Wednesday, December 3, 2008

Debt Rattle, December 3 2008: It's Not A "Slow Down", Barack

G. G. Bain Taffy 1921
Chicago Civic Opera soprano Florence Macbeth in New York
Concession stand sells Atlantic City saltwater taffy

Ilargi: The piece below by Dan W. (which I edited a little) is an example of what TAE readers have picked up from following us (and not just us, of course) over the past year (and before that when we were on the Oil Drum). I find it interesting to see what trickles down, which is why I decided to publish this here. I don’t agree with everything Dan says, and these are his words, not mine, but that for me, in this instance, is beside the point. Which is that I like to see people starting to get the idea, the one that is made up of many smaller ideas, which when grouped together lead to an A-Ha! or rather Oh-S*it! moment.

Economy, energy and environment (or as we say here: Debt, Diesel and Dämmerung) issues all come together, albeit often in ways people fail to see beforehand. The driving force among them, though, today, is the economy, which is crashing so hard and so fast that for now the other factors are a mere afterthought. That is simply because the ways to approach energy and environmental issues in times of plenty are completely different from those in a time of desolate poverty. For instance, I don’t think we'll see a rapid depletion of the world's oil reserves. We'll see a depletion of the available reserves as exploration and production grinds to a halt. First, though, there'll be a huge production surplus as oil states go full throttle trying to save their economies and political powers. OPEC members' compliance with announced cuts has never been more than 50%, and it will go much lower in times of distress.

Similarly, grand and lofty visions of alternative energy policies on the scale of the Marshall, Apollo and New Deal projects are bound to fail. There is no money left to realize them. Anything that does happen will have to do so on a much smaller scale, in towns and villages, not on a national or state level. Mostly, problems all around will grow far worse than they are now, leaving people with very few money and energy sources, but with a killer legacy of pollution. Just wait till your community’s water treatment plant shuts down, that's when you'll see what I mean. We'll get into that on a later date; first, without further ado, here's Dan:

Dan W. It's Not A "Slow Down", Barack

A few days ago during a press conference involving the governors of the 50 states, Barack Obama talked about all of the states needing to work together so that we can quickly turn around this economic "slow down". I have bad news for Mr. President-elect: this is not a slow down. This is an economic disaster that will dwarf the Depression of the 1930s in scope and toll.

Let's do an always popular top 10 reasons why considering the current economic situation a "slow down" is actually very dangerous and irresponsible:

1. Almost all the banks of the world are, essentially, bankrupt. They have no capital, solvency. Capital has been summarily destroyed over the years by falling interest rates, rampant -bond- speculation and governmental check-kiting, fraudulent accounting, fraudulent valuation, the elimination of reserve ratios, the creation of money by federal decree (fiat currency), hidden off-book "assets" in the tens of trillions of dollars, a shadow banking system driven by derivative betting scams that globally reach beyond a QUADRILLION dollars in scope, etc. Were you to go the radical route of declaring a bank "holiday" and forcing the banks of the world to "open" their vaults and hard drives for objective inspection, what you'd find is trillions of pieces of worthless paper. If Assets = Liabilities + Equity - and in a world where many if not most of these institutions are leveraged 30:1, 40:1 and beyond - then the assets currently held by the world's banks are worthless.

2. The environment is collapsing. Oceanic acidity and de-oxygenation are creating enormous "dead zones" in which fish cannot live. The polar ice caps are melting at a rate far more hyper-annuated than first thought, destroying habitat at an alarming rate. Phytoplanktons are disappearing from the world's salt water bodies, depriving many of the ocean's species of ample food sources. Disease-carrying insect populations are exploding due to longer and warmer springs and summers around the globe, leading to large outbreaks of Malaria, Dengue Fever and Sleeping Sickness. We have reached the Peak Oil plateau and will begin to see rapid depletion of the world's oil reserves: The age of fossil fuels is coming unceremoniously to a close.

More and more countries are facing drought and famine caused in part by a lack of predictable rainfall and in part by a lack of glacial run-off. I could go on of course. The conclusion drawn however is that trillions of dollars would need to be invested immediately in developing technologies aimed specifically (not secondarily or in by-product) at trying to reverse these ongoing processes. Not only are these dollars we do not have, but under current economic conditions the cries of build more, dig more, mine more, produce more are the cries of the desperate: and desperation cannot tarry with the indulgences of environmentalism. Thus comes the death bind of depleted resources, environmental degradation, and a lack of capital to employ in the production of goods that use these depleted and un-harvestable resources.

3. Sovereign default looms on the horizon at a scale never before witnessed. Ecuador will default on its loans 2 weeks from now---unless of course it secures more loans to stave off the need to service the interest on existing loans. Ecuador is but the 1st of many. Pakistan, Iceland, Ukraine---all countries lining up to receive emergency sustenance from the soon-to-be illiquid IMF. The Baltic states, Ireland, Argentina---all countries teetering on the edge of default. The cascade of events precipitated by such defaults will be horrific.

4. The Baltic Dry Index currently stands at a rate of 684, down 14 points from yesterday's close. The index essentially tells us how much it would cost to send certain goods and commodities via ship to different locations around the globe. In May of 2008 the Baltic Dry Index reached its high of over 11,700 points. A 90+% drop in just 6 months means ships are not moving goods because the ship-owners cannot make a profit in doing so. As such, much needed bulk commodities (wheat, steel, etc.) are not being shipped to market. When reserve stocks run out, so will the production of food. This trend cannot be reversed through the infusion of more debt into the already reeling system. Additionally, within months the cost of oil might once again rise as OPEC manipulates markets to try desperately to maximize gains. When this happens, the Baltic Dry Index should reach 200 or less. At that level, it will cost a shipping company hundreds of thousands of dollars to ship goods. Not a great business model.

5. The housing implosion is surreal in the level of capital destruction that is ongoing and that is not even close to "bottoming":
  • a. It is impossible to valuate CDOs that 'hold' mortgages because it is impossible to untangle them. No longer do banks hold the loans from which they have profited: they are packed together with hundreds of other "like" assets and sold on the market to investors. (Of course those days are gone, but the detritus remains)
  • b. Nobody trusts valuations anymore anyhow. The agencies who were supposed to valuate securities accurately did nothing of the kind. The depth of mistrust--and rightly so---is so deep that, in fact, all of the moves to prop up the system are viewed by the public as ways in which the rich can make themselves richer. Claims to the contrary by Paulson et al are met with anger and amazement: "Do they really think we are that dumb?!?"
  • c. There is no such thing as mark-to-market anymore: even mark-to-model is dubious as the current models are utterly fraudulent.

6. People aren't going to start borrowing anew, and banks aren't gonna start lending anew, because suspicion runs deep regarding duplicity, off-book debt, etc. The FED can spend trillions on "purchasing" and guaranteeing anything it so desires, but until the government carries out a full blown censorship campaign on the Internet and on Television, trust will not return. Every time Paulson or Bernanke speak, the market responds with fear. The market knows that these men are dissemblers extraordinaire, and the markets respond accordingly. Your team, Mr. Obama, does nothing to engender the kind of trust necessary for individuals and institutions to willingly take chances on the kind of investments that have just recently been exposed as fraudulent and illegal.

7. Foreign countries who have purchased US Bonds are not stupid and they are NOT going to wait until those bonds reach maturity. As soon as it becomes crystal clear that default may be looming, the run on the US bond market will be, shall we say, entertaining.

