," says the 55-year-old. "Without my sight, I can't work. And paying off a $30,000 medical bill is just not possible."

Massachusetts does have a $448 million state financial-aid program, officially called the Healthcare Safety Net, that patients can apply for, to help reimburse hospitals for some of the cost for uncompensated care. But because McNamara is a New Hampshire resident, she doesn't qualify. And though Tufts said in an e-mail to NEWSWEEK that they've provided nearly $159 million in medical charity care over the last five years, McNamara says she hasn't been offered a dime. A Tufts spokeswoman told NEWSWEEK that patient privacy laws barred them from confirming McNamara as a patient or providing details about her care. "The issue of the uninsured is a matter of great concern for our country, and we and other hospitals are committed to finding long-term solutions," the hospital said by e-mail (See Editor's Note).

McNamara, meanwhile, has started getting collection notices in the mail, and she worries she might lose her home. The Fair Credit Reporting Act allows medical providers to report medical debts to credit reporting agencies but forbids them from indicating what treatments were involved. But rather than report delinquent accounts to credit agencies outright, hospitals often send them—or, ever more frequently, sell them—to outside collection agencies, which are more than happy to do the dirty work for them. That means threatening phone calls, lawsuits—and, in some states, agencies even going after spouses or grown children. (According to a 2003 Federal Reserve study, 52 percent of collection records that appear on credit reports are related to medical debts.)

The American Hospital Association provides guidelines on debt-collection practices—recommending that each patient receive financial counseling with appropriately trained staff, and that costs be reasonable. A number of states, meanwhile, have taken action to make sure such guidelines are mandatory. In 2007, the Minnesota attorney general signed an agreement with 50 hospitals on debt-collection practices that included a promise to offer discounts to uninsured patients with limited incomes. In New York, a 2006 law allows patients to pay in installments, and prohibits creditors from foreclosing on a patient's home. California hospitals must provide uninsured and underinsured families a 150-day period during which they can negotiate their bills before they can be sent to collection.

Those laws are good, says Chi Chi Wu, an attorney with the National Consumer Law Center, but they're by no means standard. In fact, one NCLC study showed that more than 70 percent of patients with medical debts are never offered financial assistance from their providers. As James Bentley, a senior vice president for the American Hospital Association, points out, growing medical debt and the economy have put hospitals in a situation where they not only have a responsibility for a patient, but to "maintain themselves as viable and operable within the community." "What we worry about," says Bentley, "is that hospitals will find themselves in a position where it's hard to maintain the policy that they've had."

With viability in mind, some hospitals are checking patients' credit scores while they're being treated. They say the credit reports help them determine which patients might qualify for financial assistance, and may even minimize losses. (Last year, nearly 5,000 community hospitals provided uncompensated care costing $34 billion, according to the AHA.) But while the credit checks are legal, they're not always welcome. Many advocates worry they could impact the quality of care—or worse, they say they've heard cases where providers have coerced patients to use available lines of credit they can see from the reports. "Our advice is that [a hospital] should always get [a patient's] permission," says Bentley. "I'd like to say that's happening every place every time, but I can't guarantee that."

Hospital administrators say they've been forced to undertake such steps in part because of the growing cost of caring for so many uninsured Americans—now numbering almost 46 million, according to Census Bureau figures released in August. But it's also the fact that those who do have employer-backed health care—more than half of all Americans—are paying more and getting less. Annual health-insurance premiums for families now average $12,680, according to the Kaiser Family Foundation—more than double the amount in 1999. Of that, families contribute about a quarter out of pocket, not including copays and deductibles.

In April, even before the latest stock meltdown, Kaiser reported that more than a quarter of Americans have faced serious problems paying health insurance or medical bills as a result of recent changes in the economy. To cut costs, some are going to extremes: not filling prescription drugs, cutting pills in half, postponing doctors appointments or skipping them altogether to avoid the extra fees. (According to the results of the Commonwealth Fund's 2007 biennial survey, released in August, 45 percent or respondents said they'd delayed or avoided care for fear of mounting costs.) "People aren't just having trouble paying bills, they're one bill away from economic disaster," says the AARP's Nancy LeaMond, the head of the powerful lobbying group's social impact division and Divided We Fail effort, which helped produce the health-care ads. "The fear of that is just palpable."

In many cases, it's the fear of losing everything that's made putting medical debt on a credit card an increasingly popular last resort. Americans now charge an estimated $45 billion in out-of-pocket medical costs to credit cards, according to McKinsey—a figure that's expected to triple by 2015. With that in mind, companies like Citigroup, GE Money and Capital One—often endorsed by individual physicians' practices and hospitals themselves—are hawking new lines of credit to be used exclusively for medical procedures.

Doctors like the idea of medical credit cards because it allows them to get paid immediately; consumers see them as a quick and easy way to deal with debt. (Many of the cards have no annual fee, and low or no interest if customers pay bills within a certain schedule.) But advocates point out that the cards' low interest rates can jump above 20 percent after an introductory period expires, and if a payment is late, interest rates can sometimes apply retroactively. What's more, advocates say medical staff aren't always doing an adequate job of explaining the card's terms and conditions. And putting bills on a card can lesson a person's leverage to negotiate directly with providers.

In California, the cards caused enough of a stir that state legislators introduced a bill last summer aimed at prohibiting the predatory marketing of high-interest credit for dental care. The bill was vetoed by Gov. Arnold Schwarzenegger, but CareCredit, a GE card, was mentioned in a case where a patient said she was signed up for $8,000 worth of dental work while sedated. "Our biggest concern is that people are making financial decisions at a time when they're feeling scared, vulnerable and concerned," says Mark Rukavina, executive director of the Access Project.

Evanston, Ill., resident Ann Cole doesn't have a credit card, but she's definitely vulnerable. At 57, Cole is five years away from receiving Social Security, eight years from Medicare, and even though she's been diagnosed with multiple sclerosis, her applications for disability have twice been rejected. Her MS makes having a full-time job exhausting, so she's worked out an arrangement with her daughter: she baby sits for her grandkids for 20 hours each week, and her daughter pays her $250.

But between Cole's $750-a-month rent, the $50 monthly student-loan payment, gas costs and rising food prices, "there's nothing extra," she says. "I don't go out, I barely drive and still, at the end of the month, there's barely enough for food. If I need something I normally don't have—like a new Brita or cleaning supplies—it's just outrageous. It's like, 'Oh, my birthday's coming up, maybe I can get shampoo!'"

Cole qualifies for free health care through a local clinic, but she has $5,000 outstanding debt from an emergency hospital visit—the result of a seizure, during a trip to Colorado last year. "When I got sick with MS I declared bankruptcy, and it felt horrible then," Cole says. "Now it's 15 years later and I may have to do it again, and I'm just like, 'Oh my God'."

Unless people like Cole start seeing meaningful reform, a deteriorating economy may force many to choose. Not between medical providers but between their financial health and their physical well-being.