8. Confidence in the veracity of our political leadership is at an all-time low. Don't under-estimate this dynamic. Even in this moment of relative beauty - the election of an African American President - you, our incipient Chief Executive, have pulled together a staff of old-school, Keynesian cronies. Your ploy may be an appeal to the Center, but it ignores the reality that tens of millions of Americans have come to associate the old school as entirely corrupt and duplicitous. And these suspicions will only be exacerbated by the doomed-to-failure Freidmanite approach to the financial crisis: that of spending trillions more on stimulus packages that cannot, by their very nature, succeed in an environment of debt-based toxic shock.

9. The Credit Default Swap Cyclops is hiding in the cave, but it has not gone away. The crime of derivative trading has created so much debt and so much counter party risk, that one more significant corporate failure could start the dominoes a-tumbling and essentially bring the global economy to a complete and grinding halt.

10. And finally, our obsessive and insane addiction to 5% GDP growth---to growth and expansion in general---makes any solution to the current mess a failed proposition before the fact. Spending trillions to renew growth in a global system that has reached well beyond the limits of healthy growth is craziness. Utter craziness.

No sir, Mr. Obama. This is not a slow down. This is not a contraction. This is not a market correction. This is an economic disaster of epic proportions. This is to the 1930s what an F5 tornado is to an afternoon thundershower. An umbrella will not shield you from this storm sir.

U.S. ISM Services Index Fell to Record Low Last Month
U.S. service industries contracted in November at the fastest pace on record, sinking the economy deeper into what may become the worst recession in decades. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 37.3, the lowest level since records began in 1997, from 44.4 the prior month, the Tempe, Arizona-based ISM said. Readings below 50 signal contraction. Americans, hurt by mounting job losses, a lack of credit and falling home and stock values, are losing confidence and cutting spending on everything from cars and furniture to food and vacations. Slumping sales are prompting even more job cuts, signaling the economic slump will persist well into 2009.

“Business activity has shut down, along with the consumer,” Stephen Gallagher, chief economist at Societe Generale in New York, said in an interview with Bloomberg Television. “There is no reason for an immediate turnaround; financial markets have not stabilized; consumers have not stabilized.” The
index was projected to decline to 42, according to the median forecast in a Bloomberg News survey of 64 economists. Estimates ranged from 37 to 46.5. Stocks retreated further after the report. The Standard & Poor’s 500 Index was down 113 percent, to 838.4, at 10:18 a.m. in New York.

Treasury securities fell as investors judged the rally that pushed yields to record lows was unsustainable amid government efforts to revive growth. Private reports today showed the labor market deteriorated further last month. ADP Employer Services reported that companies cut an estimated 250,000 jobs in November, the most since the 2001 recession. The number of announced firings surged 148 percent last month from November 2007, led by a jump at financial firms as the credit crisis deepened, according to Chicago-based Challenger, Gray & Christmas Inc.

The Labor Department’s November jobs report, due Dec. 5, may show the biggest one-month payroll drop since the 2001 terrorist attacks, according to the Bloomberg survey. Companies, trying to shore up profits as the economy sinks, cut worker hours in the third quarter by the most in six years, a report from the Labor Department showed. The decline contributed to a higher-than-forecast gain in productivity and an increase in labor expenses that was smaller than economists surveyed by Bloomberg News anticipated. The ISM group’s index of new orders for non-manufacturing industries decreased to 35.4 from 44 the prior month. Its gauge of employment dropped to a record-low 31.3 from 41.5, and a measure of prices paid fell to 36.6, also the lost since at least 1997.

ISM said earlier this week that its factory index dropped in November to the lowest level since 1982. The U.S. entered a recession a year ago this month, the National Bureau of Economic Research, which dates American business cycles, said this week. At 12 months, the contraction is already the longest since the 16-month slump that ended in November 1982, and exceeds the postwar average of 10 months. Later today, the Federal Reserve’s beige book survey, a compendium of regional economic activity, may underscore the worsening outlook. The information will be used by policy makers when they meet later this month to discuss whether of cut interest rates again to revive the economy.

Consumer spending, which accounts for about 70 percent of the economy, faltered last quarter and is likely to keep sliding. Purchases from July through September posted the biggest drop since 1980, causing the economy to shrink. The housing downturn, likely to extend into a fourth year, will remain a drag. Retailers are concerned the holiday shopping season may be the worst in at least six years.

Sears Holdings Corp., the largest U.S. department-store company, yesterday abandoned its earnings forecast for the remainder of the year, citing “severe conditions in the economy.” Financial services remain in distress. Citigroup Inc., which is planning to eliminate 52,000 jobs, this week said it dropped a portion of the severance payment offered to employees who have been at the bank for a decade or longer.

Eurozone retail sales slump 2.1%
Retail sales across the 15 nations that share the euro fell more than expected in October, increasing the likelihood of a cut in interest rates this week. Sales across the eurozone declined 0.8% on a month-by-month basis in October, and by 2.1% from a year earlier, more severe than analysts had expected. A separate business activity survey said output levels had worsened.

The European Central Bank (ECB) is widely expected to cut rates from the current 3.25% level on Thursday. Last month it reduced rates by half a percentage point, and ECB president Jean-Claude Trichet said further cuts could not be ruled out as Europe aims to limit the economic downturn. Figures from Eurostat showed inflation in the eurozone fell to 2.1% in November, from 3.2% the month before, furthering the chance of a rate cut.

"Worries about the outlook for the economy and the labour market are probably prompting households to save relatively more," said Nick Kounis, chief European economist at Fortis Bank. "This leaves High Street activity heading for a renewed deterioration in the fourth quarter following the improvement seen in the third." Retail sales in September had been flat compared with August, and down 1.4% on an annual basis.

The separate business activity data came from research group Markit. It has revised its purchasing managers' index down to 38.9 points in November from its first estimate of 39.7. Any figure less than 50 representing a contraction, and the latest number compares unfavourably with the 43.6 figure in October. Fortis' parallel service sector activity index also fell further than first estimated in November, down to 42.5 points from the initial 43.2 points figure.

"This is a horrible survey across the board, showing that the eurozone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets," said IHS Global Insight economist Howard Archer. European shares were down in Wednesday trading, with Germany's main Dax index 1.8% lower, and France's Cac falling 1.6%.

Audit: More oversight for $700 billion TARP bailout needed
The first official review of the federal government's $700 billion financial rescue plan said Treasury has yet to address "critical" oversight issues to ensure the plan is working. The Government Accountability Office's study, presented to Congress Tuesday, found that the Treasury program needs more staff, better management, an improved transition effort and facilities to ensure banks are using bailout funds effectively. "Without effective oversight, Treasury cannot ensure that those receiving funds are complying with [the capital purchase program's] requirements," the report said.

The report called for a consistent process for monitoring participating institutions, so that Treasury can identify and address any potential compliance issues with banks receiving funds from the Troubled Asset Relief Program, or TARP. The Treasury so far has injected $150 billion in capital into the financial system by buying preferred shares in 52 institutions. Treasury Secretary Henry Paulson said Monday that the department is reviewing hundreds of applications from banks seeking funding. Treasury doled out the government money with the intention that banks use it to lend, but some have instead used bailout funds to finance purchases of other institutions. The program is meant to ensure the bailout funds do not go to finance paychecks of top executives, and banks are required to pay out a dividend.