Editor's Note: Since this story was published, Tufts Medical Center has offered to waive all of Maria McNamara's medical fees at the hospital, including that of an upcoming laser treatment she has scheduled for Dec. 19. She hopes that treatment will be the last one she needs to regain her sight.

When the Downturn Sailed Into Savannah
DOZIER COOK founded the construction crane company that bears his name here 35 years ago. He’s weathered economic scares over the years — the wrenching recessions of the mid-1970s and early ’80s come to mind — and he’s confident that the current downturn will be no worse. His words ring with optimism. “We have people lined up to buy, and we are losing deals because we don’t have enough cranes to sell to them,” he says, adding that even if the market “gets bad here, we sell cranes in Russia, Dubai, you name it.” But Robert B. Briscoe, the chief financial officer of Dozier Crane and Machinery Inc., quietly contradicts his boss.

“We are battening down the hatches and being cautious,” he says, ignoring his boss’s frown. “Before the credit crunch we were not as cautious as we are now. We want our bankers to know that. They would be spooked by anyone who showed too much optimism today.” And so it goes, as a crisis born in the mortgage collapse and sent into overdrive by Wall Street’s financial disaster now spreads to the broader economy. In this port city, near the mouth of the Savannah River, the downturn is chipping away at expansion and prosperity, dimming a 20-year boom. The unemployment rate in Savannah has risen sharply, just as it has across the nation. And cutbacks in output in midsize cities like Savannah are contributing to an accelerating decline in the country’s gross domestic product.

“You are seeing a fairly widespread recession, with all major components of demand now in decline,” said Brian Sack, an economist in Washington for Macroeconomic Advisers L.L.C., a consulting and forecasting firm. It expects the gross domestic product to decline in the fourth quarter at an annual rate of 4 percent, down sharply from the contraction of 0.5 percent in the third quarter.

For his part, Mr. Cook, 62, remains an assertive, upbeat commander of a company that buys truck-mounted cranes new — at $450,000 or more a pop — and then rents or resells them. But four months ago, as economic shifts became more dramatic, he hired Mr. Briscoe, a 56-year-old former banker, to keep himself and his staff grounded in reality. In addition to a hiring freeze and other cost-cutting measures, Mr. Briscoe explained, the company has cut back sharply on the number of new cranes it will buy next year. It made that move largely at the direction of its bankers, who had grown leery of financing an expansion.

Even so, buoyancy still holds sway in Savannah. During the Civil War, the relentless Union general, William T. Sherman, spared Savannah in his devastating march to the sea. Residents here think that the financial whirlwind will also ultimately pass them by. On Wall Street and in Washington, where the crisis is more palpable, comparisons with the Great Depression are frequent. In interviews here, however, that association was never made. Even those squeezed the most said they expect this recession to be no worse, or not much worse, than others since World War II — ending in six months, by Mr. Cook’s estimate; by late next year, according to others; or, by still others, 18 months at the longest. “The belief in an early rebound is real,” said Michael Toma, an economist at Armstrong Atlantic State University here. “The history of our economy in Savannah has been slow, steady growth since 1990, and we are conditioned to believe this will resume.”

STATELY antebellum mansions and Victorian homes, many of them newly renovated, fan out from the river here, clustering near rectangular plazas originally laid out in 1734. Savannah is proud of that heritage, and locals are determined to try to ensure that any economic malaise be short-lived. No one has a greater stake in keeping the recession mild than Doug J. Marchand, executive director of the Georgia Ports Authority, which operates the port here, a mile upriver from the Atlantic Ocean. It is now the fifth-largest port on the East Coast, as measured by cargo tons; most cargo is shipped in huge steel containers. But the tonnage in those containers, rising at an annual rate of 10 percent or more annually through most of the last 20 years, has lately “flattened,” as Mr. Marchand put it, to almost no rise at all — the first time that has happened in his 13 years as port director.

That unanticipated slowdown caught Savannah off guard. The city has four million square feet of newly built, never-occupied warehouse space, intended primarily as temporary quarters for the growing flow of imports. Big as hangars, these buildings sit shuttered and alone in industrial parks sprouting weeds. Mr. Marchand helped ignite the building boom. In a 2004 “call to action,” a speech that business and government officials still cite here, he declared that Savannah needed to make room for a vast new crop of warehouses to accommodate the cargo surge. Savannah had benefited in recent years, he noted, as cargo shippers shifted delivery routes away from California and to the East Coast, in order to escape possible strikes near Los Angeles and to avoid cross-country rail delays. Huge retailers like Wal-Mart, Home Depot, Lowe’s, Pier 1, Ikea and Target already had warehouse and distribution centers here. Mr. Marchand said Savannah needed even more.

Developers, caught up in the euphoria of the real estate bubble, responded quickly to Mr. Marchand’s invitation, buying and clearing land for new industrial parks and putting up giant warehouse and distribution centers on speculation. They were counting on companies to quickly occupy the completed buildings. That happened initially, but now demand has petered out. Mr. Marchand, saying the setback is temporary, has nevertheless frozen hiring at the port. He is going ahead, however, with an expansion of its facilities. In an interview, he ticked off the multimillion-dollar projects under way: four new ship-to-shore cranes have been ordered, along with a dozen smaller ones; rail facilities along the docks are being upgraded; and work is progressing on a system for moving trucks through the port more quickly. “I don’t know how long this downturn will last, but I don’t think it will be a protracted period of time,” Mr. Marchand said. “So I think it makes sense to get ourselves ready for more strong growth once this recession ends.”

WHILE Mr. Marchand and many others await an upturn, Savannah’s economy deteriorates. The unemployment rate in the three-county metropolitan area has jumped to 5.7 percent from 3.9 percent a year earlier. Analysts attribute the jump to hiring freezes and a lot of little job cuts. With home sales down 24 percent, the local Coldwell Banker has watched its army of real estate brokers, the largest in the city, dwindle to 180 from 240 last year. “They just went into other businesses or stopped working altogether,” said Connie F. Ray, chief executive of the Coldwell operation here, adding that through last year brokers had been averaging $40,000 to $50,000 annually in commissions.

Manufacturers still have a big presence here, employing 15 percent of greater Savannah’s 171,000 workers, but factory employment is shrinking. Georgia-Pacific, for example, which makes paper towels, napkins and toilet paper at a mill here, no longer hires dozens of contract workers. They had been used as a flexible work force, a supplement to the 1,200 regular employees, to step up production during demand surges, now nonexistent. “It is prudent not to bet on demand at this time,” said Russ McCollister, a Georgia-Pacific vice president. He notes that as output has tapered off, some machines have been taken out of production, and workers are no longer assigned, or brought in, to maintain them. “We invest in maintenance for those machines that are running,” he said. “It is little choices like that that get us through these times.”