But the report said Treasury currently lacks sufficient oversight methods to ensure banks comply. "It's not at all surprising, that Treasury's still behind the 8-ball," said Bob Brusca, economist with FAO Economics. "How would you know if TARP funds go to pay for loan servicing or went to pay a CEO salary? Money doesn't have footprints." GAO recommended that Treasury work with bank regulators to establish a "systematic" and transparent way to hold banks accountable for how they use bailout funds. The report said Treasury should develop a method to ensure that banks' activities are consistent with TARP's goals. Furthermore, GAO said the program needs robust policies, procedures and guidance that protect taxpayers.

In response to the report, Neil Kashkari, the Treasury Department's interim point person for the bank bailout, said Treasury agreed with all of GAO's recommendations, except it disagreed on the methods of evaluating how banks are using TARP funds. He said Treasury is developing its own compliance programs for banks, but he did not say what was different about those programs from the report's recommendations. In addition to oversight, GAO made several other recommendations to improve Treasury's program:

Improve communication: The report said communication about TARP should be "formalized," so that lawmakers and the public remain up-to-date on the program's strategy and actions "to avoid information gaps and surprises." In mid-November, Paulson said Treasury would no longer buy up toxic assets from banks' balance sheets, surprising investors and banks alike. The announcement resulted in several days of rising borrowing costs and tumultuous stock trading. The report did not question why Treasury changed its original game plan or whether it was using TARP for the best purpose.

"The report missed the forest through the trees," said said Edward E. Gainor, a lawyer at McKee Nelson in Washington. "There are valid questions to be raised, like why did they ignore so many basic goals of the legislation?" Gainor, who represents funds pursuing distressed asset investments, said if the report was intended to serve as a roadmap for how Treasury is to proceed with TARP, "they could have focused more sharply on substance and less on procedure." House Speaker Nancy Pelosi, D-Calif., called the GAO report "discouraging." "The GAO report reaffirms Congress' view and calls on Treasury to take several critical steps to accomplish this goal, specifically by improving its communication with Congress and the general public," Pelosi said.

Presidential transition: GAO said Treasury must "facilitate a smooth transition" to the Obama administration. President-elect Barack Obama's nomination of New York Fed President Timothy Geithner was praised by economists, who applauded the selection of an insider who would allow for a seamless handover. The report said Treasury should formalize its bailout activities to make for an even smoother transition.

Hire more staff: The report said the government must hire more personnel to and train them appropriately. A common criticism of the program is that it is inadequately staffed, making oversight difficult. "When Paulson first announced the plan, he had an idea that was based on a program that was never tried," Brusca said. "They had to put a staff together quickly."

Mitigate conflicts of interest: Treasury relies heavily on private sector third-party personnel to help oversee the program, which could result in conflicts of interest, especially if the industry staff's parent companies are in receipt of bailout funds. GAO recommended that the Treasury set up provisions to monitor those potential conflicts.

Measures of success: The report said Treasury does not yet have an effective way to determine if the plan is working. GAO said measuring the impact of TARP on credit markets and the broad economy will be challenging, because economic conditions are deteriorating. Still, the study identified some indicators that will show whether TARP is working. Such measures include falling mortgage rates, higher mortgage volume and fewer foreclosures and home loan defaults. GAO also said narrowing corporate bond spreads and Libor-OIS and TED spreads, which measure investor confidence and banks' cash availability, will show credit markets are improving and the Treasury's efforts are successful.

3-pronged oversight effort The report is the first of a series of reports that the GAO must submit to lawmakers on a bi-monthly basis.
The office represents one of three oversight components required by the Emergency Economic Stability Act. Even though the bailout bill was passed Oct. 3, the other two oversight bodies - a five-member congressional oversight panel and an inspector general - weren't named until mid-November. President Bush nominated Neil Barofsky, a New York federal prosecutor, as EESA's inspector general. Despite bipartisan support for his nomination in the Senate Banking Committee, the nomination was blocked, and confirmation proceedings are expected to continue.

The congressional panel is made up of Harvard law professor Elizabeth Warren, New York state Superintendent of Banks Richard Neiman, AFL-CIO Associate General Counsel Damon Silvers and Rep. Jeb Hensarling, R-Texas. A fifth member, Sen. Judd Gregg, R-N.H, stepped down Monday. The panel is expected to produce a report on the status of the bailout by the end of the year.

Paulson Debates Second Infusion
U.S. Treasury Secretary Henry Paulson is debating whether to ask Congress for the second installment of the $700 billion bailout package, concerned about competing demands for the funds and a potentially hostile reaction from lawmakers. Mr. Paulson's dilemma was thrown into relief Tuesday by a report from the Government Accountability Office, the investigative arm of Congress, which criticized the Treasury Department's handling of the Troubled Asset Relief Program, or TARP. Besides lawmakers threatening to deny a request for the additional money, Mr. Paulson is also grappling with confusion stemming from the transition to a new administration.

If Mr. Paulson decides to request the next $350 billion, he is expected to do so next week. His hand may ultimately be forced if market conditions continue to deteriorate.
Political and practical concerns also color the debate. While Mr. Paulson wants to steer more funds to financial institutions, Congress has its own ideas, including aid for the auto industry and troubled homeowners -- two ideas Mr. Paulson has resisted. In its report, the GAO said Treasury hasn't yet developed a way of ensuring that firms receiving federal funds are complying with limits on dividends or executive compensation. Officials also have yet to address such critical issues as how to ensure that the injection of $250 billion into the banking system "is achieving its intended goals."

The report suggested Treasury has little ability to monitor potential conflicts of interest among independent contractors helping implement the program. As a result, there is a "heightened risk that the interests of the government and taxpayers may not be adequately protected and that the program objectives may not be achieved in an efficient and effective manner." The problems are due in part to the rapid implementation of TARP and a lack of staff for the program. The report said about 48 employees had been assigned to TARP as of Nov. 21, only a quarter of the 200 full-time employees the GAO said may be needed to properly implement rescue efforts.

Treasury Assistant Secretary Neel Kashkari, in a letter included in the GAO report, said Treasury has moved aggressively in the 60 days since TARP was passed. He said Treasury has made "significant progress" building a program that will "carry out our ongoing responsibility to develop other programs, measure risk, monitor compliance and ensure robust internal financial controls." Economic conditions have weakened over the past weeks, including rising unemployment and declines in consumer spending and manufacturing. Accessing the second batch of money could comfort markets, but a protracted fight with Congress could have the opposite effect.

The presidential transition is adding to the uncertainty. White House aides approached the transition staff of President-elect Barack Obama two days ago and talked about convening a bipartisan meeting, including congressional leaders, to discuss the next installment, according to an Obama aide. The Obama staff was noncommittal and offered little advice beyond insisting that more money be directed toward direct mortgage assistance. "We're not in the lead here," the aide said.

On Capitol Hill, there is little appetite to grant access to the second $350 billion. The skepticism that almost torpedoed the original legislation in September has turned into full-blown revolt amid distrust over implementation and frequent changes to the program. "Paulson is a big part of the problem because they don't have a coherent plan," said Rep. Virginia Foxx (R., N.C.). Rep. Foxx is one of a number of lawmakers who have laid the groundwork to block access to the second half of the bailout funds. Last month, Rep. Foxx and 15 House colleagues introduced a resolution that would be considered if Treasury does make a request.