THE much smaller Chatham Steel Corporation, which buys steel in bulk directly from mills and cuts it into beams, pipes and plates for customers, has gone through a similar weakening in demand since late summer. It has also reduced its staff since last year, to 140 from 146. Even so, Chatham’s president, Bert M. Tenenbaum, is upbeat. His immigrant grandfather founded the company, which is now a division of Reliance Steel and Aluminum. Mr. Tenenbaum was a big supplier of steel for shopping-center construction, and with that business drying up, he talks of a coming boom in oil and gas pipelines, refinery upgrades, hospital construction and, if the government comes through with significant infrastructure spending, school and wastewater plant construction. “We think the economy will come back sooner rather than later,” he says. He has cut back on inventory, meanwhile, reducing his purchases from steel mills. Like so many others, he shaves costs in little ways, putting speed governors, for example, on his trucks so they can’t go over 68 miles per hour. “That has translated into a 5 percent saving in fuel, which is huge for us,” he says.

And so it goes across the Savannah economy: falling retail sales, fewer hotel bookings, a canceled convention, layoffs at Memorial Hospital, an announcement late this month that Great Dane Trailers, a major manufacturer, would soon close its factory here, and weakened tourism in a city that over the last 15 years has built an industry out of visits to its historic downtown. The tourists are still coming. With gasoline prices falling, they’ve been driving here in growing numbers from Southeastern states, according to the Savannah Area Convention and Visitors Bureau. But tourists are no longer big spenders. Elizabeth Patterson said business at her cigar and novelty store on Bull Street, in the middle of the historic district, has slowed. She said her competitors had seen a slowdown as well.Her top seller once was a $4.75 Nicaraguan cigar, the Savannah Bulldog (also the name of her store). Cigars are still 50 percent of her revenue, which she says was $400,000 in 2007. But revenue is down 30 percent so far this year, mainly because tourists are buying cheaper cigars. They’re also purchasing fewer of her other big seller: novelty chess sets, at $35 and up, with pieces modeled on Walt Disney characters. “They come in and ask, ‘What kind of cheap cigar do you have,’ ” she says. “Or they say, ‘Just looking.’ There is a total softening of our sales.”

Not surprisingly, the city government’s tax revenues have fallen, particularly since August, because of slowdowns from sales and lodging taxes. With home prices and construction down, property tax revenue is no longer rising at its old, brisk pace, and state aid has been trimmed. Stuck with a shortfall, the city government has postponed until May a scheduled 2 percent pay increase for its more than 15,000 employees, including police officers and firefighters. It has also delayed for a year a host of capital projects, from building a new firehouse to rehabilitating storm sewers. “We’ll still fill potholes,” says Christopher Morrill, the assistant city manager, “but we won’t repave any streets.”

From his perch as chief executive of Savannah Bancorp, John C. Helmken II, a 45-year-old native of this city, contributes to the slowdown, although reluctantly. Most of his clients are small businesses, and they are hesitant to expand. Mr. Helmken, like other bankers here, encourages that hesitation. He defines the bank’s lending practices as “defensive.” Consumer lending is moribund, and with foreclosures having increased, home buying is, in effect, discouraged. “We still have programs where the purchaser can get by with as little as 5 percent down,” he says, “but it is usually 10 to 15 percent and borrowers must verify they have adequate incomes.” In any event, mortgages are only 6 percent of the bank’s current loan portfolio of $850 million. The bulk of its lending is to small companies, but in the current downturn, the bank is focusing on professionals like lawyers with established practices and steady incomes who are opening or expanding an office. “Dentists fall right into this preferred group,” Mr. Helmken says. “It was always a large part of our client base and now we are pushing it more.”

Dozier Crane is a longtime Savannah Bancorp client, with a line of credit exceeding $8 million. Mr. Helmken describes it as a healthy company. But when Dozier said it would draw down its entire credit line to buy more cranes, Mr. Helmken balked. There were discussions, particularly with Mr. Briscoe, the Dozier C.F.O. In the end, Dozier borrowed less than it originally intended and bought fewer cranes — which in turn reduced production at the American manufacturers of the cranes, which in turn bought less from their suppliers, and so on up the line, effectively weakening the broader economy. “He said and we said, this is the right thing to do, given what is going on in the world,” Mr. Helmken said. “We asked the questions and he confirmed that Dozier would take a more cautious step.”

THERE are still islands of strength in Savannah’s economy. Gulfstream, which has its headquarters here, along with its research facilities and a big factory, is expanding and adding workers. It came into the financial crisis with a backlog of more than 500 orders for its luxury jet aircraft, a majority from wealthy individuals and companies located overseas. Even without another order — and Gulfstream says orders are lagging — the backlog is enough to keep production going for about three years. The Savannah College of Art and Design, with 8,000 students scattered in classrooms across the city, is also going strong. Five hotels and office buildings, started before the crisis, are still under construction. Fort Stewart, the huge Army base outside the city, is expanding, adding 3,800 soldiers to the 19,000 already stationed there, many of them living with their families on Savannah’s south side. Mr. Helmken says he sees evidence of their contributions to Savannah’s economy, or at least evidence of the south side’s contribution. “When I go by a Red Lobster inn on the south side on a Friday night,” he says, “there are people lined up waiting to be seated.”

But American cities depend heavily on corporate investment for expansion and new jobs, and that is dwindling here as capital spending grows more slowly everywhere. The Savannah Economic Development Authority, having signed up $360 million in new investment last year, has commitments this year for only $33 million.“There aren’t that many deals in the country anymore,” says Lynn Pitts, the development authority’s senior vice president. “Everyone has pulled in their horns big tim

How on earth did we get into this mess?
Listening to Alistair Darling's speech last Monday, I had a surreal experience. It was as though I had listened to it before. You see, during all those awful Brown budgets, although I never knew when, I always knew that it would end like this. You know the stuff, "I am today spending squillions to provide help for hard–working families, cutting the basic rate of tax, and all the while the nation's debt is falling. We are the best performing of all the G7 countries. Best economy in the world; fastest growth rate since Hereward the Wake, etc etc." Remember all that stuff? But even so, I am still puzzled about how we allowed ourselves to get into this mess. It is tempting to say that the Government fooled us. But the truth is that they first fooled themselves. And not only the Government. The whole establishment and most of the commentariat fell for it. We have passed through a mass delusion of gross proportions.

Such things are not that unusual. The late John Kenneth Galbraith explained that to have a bubble economy, more than just a few speculators need to be taken in. The whole system has to believe it. Otherwise, it won't get going. But in the best bubbles the whole system does believe it, not least because, in the short term at least, it pays to believe it. This was a delusion about the level of prosperity and about what it derives from. Some aspects were shared internationally; some were purely British; but they were all old hat. It was the combination and the scale which made the effects so devastating.

There were three elements. The first was something about which I have waxed lyrical for years – housing. That the bursting of this bubble would cause severe trouble I never doubted. But I had not seen quite how much trouble because I had not reckoned just how vulnerable the banks were. The second delusional aspect was a British classic – the current account of the balance of payments and the pound sterling. Whenever there is a crisis in the British economy the pound is at the bottom of it. After we came out of the ERM in 1992, sterling languished at low levels for 4 years. This was one of our most successful periods of economic management. The pound then began a rapid ascent before Labour came to power in 1997, and it carried on subsequently, reaching a peak roughly equal to where it had been under the ERM regime. It then enjoyed a long period of stability – but stability at the wrong rate. After its recent fall, the pound is now just about back to where it was in those years after the ERM exit.

The high pound was one of those delusions which was wonderful to believe in. Not only did it mean that imported goods were cheaper, but overseas holidays too were cheaper. And the newly enriched British went a stage further – buying overseas properties. Some even reached the third degree – portfolios of buy-to-let properties overseas. And, of course, cheaper goods helped to keep the inflation rate down, which encouraged the Bank of England to set interest rates very low, which underpinned the housing boom. The third delusion was that we could go on borrowing like the blazes to fund the creation of make-believe jobs in the public sector. This delusion was multi-faceted – that the private economy was strong enough to bear the burden of the bloated public sector; that the economy would never experience a severe downturn which would undermine tax revenues; that the tax-take could go on rising, even though it rested to a large extent on two of the most vulnerable bits of the economy, namely the housing market and the financial sector; and that all extra jobs in the public sector were real.

These three aspects of the delusion were closely linked. Accordingly, it is unsurprising that they have all collapsed pretty much simultaneously. As regards the effects on our future, after last week's dire borrowing numbers from the Chancellor, most attention now focuses on prospective tax rises. But the end of the other delusions will require some major adjustments also. For millions of people, rising house prices have seemed like the road to riches. Holidays, cars, school fees, everything, could be financed by these magical bits of bricks and mortar. What is the point of saving when your house will do it for you? These people will now experience the cold winds of economic reality. For some people, rising house prices seemed to guarantee a comfortable retirement. With pensions squeezed and now their nest-egg reduced, they will surely feel the need to tighten their belts.

The scale of the shift in resources implied by the need to adjust the international trading aspect of the delusion is widely underestimated. Our overall trading position, including services and investment income, has been running a deficit of roughly 4pc of GDP. To bring this to balance would require a corresponding squeeze in the other parts of the economy. The public sector is supposedly going to trim back a bit but the lion's share of the adjustment will have to come from consumers. What will happen initially is that we will buy less from abroad, because the stuff is relatively more expensive, including foreign holidays. But if we are to recover from this ghastly mess the process will have to include strong growth of exports. As and when that happens, it will boost GDP and employment but it will do nothing, directly, to boost consumption. In other words, there will be years ahead when the growth of consumption is below the growth of GDP, pitiful though that might be.

For some time, we will be making additional goods and services for people abroad, without the quid pro quo of receiving imports in return. We will be doing this in order to reduce our borrowing from abroad. If it is any consolation, our problems are not uniquely British. The first aspect of the delusion was international. The second, though, was not and could not be, because for every current account deficit there must be a surplus. It is striking, however, that the US, which was a sufferer from the first delusion, also for many years laboured under the second. There are some countries, besides ourselves, which have had a dose of all three – for example, Spain, Greece and Italy. But no other major country is as badly placed as we are. May I suggest a new index of the three delusions which puts them on a common footing? To borrow from Gordon Brown, on such an index we would come out about the highest we have ever been – and the highest in the G7.


Anonymous said...


Following the advice here, I read the book by Galbraith on financial euphoria. It is excellent, particularly page 19, where I found what I think it the kernel of the book:
"As to new financial instruments, however, experience establishes a firm rule, and on few economic matters is understanding more important and frequently, indeed, more slight. The rule is that financial operations do not lend themselves to innovation".

Finance is about debt and the basic mechanisms are exceedingly simple. Beware when it becomes less simple.


Anonymous said...

Thank you for this post. I have been reading you daily for a year now, but still have difficulty understanding the situation.

I have a few questions...

Comments on yesterday's post spoke of the dangers of buying Treasury Bonds from a broker, and stated a preference for buying direct from the treasury. Is this the same for Canadian Treasury Bills? Should buying from banks or brokers be avoided?

What do you consider the safety of Canada Savings Bonds to be?

Do you have opinions on how long a term to buy T-Bills for?

Finally, have you heard any rumours about the stability of Vancity, which is a very large credit union in British Columbia? I don't know how much to worry about them.

Thank you,


Anonymous said...


regarding precious metals.

Can you comment on the disconnect between the amount of paper gold on the market relative to the amount of physical gold behind it.

Here is an article that suggests there is a massive disconnect and that it would onyl take a group or nation about 6 billion dollars to collapse the paper gold market (gold futures)

Anonymous said...

Stoneliegh, Illargi

Would it be possible to setup a google map or something similar so that anyone who wants could add a location push pin for where they are located.

The idea being that maybe we can facilitate finding like minded people in our vicinity who we could cooperate with.

Anonymous said...

I'll start and say i am in New Jersey

Stoneleigh said...


I don't know how to do that. Maybe Ilargi does as he's multimedia guy, but he's away at the moment. I agree that getting like-minded people together is a worthy goal, after all, Ilargi and I live communally here in eastern Ontario.

Anonymous said...

Ebrown writes:

I'm thinking about taking OC up on the proposal to write an article comparing and contrasting the current credit crisis with that of the Great Depression. Has anyone else started on such an endevour already?

Over the last 18 months, Dr. Housing Bubble HERE has been doing a series comparing the Great Depression to today. He's up to post XXII in the series. Today, he quotes Frederick Lewis Allen from Since Yesterday describing 1931:

Hoover called fifteen of the overlords of the banking world to a secret evening meeting with him and his financial aides at Secretary Mellon’s apartment in Washington, and proposed to them that the strong banks of the country form a credit pool to help the weak ones. When it became clear that this would not suffice - for the strong banks were taking no chances and this pool, the National Credit Corporation, lent almost no money at all...-

What strikes me about this is how Hoover, the rugged individualist, expected capitalists to be charitable. Capitalists disdain charity for the weak until they become weak themselves. DHB also quotes that in 1931:

American business was weakening faster than ever. In September the United States Steel Corporation - whose President, James A. Farrell, had hitherto steadfastly refused to cut the wage-rate - announced a ten-per-cent cut; other corporations followed; during that autumn, all over the United States, men were coming home from the office or the factory to tell their wives that the next pay check would be a little smaller, and that they must think up new economies. The ranks of the unemployed received new recruits; by the end of the year their numbers were in the neighborhood of ten millions.”

When I suggest to other teachers that they need to prepare for their union contracts to be cut, they look at me as though I just told them outer space aliens were invading their house.

Anonymous said...


Stoneleigh, you wrote:
I would only own short-term bonds, where you don't have to worry about finding a buyer.