For Mr. Paulson to obtain the funds, the administration must submit a detailed report to Congress outlining how Treasury would use the money. Congress can deny the funds by passing a resolution like the one already introduced, disapproving of Treasury's plan within 15 days. If Congress doesn't act, the funds are released. House Minority Leader John Boehner (R., Ohio) has told Mr. Paulson that there aren't enough votes in favor of releasing the funds, according to people familiar with the matter. Critics in the Senate, where anger is also running high, are also moving to block a potential Treasury request. Perhaps the biggest sticking point is whether to use TARP funds to aid homeowners, a move the administration has been reluctant to take because of the complexity of designing such a program. Rep. Joseph Crowley (D., N.Y.) said "serious consideration" would have to be given to making sure part of the second tranche is used to help homeowners.

Corporate Debt Protection Costs Climb Amid Depression Concern
The cost of protecting corporate debt from default jumped to a record in Europe and neared a high in the U.S. amid concern that the global recession will sink into a depression. Credit-default swaps on a benchmark index tied to below-investment grade companies in Europe reached levels considered distressed for the first time. The cost to protect U.S. leveraged loans from default neared a record, and a benchmark gauge of credit risk tied to investment-grade companies including retailer J.C. Penney Co. and Alcoa Inc., the largest U.S. aluminum producer, also jumped as a private report showed the nation’s companies last month cut the most jobs in seven years.

“Markets are pricing somewhere between a recession and a depression, and that is what we are faced with,” said Philip Gisdakis, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “We are already in a recession. The next economic phase will not be recession, but depression.” Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada climbed 8 basis points to 267 basis points as of 10:10 a.m. in New York, according to Barclays Capital. The index is at the highest since Nov. 20, when it traded at a record 284 basis points, prices from broker Phoenix Partners Group show.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly sub-investment grade credit ratings increased 65 basis points to 1,005 and earlier reached a record 1,010, JPMorgan Chase & Co. prices show. The index traded above 1,000 basis points for the first time, a level investors consider distressed. The Markit iTraxx Europe index of 125 investment-grade companies rose 9 basis points to 195 after earlier trading at 198, which matched a record reached yesterday, according to JPMorgan.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should borrowers fail to adhere to their debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. UniCredit is forecasting a 35 percent chance of a global depression as deteriorating labor markets undermine consumer confidence.

Companies in the U.S. cut an estimated 250,000 jobs last month, according to an ADP Employer Services report. The decline, more than economists had forecast, was the most since November 2001. The U.S. economy has lost 1.2 million jobs in the first 10 months of the year, government reports show. U.S. service industries contracted in November at the fastest pace on record, according to the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the nation’s economy. A survey of about 700 service companies in the U.K. showed that services from banks to recruiters contracted at the fastest pace in at least 12 years last month, Markit and Chartered Institute of Purchasing and Supply said today.

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as investor confidence deteriorates or as they hedge against losses, reached a record low. The index, tied to the loans of 100 companies including General Motors Corp. and Ford Motor Co., fell 0.9 percentage point to 75.9 percent of face value after earlier trading as low as 75.5, according to Goldman Sachs. The index reached a record low of 75.25 on Nov. 21. Credit-default swaps on U.K. gilts and U.S. Treasuries also rose to records, according to CMA Datavision. Five-year contracts used to hedge against losses on U.K. government debt increased 6 basis points to 113.5 and 10-year contracts climbed 9 to 116.5. Five-year contracts on Treasuries rose 2.5 basis points to a record 60.5, CMA prices show.

FDIC Survey Confirms Widespread Use of Unauthorized Overdrafts by Banks
A new survey by the Federal Deposit Insurance Corp. underscores the need for regulatory and congressional action to stop banks from artificially increasing overdrafts without a customer's express consent, a practice that unfairly strips billions of dollars annually from checking accounts.

The survey, taken of the banks the FDIC supervises, found that a majority of banks reported automatically enrolling customers into overdraft systems that impose a fee. Rules under consideration by the Federal Reserve Board would require banks to give customers the choice of opting out of the expensive, fee-based overdraft program. However, the FED rules as now proposed would not require banks to obtain explicit "opt-in" permission from their customers. The Center for Responsible Lending has urged the Fed to strengthen its final rules by requiring lenders to give customers the option to "opt-in," and, along with that option, clear disclosures of the cost to customers.

The FDIC survey also finds that customers living in low-income areas carry the brunt of most of the fees, and that young adults are charged for unauthorized overdrafts in high numbers--over 46 percent of young adult accounts were levied these fees. Consistent with our research, the report shows debit card transactions are the most frequent cause of overdrafts and that these purchases typically are less than the overdraft fee charged. In most cases, banks do not warn customers at the ATM machine or checkout counter if their transaction will result in this fee.

The report also shows that over half of the large banks surveyed process overdrafts from largest to smallest, which can artificially increase the number of overdrafts fees incurred by consumers. This confirms CRL's research showing this practice is widespread among banks. The FDIC survey found, not surprisingly, that banks that engage in these abusive practices generate the most overdraft fees but also end up with the highest amount of uncollectible debt. Congress needs to curb these and other manipulations that result in unfair fees.

Meredith Whitney on credit cards: Understanding “De-leveraging,”
If you want to understand de-leveraging, you could do worse than Meredith Whitney's op-ed in yesterday's Financial Times. She noted that $3 trillion of credit had been "expunged" from the economy so far this year. She also said credit card lines could be substantially reduced:

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.

This makes complete sense when you consider the leverage ratios of the big banks. As I wrote a week ago, Citi has $2.1 trillion of on-book assets and $1.2 trillion of off-balance sheet assets compared to less than $10 billion of tangible common equity. Depending on how much of those off-balance sheet assets have to be taken back onto the balance sheet, Citi's leverage ratio is impossibly high for the bank to keep operating without government guarantees.

If I'm reading their financials correctly, and I think I am, in addition to the $3.3 trillion of on/off balance sheet assets, the company has another $1.3 trillion in untapped credit commitments (see page 78 of the most recent quarterly filing), over 70% of which is for untapped credit card lines. If you've got a Citi card with an outstanding balance of $3,000 and a credit limit of $10,000, then Citi stands ready to provide you with $7,000 of additional credit on demand. As other forms of credit (like Home Equity Loans) disappear, consumers will turn to more expensive funding sources like credit cards to help them get by. So as those credit lines are tapped, the additional credit goes onto the asset side of Citi's balance sheet, increasing leverage.

The trouble, of course, is that Citi's balance sheet is already over-leveraged relative to its tangible equity. It doesn't have the balance sheet capacity to expand credit. In fact, to protect itself and taxpayers (who now implicitly back the company's debts) it must reduce its credit commitments significantly in order to reduce its leverage ratio.

This is "de-leveraging." It's what happens during a "credit crunch." Those employing too much leverage to begin with, like all the banks, have to shrink their balance sheets by crunching credit: cutting credit lines, selling good assets and raising capital (either from the government or privately. Leverage = Assets / Equity. Reducing credit lines shrinks the numerator; selling assets shrinks the numerator and plugs cash into the denominator; raising capital grows the denominator.

By pulling credit out of the economy, de-leveraging leads to deflation. Credit is a form of money just like cash. Removing it from the economy reduces the amount of dollars chasing goods and services, lowering prices. We've already seen this with housing prices of course: As mortgages are harder to come by, fewer people are able to buy a house. Demand falls relative to supply, so prices fall too. Senators and Congressman may want the banks to lend more, but they simply don't have sufficient equity capital on their balance sheets to do so.

Fed officials play down risk of deflation
The United States does not face a high risk of Japan-style deflation and ought to spell out a target for prices to keep this threat at bay, two top Federal Reserve policy-makers said on Tuesday. With the United States already in recession for a year after the collapse of its housing market, many economists fear it could suffer the sustained decline in prices that inflicted a decade of stagnation in the Japan during the 1990s.