I understand that and find it very sensible. But did you notice what Hugh Hendry wrote on the 26th (the Oz article)? He said essentially the same (though about German Bunds) a few days earlier in the video that Ilargi posted. He wrote:
So, for now, I would stick with the bonds. The 18-year British gilt yields 4.8pc but, with the Bank of England likely to follow the Fed and slash rates to 1pc, I believe we could see gilt yields below 3pc. And I promise you that if bond yields broke 3pc there would be a stampede to buy. At this stage gold might trade close to $500, and those who missed its rally from 2002 would have the solace of schadenfreude when in reality they should be buying the stuff and selling their bonds.

Do you feel that he is courting disaster? Could the reversal be very sudden and sharp?


Anonymous said...

Just listened to a depressing BBC radio programme.... Not a good advert for HBOS mortgage department.
"Repossession is always our final resort, it is only ever considered when all other options have been exhausted."

Why my bank tried to evict me

On a more historic note, thoughts on dealing with embarassing debt from
This time is different - A Panoramic View of Eight Centuries of
Financial Crises

Because the French monarchs had a habit of executing major domestic
creditors during external debt default episodes (an early form of “debt restructuring”), the
population came to refer to these episodes as “bloodletting.”11 The French Finance Minister
Abbe Terray, who served from 1768–1774, even opined that governments should default at
least once every 100 years in order to restore equilibrium (Winkler, p. 29).12
[footnote]12 One wonders if Thomas Jefferson read those words, in that he subsequently held that “the tree of liberty
must be refreshed from time to time with the blood of patriots and tyrants.”


..... Henry VIII,
in addition to engaging in an epic debasement of the currency, seized all the Catholic
Church’s vast lands. While not strictly a bond default, such seizures, often accompanied by
executions, qualify as reneging on financial obligations.

Who will seize what this time?


Anonymous said...

Good post, it would make a good FAQ for your site.

Anonymous said...

Stoneleigh: would it be possible to make a library (permanent links accessible from the main page) containing such articles of today and yesterday?

Stoneleigh said...

Anon @4:44,

I'll ask Ilargi - he's the webmaster. The idea was to have something like an FAQ, as someone here suggested.

Anonymous said...

FB: I do believe that the world is a little different today. Back in the 1700s most people were self sufficient and did not participate in and depend upon the economy in the way that billions do today.

However, I can't imagine presidential candidates fighting over making the largest cuts to meet challenges such as "wave of elders" and end of oil. I seems more likely to let the system throw itself down for then to rebuild in accordance with the new situation. In that way new heroes are created.

Anonymous said...

Stoneleigh: maybe someone here are computer wizards and can give a helping hand in developing FAQs, google maps etc?

Anonymous 4:44 PM

Anonymous said...

I live in central Texas and all seems to be well here; grocery prices are up; gasoline prices down; people shopping as if there is no tomorrow. Any ideas on what to expect next or time frame of the unraveling.

What kind of unemployment figure is out of the ordinary? I don't think any region is exempt, but I do think different regions are impacted at different times. All comments in response are appreciated.

Jan Steinman said...

I find the advice to avoid real estate a bit troubling for its lack of discrimination.

Surely, one should avoid REITs and other "collateralized" investments that track the real estate market in general. And one should avoid investing in shopping centres and office buildings.

But it seems to me that owning your own home is a bit different, if you can afford to own it outright. You don't pay rent, and can't easily be kicked out. What's bad is that we've grown used to thinking of our houses and infinitely swelling piggy banks, and that, of course, can't continue, but when viewed for the other benefits provided (low-cost shelter and housing security) it seems talking people out of paid-up home ownership seems a bit ill-advised.

I feel even stronger about productive farmland. People are not going to stop eating! That will be the last thing they give up, after they are homeless and car-less. If you own the means of producing food -- again, outright, debt-free -- then I think you will continue to 1) be able to feed yourself, and 2) have a small, but reliable revenue stream that will keep pace with other investments.

Stoneleigh said...

Jan Steinman,

I did say that property owned outright is different from investment property, especially investment property owned on margin. I wouldn't sell a paid for homestead. With other homes it would depend on factors such as the suitability of the home for self-sufficiency, its proximity to necessities and friends/family, or its relative security.

Anonymous said...


Thanks for doing all this work over the weekend. It's great to have access to the full argument in a couple of easy-to-access posts.

As I try to discuss this situation with others, I suspect that the counter argument will be "Obama is going to spend a ton of money on infrastructure, education, etc., and that money will jump start the economy and pull us out of this."

I was listening to an interview with Liz Anne Sonders (chief investment strategist at Schwab) on the radio over the weekend, arguably a very switched-on person, and she seemed to think as much.

Is there a fundamental reason why this won't work? (I understand that it's possible that foreign governments won't lend to us anymore, but maybe they will. And we could probably print money with the intent to pay it back when the economy grows again, no?).

el gallinazo said...

Crystal Radio,

You got your donut with a tutu in today's photo and you didn't even have to fast for 30 days :-)

el gallinazo said...
This comment has been removed by the author.
el gallinazo said...

"Is there a fundamental reason why this won't work? "

Will St. Stoneleigh have the time, patience, and energy to explain why Keynesian economics is somewhat less valid than Ptolemaic astronomy? Will Alfred Nobel's zombie have the physical strength to claw open his crypt, seize Paul Krugman's pseudo Nobel (memorial) prize and throw it into the crater of Mt. Doom? Will President elect Obama have the time to feed his staff Viagra in order to part the Red Sea of debt destruction?

Tune into the next exciting episode of TAE.

Anonymous said...


I am also in NJ and you can contact me via email to t30tw4wk1 (at) gamil (dot) com if you like.

el gallinazo said...


Hendry is one smart cookie. He already has made his billions on paper on US 10 year Treasuries and will probably be selling them off either now or in the very near future. He is going long undoubtedly on French and German 10 years bonds for the future, since they are 6-12 months behind the USA curve.

When the shock hits and the longer term treasuries have to bribe capital to buy them, (maybe a year or two from now), only Hendry's footprints will remain.

Unknown said...


Economists seem pretty sure they know how to handle deflation -- basically set an inflation target, say 3% per year, "print" money, buy government debt or anything else until you get hit the target. James Hamilton on Econobrowser talks about this, and Bernanke gave a speech several years back, still on the Fed website, that discussed exactly how they would respond to deflation. To convince me, and maybe others, you'd need to explain why Hamilton's and Bernanke's position is incorrect.

Stoneleigh said...

I also put the last two days intros up as one post at Daily Kos. I wanted to attract new readers if possible.

Webjazz also posted the first part at Ticker Forum.

Stoneleigh said...


Hamilton and Bernanke's model of the economy is simply wrong, for precisely the reasons you mention - that they treat it as if it were an impersonal machine. Markets do not respond to lever-pulling (or pushing). They are thoroughly grounded in human herding behaviour (the subject for a future editorial) and as such are driven by emotions, primarily greed and fear in endless opposition. Emotions are exceptionally 'catching' (see mirror neurons), hence swings of destabilizing positive feedback rather than the stabilizing negative feedback loops that economists fondly imagine.