Philadelphia Federal Bank Reserve President Charles Plosser, a noted inflation hawk who has voted against rate cuts twice this year, noted that tumbling energy prices had dragged down the headline measure of the U.S. consumer price index. "This has prompted some commentators to suggest that the U.S. is facing a threat of sustained deflation, as we did in the Great Depression or as Japan faced for a decade. I do not believe this is a serious threat," he told an economic seminar at the University of Rochester Business school.

In Japan, falling prices after a property and stock market bubble burst made its economic downturn worse because assets dropped in value relative to the loans with which they were purchased, causing loan defaults and bank failures to soar. St Louis Federal Reserve President James Bullard, another anti-inflation hawk, separately made a similar point.

"Look at PCE (personal consumption expenditures) inflation measured from one year earlier. It smoothes out some of the fluctuations. It is still over two percent. It would take a lot to drag that down to a deflationary level," he told Bloomberg Television in an interview. "So I don't think the risk is that high right now. I do think that the inflation expectations are very fluid right now. The big challenge for the Fed is to keep these under control and keep people reassured that we are intending to stay near target," said Bullard, who is not a voting member of the Fed's interest rate-setting committee this year.

Fed Chairman Ben Bernanke is a long-standing advocate of inflation targeting, but was unable to persuade enough Fed colleagues of its merits when this topic was debated after he took over at the helm of the U.S. central bank in 2006. Plosser made clear he felt an inflation target would help the Fed communicate its monetary policy and keep deflation risks under wraps. "As long as inflation expectations remain well anchored, these declines in energy prices are unlikely to lead to sustained deflation any more than their previous increases were likely to lead to sustained inflation," said Plosser.

The Fed has slashed interest rates by 4.25 percentage points to 1 percent to contain the housing fallout and is expected to cut by another half point at its next scheduled meeting, on December 15-16, and maybe go to zero in January. Bullard made clear that he was not convinced by arguments for further rate reductions. "Fed funds is trading pretty low right now. I have not been a fan of going to really low levels," he said, noting that when the Fed held rates at 3 percent during the 1990-91 recession, the outcome had been good for growth, jobs and employment "In the 2001-2003 episode we went all the way down to 1 percent. Some have said that that created problems. So I think those two episodes: stopped at three, stopped at one. Why not stop at one this time? Why is it zero this time? I don't quite get that," he said.

Answering reporters' questions after his speech, Plosser said the Fed will face difficult decisions as interest rates go lower, including about how quantitative easing would work. If the Fed were to embark upon a regime of quantitative easing, using unconventional measures to boost the supply and circulation of money alongside conventional rate policy, he said it could buy a range of securities to expand its balance sheet, not just U.S. Treasuries or shorter-term securities. Asked if the Fed was already quantitatively easing, Plosser said it was "not unreasonable" to describe the Fed's recent balance sheet expansion as "a form of quantitative easing."

Financial Implosion and Stagnation
    But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed… We will then be in a new situation as unprecedented as the conditions from which it will have emerged.
    —Harry Magdoff and Paul Sweezy (1988)

“The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.” In response to a financial crisis of a magnitude not seen since the Great Depression, the Federal Reserve and other central banks, backed by their treasury departments, have been “bailing like hell” for more than a year. Beginning in July 2007 when the collapse of two Bear Stearns hedge funds that had speculated heavily in mortgage-backed securities signaled the onset of a major credit crunch, the Federal Reserve Board and the U.S. Treasury Department have pulled out all the stops as finance has imploded. They have flooded the financial sector with hundreds of billions of dollars and have promised to pour in trillions more if necessary—operating on a scale and with an array of tools that is unprecedented.

In an act of high drama, Federal Reserve Board Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson appeared before Congress on the evening of September 18, 2008, during which the stunned lawmakers were told, in the words of Senator Christopher Dodd, “that we’re literally days away from a complete meltdown of our financial system, with all the implications here at home and globally.” This was immediately followed by Paulson’s presentation of an emergency plan for a $700 billion bailout of the financial structure, in which government funds would be used to buy up virtually worthless mortgage-backed securities (referred to as “toxic waste”) held by financial institutions.

The outburst of grassroots anger and dissent, following the Treasury secretary’s proposal, led to an unexpected revolt in the U.S. House of Representatives, which voted down the bailout plan. Nevertheless, within a few days Paulson’s original plan (with some additions intended to provide political cover for representatives changing their votes) made its way through Congress. However, once the bailout plan passed financial panic spread globally with stocks plummeting in every part of the world—as traders grasped the seriousness of the crisis. The Federal Reserve responded by literally deluging the economy with money, issuing a statement that it was ready to be the buyer of last resort for the entire commercial paper market (short-term debt issued by corporations), potentially to the tune of $1.3 trillion.

Yet, despite the attempt to pour money into the system to effect the resumption of the most basic operations of credit, the economy found itself in liquidity trap territory, resulting in a hoarding of cash and a cessation of inter-bank loans as too risky for the banks compared to just holding money. A liquidity trap threatens when nominal interest rates fall close to zero. The usual monetary tool of lowering interest rates loses its effectiveness because of the inability to push interest rates below zero. In this situation the economy is beset by a sharp increase in what Keynes called the “propensity to hoard” cash or cash-like assets such as Treasury securities.

Fear for the future given what was happening in the deepening crisis meant that banks and other market participants sought the safety of cash, so whatever the Fed pumped in failed to stimulate lending. The drive to liquidity, partly reflected in purchases of Treasuries, pushed the interest rate on Treasuries down to a fraction of 1 percent, i.e., deeper into liquidity trap territory.

Facing what Business Week called a “financial ice age,” as lending ceased, the financial authorities in the United States and Britain, followed by the G-7 powers as a whole, announced that they would buy ownership shares in the major banks, in order to inject capital directly, recapitalizing the banks—a kind of partial nationalization. Meanwhile, they expanded deposit insurance. In the United States the government offered to guarantee $1.5 trillion in new senior debt issued by banks. “All told,” as the New York Times stated on October 15, 2008, only a month after the Lehman Brothers collapse that set off the banking crisis, “the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.

” But only a few days later the same paper ratcheted up its estimates of the potential costs of the bailouts overall, declaring: “In theory, the funds committed for everything from the bailouts of Fannie Mae and Freddie Mac and those of Wall Street firm Bear Stearns and the insurer American International Group, to the financial rescue package approved by Congress, to providing guarantees to backstop selected financial markets [such as commercial paper] is a very big number indeed: an estimated $5.1 trillion.”

Despite all of this, the financial implosion has continued to widen and deepen, while sharp contractions in the “real economy” are everywhere to be seen. The major U.S. automakers are experiencing serious economic shortfalls, even after Washington agreed in September 2008 to provide the industry with $25 billion in low interest loans. Single-family home construction has fallen to a twenty-six-year low. Consumption is expected to experience record declines. Jobs are rapidly vanishing. Given the severity of the financial and economic shock, there are now widespread fears among those at the center of corporate power that the financial implosion, even if stabilized enough to permit the orderly unwinding and settlement of the multiple insolvencies, will lead to a deep and lasting stagnation, such as hit Japan in the 1990s, or even a new Great Depression.

The financial crisis, as the above suggests, was initially understood as a lack of money or liquidity (the degree to which assets can be traded quickly and readily converted into cash with relatively stable prices). The idea was that this liquidity problem could be solved by pouring more money into financial markets and by lowering interest rates. However, there are a lot of dollars out in the financial world—more now than before—the problem is that those who own the dollars are not willing to lend them to those who may not be able to pay them back, and that’s just about everyone who needs the dollars these days. This then is better seen as a solvency crisis in which the balance sheet capital of the U.S. and UK financial institutions—and many others in their sphere of influence—has been wiped out by the declining value of the loans (and securitized loans) they own, their assets.

As an accounting matter, most major U.S. banks by mid-October were insolvent, resulting in a rash of fire-sale mergers, including JPMorgan Chase’s purchase of Washington Mutual and Bear Stearns, Bank of America’s absorption of Countrywide and Merrill Lynch, and Wells Fargo’s acquiring of Wachovia. All of this is creating a more monopolistic banking sector with government support. The direct injection of government capital into the banks in the form of the purchase of shares, together with bank consolidations, will at most buy the necessary time in which the vast mass of questionable loans can be liquidated in orderly fashion, restoring solvency but at a far lower rate of economic activity—that of a serious recession or depression.

In this worsening crisis, no sooner is one hole patched than a number of others appear. The full extent of the loss in value of securitized mortgage, consumer and corporate debts, and the various instruments that attempted to combine such debts with forms of insurance against their default (such as the “synthetic collateralized debt obligations,” which have credit-debt swaps “packaged in” with the CDOs), is still unknown. Key categories of such financial instruments have been revalued recently down to 10 to 20 percent in the course of the Lehman Brothers bankruptcy and the take-over of Merrill Lynch. As sharp cuts in the value of such assets are applied across the board, the equity base of financial institutions vanishes along with trust in their solvency. Hence, banks are now doing what John Maynard Keynes said they would in such circumstances: hoarding cash. Underlying all of this is the deteriorating economic condition of households at the base of the economy, impaired by decades of frozen real wages and growing consumer debt.

To understand the full historical significance of these developments it is necessary to look at what is known as the “lender of last resort” function of the U.S. and other capitalist governments. This has now taken the form of offering liquidity to the financial system in a crisis, followed by directly injecting capital into such institutions and finally, if needed, outright nationalizations. It is this commitment by the state to be the lender of last resort that over the years has ultimately imparted confidence in the system—despite the fact that the financial superstructure of the capitalist economy has far outgrown its base in what economists call the “real” economy of goods and services. Nothing therefore is more frightening to capital than the appearance of the Federal Reserve and other central banks doing everything they can to bail out the system and failing to prevent it from sinking further—something previously viewed as unthinkable. Although the Federal Reserve and the U.S. Treasury have been intervening massively, the full dimensions of the crisis still seem to elude them.

Some have called this a “Minsky moment.” In 1982, economist Hyman Minsky, famous for his financial instability hypothesis, asked the critical question: “Can ‘It’—a Great Depression—happen again?” There were, as he pointed out, no easy answers to this question. For Minsky the key issue was whether a financial meltdown could overwhelm a real economy already in trouble—as in the Great Depression. The inherently unstable financial system had grown in scale over the decades, but so had government and its capacity to serve as a lender of last resort. “The processes which make for financial instability,” Minsky observed, “are an inescapable part of any decentralized capitalist economy—i.e., capitalism is inherently flawed—but financial instability need not lead to a great depression; ‘It’ need not happen”.Much, much more

UK debt seen as riskier than France and Germany
Investors are predicting the likelihood of the UK Government defaulting on its debt is higher than that of Portugal, Belgium, the Netherlands, France, Finland, Germany and Norway failing to pay back their loans. The cost of buying insurance covering the Treasury from defaulting on its gilts in the next five years reached a record high of 106.5 basis points above Libor at one stage on Tuesday. A year ago the insurance, known as a derivative called a "credit default swap" (CDS) stood at 7.2 basis points. This compares to a CDS of 32.3 basis points for Norway, 38.1 for Germany and 54.4 for France. The Conservative party said the higher cost of insurance on the UK defaulting followed the record level of borrowing outlined in last week's pre-Budget report. The Government plans to borrow £118bn next year, leading to the issue of an unprecedented £146.4bn of gilts. Shadow Chancellor George Osborne said: "Just a week after the pre-Budget report the markets are delivering their own verdict on Gordon Brown's plans to double the national debt to more than £1 trillion pounds. "Thanks to the Government, many European countries, including Portugal and Belgium, are seen as safer investments than the UK."

Pound falls heavily against the dollar as interest rate cut expectations intensify
The pound had fallen by almost two cents against the dollar by midday, and the FTSE 100's decline continued amid gloomy reports and heightened expectation for a big interest rate cut tomorrow. Sterling fell 1.3pc against the dollar to $1.4741, compared with yesterday's close of $1.4937. Overall this year It has fallen by 25pc against the dollar. The pound was also marginally weaker against the euro at 85.75p, compared with yesterday's close of 85.14p on Tuesday. Dismal surveys from the manufacturing, services and construction sectors over the last three days have increased the likelihood and the expectation that the Bank of England's Monetary Policy Committee will slash interest rates by a full percentage point or more when it votes tomorrow. The expectation for lower UK rates in the mid-term is partly behind sterling's recent weakness.

The FTSE 100 was down only marginally by 7.32 points or 0.2pc at 4,115.54 despite a steeper decline earlier. The biggest faller was Stagecoach, at one point off 20pc, after it warned the outlook for rail was "challenging" despite reporting a 25pc increase in first-half profits. German and French stock markets also fell, with Frankfurt's DAX down 1.47pc, or 66.5 points, at 4465.29, and in Paris the CAC 40 fell 0.7pc or by 21.17 points to 3131.73 by 12.30. Dow futures were pointing toward the US index opening down nearly 1pc when trading begins in New York. Europe's main stock markets had closed sharply higher yesterday in a technical rebound, after suffering very heavy losses Monday on increasing concerns that the global economy faced a long and painful recession. In Asia stocks clawed back some ground in early trade after Wall Street rebounded last night on hopes for a US government rescue for ailing Detroit carmakers.

But the recovery from heavy losses the previous day was relatively modest and dealers said it was driven largely by technical factors, with sentiment still cautious following a recent flood of grim economic data. Stocks rose 1pc in Tokyo, 1.4pc in Hong Kong, 1.5pc in Seoul and 2.2pc in Sydney, after substantial falls on Tuesday. "The market continues to be influenced by US stocks, reversing recent losses slightly after the Big Three put forward their revamp plans," said Hideaki Higashi, a strategist at SMBC Friend Securities. Wall Street rose yesterday as the Big Three Detroit automakers pressed Congress for billions of dollars in emergency loans to avert a potentially catastrophic collapse. The Dow Jones Industrial Average rallied 270 points or 3.31pc, clawing back from a 679-point loss the previous day.

But Mr Higashi said the automakers would still face a bumpy road to clear negotiations with Congress before they get a bailout. "The rescue plan could be diluted from what they want," he warned. "There are calls for the management to take responsibility and protect payrolls in the auto sector, which is considered the soul of America, unlike financial companies." Wall Street was also boosted overnight by General Electric's better-than-expected business update. European investors drew encouragement from news that finance ministers from all 27 European Union nations endorsed plans for a stimulus package totalling 200bn euros, equivalent to 1.5pc of EU gross domestic product. Investors are looking to central banks this week for the latest round of action to combat the worst financial crisis since the 1930s which is threatening to plunge the global economy into recession. The European Central Bank and the Bank of England are both widely expected to slash interest rates on Thursday.