Central bankers have nowhere near the power that they think they do. Their ability to control events is dwarfed by the power of the collective - all determined to move in the same direction at once.

Unknown said...


Thank you for your explanation. I was wondering if you had some historical examples in mind of herd behavior that swamped the "correct" -- the economy is a machine with levers we can pull -- central bank response?

It is hard to imagine that if the Fed mailed everyone a check for $100,000 there wouldn't be a whole lot of buying suddenly going on. I think even the herd would notice.

Anonymous said...


You have spoken about human herding behavior in economic many times. Is there a certain text(s) that address this topic that you can point to. I would be intereste din reading more on the subject.

Thank you as always


Anonymous said...

The comments at "Daily Kos" were very good.

"...human herding behavior in economic many times...

If you think going against the tide seems difficult ... do a search of what the conservative gov. in Canada is trying to do.


Anonymous said...

As I am not a sophisticated investor and understand that banks may fail, I assume that means in Canada also.
It then leaves me wondering who I go to to get my GICs, is it safe to go to the credit union or the bank?
If not then where do I go?

Anonymous said...

There was great variation in how the great depression affected countries. The situation in Canada was quite different than the USA - and the news heavily favors the USA these days.
It's getting very interesting in Canada though with the possibility of a coalition government! Let's hope that the Regressive Conservatives get turfed out!!

In terms of Health is Wealth. I heartily suggest that people learn to cook their own foods - no buy prepared stuff. Stock dried beans, dried goods, grains and the like. In particular look at your waistline. If you not near the middle of the BMI scale - start looking at your diet. Junk food in - junk body.

In detail - junk the processed crap, dairy and meats. I really mean it. Read The China Study by T. Colin Cambell, anything and everything by Robbins (Diet for a New America, The Food Revolution). Dramatically cut, or eliminate, animal products. My experience is a 30lb weight loss, 5" gone from my waist and we are lighter than we were in highschool.
I've since gone vegan and my blood cholesterol is low enough to start cleaning out 4 decades of eating badly (well not as bad as the average person in North America) and make me Heart Attack Proof (read that book by Essellstyn). I do not expect that diet to survive into post peak oil - I've lived on farms and eaten most every part of every animal we raised - but right now a change in diet will help people get into a healthy weight, lower their blood cholesterol, elimate diabetes, and at least any fat that they'll put on will be healthy fats - not saturated / trans or omega 6 loaded fats.

Anonymous said...

Hilary wrote:
"It is hard to imagine that if the Fed mailed everyone a check for $100,000 there wouldn't be a whole lot of buying suddenly going on. I think even the herd would notice."

Foreigners would dump the dollar and imports would cease to reach american shores. Most important would be the loss of strategic imports such as Oil which are vitual to the survival of the US.

EBrown said...

Anon 8:38,
I am a former vegetarian, and I partially disagree with your diet prescription. In comparison to the processed junk food regime you describe a vegan/veggie rich diet is vastly preferable for health and environmental reasons. However there is a growing body of science that supports the health supporting aspects of diets based on animal fats and proteins. I've read a most of the books you mention in your post and find the researchers who propose eating lots of animal products and restricting processed carbohydrates make a stronger case for their prescriptions.

About ten years ago I read an anthropological book (I can no longer rememeber the author or title), and the overwhelming proponderance of the evidence points to human diets being primarily meat from the time of the emergence of Homo sapiens until the advent of agriculture about 10,000 years ago. Ten thousand years is a long time, but in evolutionary terms it is only time enough to insert a few digestive/metabolic genes here and there that confer significant advantages (e.g. the ability to digest lactose as an adult). It is not enough time to change the fundamental metabolic processes that govern the human organism (barring some extremely powerful selection pressure like death at 15 years of age from a given diet). One datum of support for the above statement is the height and weight that people achieve on western diets. I have five adopted siblings from Korea. The oldest two, who were through a fair amount of their growing years when they arrived in the US are both inches shorter than their younger three siblings. That is only anecdotal, but it is confimed by the observations of many other asians who end up far taller and heavier than their parents were when supplied with more animal protein and fat. Clearly the genetic potential of many humans is stunted by lack of protein and fat in the diet...

As for health, the diet-fat-heart disease hypotheis is bunk as far as I'm concerned. A much stronger case can be made that it is carbohydrates, particularly processed high glycemic index sugars (though not exclusively since sucrose is terrible but not super high on the glycemic index scale because its only half glucose), that cause many of the diseases of modernity including but not limited to vascular disease, type II diabetes, colon cancer, and gall bladder problems.

I would certainly recommend one eat veggie and vegan compared with a processed meat, pasturized milk, and white bread diet. But there are other options. Organic grass fed meat and dairy foods are HEALTHY! I now eat a lot of butterfat and I'm thin as a rail (5'10" and lucky to break 145 pounds). I think blood cholesterol is an associate of, not a cause of heart disease, but it can be mildly useful in checking on health. My cholesterol is lower than I'd like it (having too low a cholesterol increases one's risk of stroke and mental illness).

For anyone interested in reading more on this topic the book I most highly tout is "Good Calories Bad Calories" by Gary Taubes. The Westin Price Foundation is another good jumping off point. Another is "Nourishing Traditions" by Sally Fallon. I don't agree with everything Fallon writes, but most of it is pretty good.

Anonymous said...

"In detail - junk the processed crap, dairy and meats. I really mean it. Read The China Study by T. Colin Cambell, anything and everything by Robbins (Diet for a New America, The Food Revolution). Dramatically cut, or eliminate, animal products."

Cutting out processed foods is a good idea. Cutting out animal products is not. Dairy products are a source of calcium, and red meat is essential for Vitamin B-12. Humans have lost the ability to produce B-12 and have become dependant on Red meat as our only source. Most vegetarians eat processed foods which contain B-12 an other essentials that are natually obtained from animal products.

I also believe that its a bad idea to make carbohydrates and starches the bulk of your calories. Carbs and Starches are converted into pure sugar in your gut (aka diabetes). A diet rich in protein, greens, and fruits is likely the optimal diet.

Anonymous said...

Meredith Whitney:
America must keep consumer liquidity flowing

Anonymous said...

Hi Hilary

Your question of Stoneleigh sounds a bit like you are searching about trying to decide on which experts you would like to trust. The community here is one where people need to do the research and then come to a decision on their own.

Since you have been enticed by the magical powers of the Federal Reserve argument, you might want to give yourself a little education about modern banking and the creation of money as debt system that we have come to rely on in these last decades. Try this helpful little video as a starting point "Money as Debt"

Anonymous said...

I have been reading this blog for about six months. It has saved as well as made me money and I am very appreciative. I have taken much of I & S’s advice and have passed it on to friends, relatives and loved ones.