Economic news remained gloomy. Australia's economy grew just 0.1pc in the third quarter - its slowest pace in eight years, official figures showed. "It is difficult to see the rally in equities being sustained and it will not take much in the way of more bad economic news to bring a dose of reality back," warned analysts at the Calyon investment bank. There were also signs that the Chinese economy is slowing. The yuan fell by its maximum daily trading limit for a second consecutive day on Tuesday. The sudden drop in the value of the Chinese currency may signal a policy shift to prop up exports during the financial crisis, analysts said.

Interest rate cut: Willem Buiter says fears of run on pound will hold back MPC
Former UK policy maker Willem Buiter said that the only thing stopping the Bank of England from cutting interest rates to zero on Thursday is a fear that it will turn sterling's recent weakness into a "rout". Professor Buiter, a founding member of the Bank's Monetary Policy Committee, told the Daily Telegraph: "I expect rates to be cut to zero before long, the reason why this will not be done in one go but in two to three is because they'll be worried about what it would do to the pound."

Last month he called on the MPC's to slash interest rates by 1.5 percentage points to 3pc, a day before it made the shock decision to do so.
He is predicting another 1.5 point cut on Thursday to 1.5pc, arguing that the pound's current level against the dollar - it was $1.4802 at noon - would not yet be considered a sterling crisis. "When you get to $1.30, you are no longer talking about a welcome adjustment and competitive advantage, it's a rout," he said after giving a speech at the Council of Mortgage Lenders annual conference in London earlier in the day. He expects further interest rate cut will bring the bank rate down to zero - a first for the UK - in January or February.

The pound has fallen by 25pc against the dollar this year, and continued its decline today. Yesterday the pound dropped by the most in one day since Black Wednesday, when measured against a basket of major currencies. Charles Bean, the Bank's Deputy Governor for Monetary Policy, has stated previously that the depreciation of the pound should provide a welcome boost to exports, giving the UK a competitive advantage. He did however concede that sterling would become a concern if it fell to a certain level, although he would not comment on what that level would be.

Banks Negotiate Covenant Waivers With Troubled Corporate Borrowers
Royal Bank of Scotland Group Plc and Barclays Capital are supporting European companies with plummeting loan values by negotiating covenant waivers on their debt. Banks including London-based Barclays are negotiating a waiver of conditions for Ineos Group Holdings Plc, the U.K.’s largest chemical maker, on 5.8 billion euros ($7.4 billion) of debt. The talks follow a similar deal by RBS in July on loans to Madrid-based Cableuropa SA. Lenders in Europe are permitting the waivers at a fraction of the price charged by banks in the U.S., which hold less of the debt on their books.

"It’s bank self-preservation,” said Alex Moss, who oversees about $1.6 billion as head of high-yield bonds and leveraged loans at Insight Investment Management in London. "Banks are accepting waivers with as little fuss as possible to justify the high price they have their loans marked at.” Leveraged loans are high-risk, high-yield borrowings rated below investment grade by Moody’s Investors Service and Standard & Poor’s. European banks hold about 70 percent of loans, with the rest sold to investors such as hedge funds and pension managers, according to data compiled by Standard & Poor’s LCD as of the end of the third quarter. In the U.S., 20 percent of loans are distributed to banks.

Covenant waivers allow companies to breach terms and conditions on their loan agreements with banks. Covenants may limit the amount of debt a company can borrow as a proportion of earnings, or set limits on its spending. Letting a borrower go bankrupt may force banks to write down the value of loans when prices are at a record low, adding to $271 billion of losses by financial companies in Europe. U.S. companies paid an average 240 basis points on their loans’ face value to waive conditions this year, S&P LCD data show. Trinity, North Carolina-based Sealy Corp., the world’s largest bedding manufacturer, paid a 75 basis-point fee plus a 300 basis-point increase to the interest margin in November for such waivers on $517 million of debt. European companies paid 30 basis points, according to Bloomberg calculations based on data compiled by Deutsche Bank AG. A basis point is 0.01 percentage point.

"In Europe, where banks drive more relationship-based lending, fees for waivers are still way off” compared with the risk lenders take, according to Chris Taggert, a New York-based senior loan strategist at debt-research firm CreditSights Inc. Ineos, which had net debt of 7.29 billion euros as of Sept. 30, offered to pay its 233 senior lenders 50 basis points upfront, plus a fee of as much as 125 basis points a year, according to Chief Financial Officer John Reece. The Lyndhurst, England-based chemical maker asked banks to waive loan conditions as sales slumped. Moody’s cut the company’s credit rating to eight levels below investment grade Nov. 18. Traders of credit-default swaps are demanding investors pay the most ever for protection on Ineos, including an up-front fee. Barclays Capital and Merrill Lynch & Co., which arranged 5.8 billion euros of outstanding loans for the 2005 purchase of BP Plc’s Innovene unit in November, agreed to the waiver request.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. William Bowen, a spokesman at Barclays Capital in London, said the bank is supporting Ineos’s waiver request, and declined to comment further. London-based Merrill Lynch spokeswoman Victoria Garrod declined to comment. Bank of America Corp. bought the world’s biggest brokerage last month. Twenty-two covenant waivers were granted in Europe this year and only one was declined, according to Bloomberg data. "Lending banks inherently want to remain just that, lenders, and will only very reluctantly become owners of stressed businesses,” said Paul McKenna, London-based head of leveraged syndicated finance at ING Groep NV.

The European leveraged loan market is "more relationship driven” as "banks hold more of the paper” than in the U.S., said Siobhan Pettit, head of structured credit strategy at RBS, Europe’s biggest loan arranger according to Bloomberg data. Borrowing costs rose to a record for companies with non- investment grade ratings, below Baa3 by Moody’s and BBB- by S&P, Merrill Lynch indexes show. Companies seeking covenant waivers typically carry debt used to fund their acquisition by private- equity firms, and a lack of cashflow makes it difficult for them to service loans. With no access to capital to service their debt, some LBO companies may go bankrupt if creditors don’t allow them to break conditions on their loans. Bankruptcy may make the debt "impaired,” meaning creditors may have to write down holdings.

The value of high-risk, high-yield loans is near a record low, according to credit default swaps on Markit Ltd.’s iTraxx LevX index. The index is at 79 today, Dresdner Kleinwort prices show, compared with an all-time low for the current series of 78.5. Creditors write down the borrowings according to their recovery rate, which could be as little as 30 percent, according to Bloomberg calculations based on secondary-market leveraged loan prices. Cableuropa, Spain’s biggest cable TV operator, paid as much as 1 percentage point for a covenant waiver on 3.6 billion euros of loans from banks including RBS and Calyon in July, S&P LCD data show. Moody’s said in October it may downgrade the company. Grupo Corporativo Ono SA, Cableuropa’s parent, sought to "modify covenants for 2009 and 2010, while the company complies with covenants for this year, which is not the profile of a company in real trouble,” said a spokesman for the company in Madrid, who declined to be named because the negotiations were private.

Lenders to French auto-parts distributor Autodistribution SA changed conditions on 535 million of outstanding debt in August while Virgin Media Inc., the U.K.’s second biggest pay-TV company, said last month it’s paying lenders to defer payments. New York-based Virgin Media’s debt risk doubled this year to within 40 basis points of what traders consider distressed levels, credit-default swaps show. Virgin Media "proactively sought to address its amortization payments,” and the waiver will give the company "significantly more time to seek a complete refinancing of the principal amounts,” a London-based spokesman, who declined to be named, citing company policy, said in an e-mailed statement.