At the same time though as a born again, baptized in Jesus’ name, tongue talking Christian, I also can hold onto the promises of Jesus:

Psalms 37:25 I have been young, and now am old; yet have I not seen the righteous forsaken, nor his seed begging bread.

I don’t want to highjack the good work that I & S are doing here, so if anybody is interested in learning how to hold onto the promises of Christ, please contact me at Thank you for not removing this post.

Terry B

Anonymous said...

Anon. at 8:38,

You are right about a plant-based diet being the best diet for humans. It is all well documented in national and international medical research. We do not need to eat animal products laden with saturated fat and cholesterol. Our livers produce all the cholesterol we need. Additionally, our intestines and teeth were "designed" for a primarily plant-based diet.

A plant-based diet composed of fruit, vegetables, legumes, whole grains, and seeds and nuts is optimal for humans. It is good for the environment (according to Michael Pollan and others, more than 40% of soybeans and grains grown in the USA go to feed animals for human consumption!), our health and all sentient beings. Pediatrician Benjamin Spock recommended a plant-based diet for children on the latest edition of his famous book.

For those interested on this topic, may I suggest books/research by Neal Barnard, Dean Ornish and John A. McDougall (, all practicing medical doctors and scientists.

Farmerod said...


I'm the temporary editor here while Ilargi's on vacation. The TAE Manual of Standard Operating Procedures and Guidelines is silent on the issue of Jesus-mongering but my gut tells me yours ought to be the last comment on it or I'll delete them all, and all responses to them for that matter. Everyone here I assume is reasonably familiar with Christianity and knows where to go for further information if needed.

And all this talk of nutrition, while more interesting and useful, also seems a little misplaced. I mean, really, grow your own food, whatever it is. It will be better than starving, even if all you grow is cotton candy.

Anonymous said...

Instead of buying gold and dealing with the headaches associated with (risk of theft, confiscation, etc) wouldn't you be better off buying a company that owns gold mines? I mean in a depression demand for gold will rise while the input costs (labor, energy, etc) will fall. I'm putting 5% of my savings into precious metal equities.

Anonymous said...

Vegan Children: Healthy and Happy

Anonymous said...

I finally stumbled on the chart that puts the current bank 'failout' into historic perspective for me. Especially as a mis-investment of unparalleled proportions and a crime against humanity.

Blue Monday

The Lizard said...

Vegans and christians?

We have two religions being flogged here.

Anonymous said...

"Instead of buying gold and dealing with the headaches associated with (risk of theft, confiscation, etc) wouldn't you be better off buying a company that owns gold mines? I mean in a depression demand for gold will rise while the input costs (labor, energy, etc) will fall."

Not neccessarily. Miners are just a vulerable to going bankrupt as any company. Like most large businesses they depend on credit to fund purchases of leases, equipment, making payroll, etc.

Mining is very dependant on Oil. When the US monertizes its debt, it will get cutoff from oil imports. Oil will be ration for essential businesses (like farming). You can't compare the 1930's depression with a modern day depression, since back in the 1930, the US was the leading exporter of Oil.

Anonymous said...

Excellent article. I just came across your site about a week ago and now make sure I visit it daily. I will be making a donation within the next couple of days. I am now about 85% cash, 10% gold and 5% equities. I hold the majority of my cash in the Vanguard Treasury MM fund. Do you see risk in US Treasury funds carried by large mutual fund families such as Vanguard or Fidelity?

Again, thanks for the quality writing.


Unknown said...

Brimstone said: Would it be possible to setup a google map or something similar so that anyone who wants could add a location push pin for where they are located.

Stoneleigh answered:
I don't know how to do that. Maybe Ilargi does as he's multimedia guy, but he's away at the moment. I agree that getting like-minded people together is a worthy goal, after all, Ilargi and I live communally here in eastern Ontario.

It is actually very easy to do. All you need is a google account, which if you have a blogger account then that may suffice. Then in Google maps you create a custom map. On it you put the push pins where you want them and label them anything you want and then save it.

You then invite others to 'collaborate' by adding their email address to the collaborate window. You can allow them to invite others (or not), but should definitely NOT tick the last box 'Allow others to edit map' so that you can retain integrity of the map.

Whenever you update the map, your collaborators will be able to see the updated map. It is a pretty good system because you can control who can edit the map, and who can view it.

I have just done exactly this for work.

Anonymous said...

I have been a daily reader for some months now and very much appreciate the effort and expertise of S & I. I will be making an donation, as well, as soon as I get my PayPal account sorted out.
I haven't commented before as I am a rank amateur in the economics arena and am on a steep learning curve reading this site and others. I do, however, know something of the science of nutrition (I do research in this area). The book, "Good Calories, Bad Calories", by Gary Taubes, is to nutrition, what this website is to the world of finance.
I live in Vancouver and travel to Ottawa frequently. I would love to buy you and Ilagi dinner sometime and explain why as I agree with your point #9 and would like to return the favour in-kind.

TeeElSea said...


I've been lurking for a couple of weeks & this is my 1st TAE post.

Thank you very much for today's "Lifeboat" post. It's magnificant. I've been feeling that I needed to come up w/ something like that for friends & family but you've saved me the trouble & done a much better job than i'm capable of.

I do have a question though:

I've read the 2 paragraphs about interest rates about 6 times now and it's not getting clearer. When you say "the interest rate" which interest do you mean? The CPI? The Fed rate? I'm afraid I need a glossery for the different catorigies of rates - "real", nominal, etc. And having an exampe would be very helpful. Thanks


Unknown said...

TeeElSea said;
I'm afraid I need a glossery for the different catorigies of rates - "real", nominal, etc. And having an exampe would be very helpful. Thanks

If I understand it correctly it works like this;
Nominal rate is the published rate in the press and on your loan agreements. It is the one that we probably think about most.
Real however is actually more important because it is the actual effect (or reality) upon your finances.

So an example.
You have a loan at 7% Nominal. Say you have a fixed income (or at least) unchanged income of $50K. If inflation is running at 3% then your Real rate is 7%-3% = 4% meaning with manageable inflation it pays to borrow. This is because you are paying the loan back with money that is worth 3% less than when you got the loan.

Now with deflation of say -3% your money is a now worth 3% more, so the cost of your loan now is acually 7% - -3% (or 7%+3%) = 10%. In deflation if it is managable it actually pays to be a lender.

So the basic rule is with inflation borrow (within your capacity), with deflation save/invest/lend to those that can definitely pay you back.

Unknown said...

Taking my above example a step further. Let say you have $10K of cash. Let's also say that deflation runs at a constant -3% for 3 years. (NB I'll use simple interest rather than compound interest).

If you just hang onto your money at the end of the 3 years you will still only have the $10K but it will have the purchasing power of nearly $11K.

Now if you can lend your money out at say 5% interest. Then at the end of the 3 years you will have received back $11.5K which now has the purchasing power of about $12.6K which is a 26% gain over the 3 years or about 8.6% per year.

The risks of the above are that in option 1. If the money is in the bank it could be frozen or lost if the bank fails. If you hold it the cash personally it could be stolen, lost or spent.

The risks with option 2 are that the borrower may not pay you back. This is why T-Bills are popular because you are lending to the government and in theory it should be able to pay you back. Everyone else is increasingly riskier from there down.

We don't KNOW the future so we don't know who is going fail and who is going to survive. If I was to bet on survivors it would be companies who are lean & mean with very low fixed overheads, with flexible staffing and who fund their operations from profits without the need for borrowings or equity raisings.

These will be slow growth companies but much more likely to be survivors. Especially if they are dynamic enough to change as market demands change.

I wouldn't venture names but an example industry might be something like a home cleaning services company or child minding (nanny) service company. Their only fixed over-heads are a phone, maybe a computer, and possibly some form of insurance. Their labour is all provided by casual contractors that can be retained or released as required.

In bad times they could run with only a few staff if need be, and can operate without loans. Even in bad times some people may value their time more to be in the fields with their crops, than in the kitchen or the nursery. Some would want that kind of service.

TeeElSea said...

Thanks, kerrysl for taking the trouble to explain that.


Anonymous said...


To Anon at 17.05 today, are you sure your response is to something I (FB) wrote???


Anonymous said...

Some people have been asking for references giving examples of herd behaviour. I would suggest that they read Charles Mackay's "Extraordinary Popular Delusions & the Madness of Crowds". It is a big book (700 pages), but fun to read due to the variety. The only thing "wrong" with the book is its age: first published in 1841. Somebody should write "Madness, Book II".

This book also suggests the perfect gift for your herd-like friends: tulips. Lots of tulips.

Anonymous said...

Stoneleigh - A question:

Do you think it wise to take a 40% hit and pull all money out of 401K?

Thank you.

Stoneleigh said...


You explanation of nominal and real rates is exactly right and makes the point very clearly.

Stoneleigh said...

I'm going to be rather swamped today as I have a very full schedule that will keep me from answering comments until this evening. I'll try to get to everything as soon as I can.

Anonymous said...

Stoneleigh, you would think there would be selective deflation, some things go down others stay the same?

Also, how far down (years, decades?) will the debt have be trashed before a recovery?

I could see housing falling a lot since so many now are underwater. I still wonder if farmland will fall a lot. I have not seen much in the news about agriculture.

Anonymous said...

This from A. Fekete:

Serial rate-cuts destroy the wage fund

"...Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer’s capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off ― or forced to take a wage cut of $25,000..."

I am having trouble wrapping my brain around this one. The confluence of interest rates, capital and wage fund is challenging my limited intellect.

Can anyone explain how capital is destroyed by falling interest rates?

el gallinazo said...

Dan W,

"Can anyone explain how capital is destroyed by falling interest rates?"

I am not sure it is. Recession tends to go along with money/credit destruction for obvious reasons. But they interact with each other. Can you give a source for this A. Fekete, so we can read the original?

"4) Sell equities, real estate, most bonds, commodities, collectibles (or short if you can afford to gamble)"

Stoneleigh recommends that we short the market if we can afford to gamble. She doesn't apparently regard us as "vultures." Anyway, if it weren't for us vultures, there would be even more stinking, corporate carcasses rotting on the ground. Better just the bones.

El Buitre

Anonymous said...

Anonymous said...


has anybody noticed that the Baltic Dry Index has fallen to 700?!?!?!?!?

Baltic Dry Index (BDI) -15 700

It was in the mid 800s last week...and of course as we know, last May it was close to 225,000!

Anonymous said...

McKay's book is available on-line from Project Gutenberg which puts a lot of out-of-copyright books on the web for free.

Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Mackay

This ought to be a link for your 'reference' section.

Myself, I think I'll go round to the public library for the paper copy.


Anonymous said...

Wow, that 700 figure of the Baltic Dry Index is scary. I wonder when we'll be seeing shortages of supplies and imported food (?).


Anonymous said...

and for searchers after hidden meanings - Oz, yellow brick, Wicked Witch of the East, silver shoes, etc, Project Gutenberg has online versions of

The Wonderful Wizard of Oz by L. Frank Baum


Farmerod said...

Just a warning to TAE readers: there's a plethora of articles for today's Debt Rattle so, not only will it not be up terribly soon, but you will have to devote more time reading it today.

Plan accordingly.

Anonymous said...

Brimstone asks:
"Would it be possible to setup a google map or something similar so that anyone who wants could add a location push pin for where they are located."

Click on the Sitemeter or Statcounter buttons on the left side of the home page. These two record and report various statistics about visitors and both offer a map showing the location of visitors.

Unknown said...

Looks like last week's 5-day stock rally has been wiped out in half a day.

Anonymous said...

Wow--thanks for all your work, OC. I also thought your "moderator comments" were well done.

Anonymous said...

Where can you turn to if you need money fast? Payday Loans! Payday loans are fast, easy, and very convenient.

Anonymous said...

But would you sell shares in oil companies, esp. those which have shown more recognition of peak oil?

Anon of UK

Anonymous said...

Though financial operations - in themselves, do not adapt to innovation, directed capital does. Investments must yield to demand.

Wandering Sage said...

Your health is the most important thing you can have.

This is absolutely true. However it is not with some exercise equipment that you are going to be able to do this. In the world to come it will be proper breathing, stretching and relaxation skills that will be of the most help in keeping one's in a good overall state of health.

Anonymous said...


I just finished reading "How to build a Lifeboat" and am also wondering where to put my cash, if not in a bank?

Should I pull out of all investments and put the liquidity into a home (no mortgage) and gold?

Sorry if you answered this elsewhere, did not see it.

Many thanks

Anonymous said...

I believe the author is incorrect. While short term deflation is coming, the long term will be inflation.

The current administration has shown it's willingness to spend and print money.

I say prepare for inflation.

Bukko Boomeranger said...

So I'm reading this in late May 2009 to catch up on the TAE gospel, and the "Top 9" list still seems like valid advice after more than half a year of political and financial permutations flowing under the bridge. Wise counsel withstands the test of time...

Anonymous said...

I realize I am a little late coming to this discussion and maybe the author is no longer responding to questions, but it is unclear what one is to do if one's debt is simply too high to get out of in the short term. I, like many students, have tens of thousands of dollars of school debt that cannot be done away with anytime soon. Thoughts?

Unknown said...

Very good read. This also applies well to the bucket trucks business. I'll have to let the people in my industry know about how well this article applies to bucket trucks. Thanks for the read

Sam said...

I definitely have learned better finance personally since I've gotten older. When I first started life as an adult, I was well versed in financial theory. Unfortunately, theory applies in specific and ideal scenarios, not real life. Currently, I'm using my real world experience and doing well as an SEO consultant in Joplin, MO. There is nothing like learning finance through experience. Good article.