Congress eyes Big Three automakers' survival plans
Detroit's Big Three auto executives have ditched their corporate jets for hybrid cars and replaced vague pleas for federal help with detailed requests for as much as $34 billion in their second crack at persuading Congress to throw their struggling companies a lifeline.
Congressional leaders are reviewing three separate survival plans from Chrysler LLC, General Motors Corp. and Ford Motor Co. as they weigh whether to call lawmakers back to Washington for a special session next week to vote on an auto bailout.

In blueprints delivered to Capitol Hill on Tuesday, GM and Chrysler said they needed an immediate infusion of government cash to last until New Year's, and both said they could drag the entire industry down if they fail. Ford is requesting a $9 billion "standby line of credit" that it says it doesn't expect to use unless one of the other Big Three goes belly up. But Chrysler said it needed $7 billion by year's end just to keep running. And GM asked for an immediate $4 billion as the first installment of a $12 billion loan, plus a $6 billion line of credit it might need if economic conditions worsen. The two painted the direst portraits to date — including the prospects of shuttered factories and massive job losses — of what could happen if Congress doesn't quickly step in.

Democratic leaders voiced concern and a desire to do something to avert an automaker collapse, but they made no commitments about helping an industry that's made few friends lately on Capitol Hill. "It is my hope that we would" pass legislation to help the automakers, House Speaker Nancy Pelosi, D-Calif., said. Senate Majority Leader Harry Reid, D-Nev., said he would lay the groundwork Monday for a possible vote on an auto bailout measure. In their first round of pleas for a government rescue last month, the Big Three executives arrived in Washington on separate private jets and enraged lawmakers who said they failed to take responsibility for their companies' troubles or justify a federal bailout. "I think we learned a lot from that experience," Ford CEO Alan Mulally said.

He, as well as GM CEO Rick Wagoner and Chrysler chief Bob Nardelli, are all road-tripping the 520 miles from Detroit to Washington in fuel-efficient hybrid cars for hearings on Thursday and Friday. Mulally and Wagoner both said they'd work for $1 a year — something Chrysler's plan said Nardelli already does — if their firms took any government loan money. Ford offered to cancel management bonuses and salaried employees' merit raises next year, and GM said it would slash top executives' pay. Ford and GM both said they would sell their corporate aircraft. All three plans envision the government getting a stake in the auto companies that would allow taxpayers to share in future gains if they recover.

Leaders of the United Auto Workers were also discussing further concessions at an emergency meeting in Detroit on Wednesday. Under consideration were the possibility of scrapping a much-maligned jobs bank in which laid-off workers keep receiving most of their pay and postponing the automakers' payments into a multibillion-dollar union-administered health care fund. Still, an auto bailout remains a tough sell on Capitol Hill. Sen. Arlen Specter, R-Pa., said the mood in Congress "candidly is not supportive" of the automakers, although he called the consequences of just one of them failing "cataclysmic."

"Two of the Big Three say they cannot survive until the end of the year and if one or more goes down, all three go down," Specter said at a round-table discussion in Philadelphia. Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said the automakers still need to prove they can survive and be profitable. "If these companies are asking for taxpayer dollars, they must convince Congress that they are going to shape up and change their ways," Dodd said in a statement. His panel is to hear testimony Thursday from the auto executives, UAW chief Ron Gettelfinger, and the head of the Government Accountability Office on the companies' plans. The House Financial Services Committee is to hold a similar session on Friday.

Vehicle sales tumble 10% in Canada
The worsening North American economic storm has finally driven Canada's auto sales into the ditch. After showing strong resilience to deteriorating conditions for most of the year, showroom business slid 10.3 per cent, or more than 12,000 vehicles, to 105,221 in November from the same month last year, manufacturers reported yesterday. "I'm surprised it wasn't even lower given the amount of negative news surrounding the industry in the last month," said analyst Dennis DesRosiers. "The industry is in crisis. It destroys consumer confidence. It's code for `don't buy a vehicle.'"

November's decline marked the biggest percentage drop in monthly sales in Canada in 4 1/2 years. It was also the worst November for auto sales here in a decade. It came as the recession in the United States triggered another spectacular crash in the American auto market in November. Overall sales plunged 37 per cent to the lowest monthly total in more than a quarter of a century. U.S. sales at industry leader General Motors Corp. fell 41 per cent for the second straight month. Chrysler LLC's sales tumbled 47 per cent; Toyota Motor Corp., 34 per cent; Honda Motor Corp., 32 per cent and Ford Motor Co., 31 per cent.

"Everyone is getting hit now, not just the Detroit Three," DesRosiers said. The bleak sales numbers came the same day GM, Ford and Chrysler sought billions of dollars in emergency aid from the U.S. government. GM is seeking $18 billion (U.S.) in the form of a $12 billion term loan and a $6 billion line of credit; Chrysler requested a $7 billion bridge loan plus an additional $6 billion while Ford asked for a $9 billion revolving line of credit. GM and Chrysler said they needed the money by year's end, warning they could drag down the entire industry if they fail.

The same automakers will seek billions of dollars from the federal and Ontario governments later this week. The steep sales declines in the U.S., which have dragged on for 13 consecutive months, will mean more job losses in Canada as assembly plants and parts makers shut down because of plunging demand for vehicles. Canada exports more than 85 per cent of its vehicle output and 60 per cent of parts production to the U.S.

GM and Ford plan to slash North American production by 35 per cent in the first three months of next year. They have scheduled a 20 per cent cut in output in the final quarter of this year. The auto sector is already reeling from closings and unemployment in many manufacturing communities in southern Ontario. That decline accelerated in the past month, including the shutdown of two Magna International parts plants. The startling drop in U.S. auto sales reflects the erosion in household spending power because of falling home prices, sliding equity markets, tighter credit and a deteriorating job market. Those factors have now spread to Canada, economists say.

GM Canada, Honda Canada and Chrysler Canada led the losers here last month despite more heavy incentives for the holiday season. Sales at industry leader GM plunged 23.5 per cent to 21,486 while Chrysler's business dropped 15.5 per cent. Honda's sales, including the Acura luxury brand, tumbled 32.6 per cent to 9,224. A Honda spokesperson could not be reached for comment on reasons for the big decrease in view of a strong sales gain for the year. However, Toyota Canada, which has moved into second place behind GM, said its sales including the Lexus brand climbed 1.9 per cent to a record 12,792 during the month.

Ford of Canada's sales improved 1.1 per cent to 16,144 while Mazda Canada's business jumped 6.6 per cent to 5,024 and Nissan's deliveries including the Infiniti brand increased 1.5 per cent to 4,929. Overall, sales through the first 11 months are still up one half of a per cent in Canada, but analysts are forecasting a poor December will leave the industry with a loss for the year.

Big Three Auto Makers Compared To Toyota and Honda, a nonpartisan 501c3 nonprofit research organization, created the new website to explore the question "Should the Big Three auto makers be bailed out by the US government?" Pro and con statements addressing this question come from President-Elect Barack Obama, former Massachusetts Governor Mitt Romney, Nobel Prize winning economists Paul Krugman and Gary Becker, General Motors CEO Rick Wagoner, former US Energy Secretary and US Senator Spencer Abraham, and several others. Also included on the site are:
-- Chapter 11 bankruptcy laws explained,
-- Contracts between the Big Three and the United Auto Workers,
-- Analysis of "legacy" employees and their impact on profits, and
-- 144-point chart comparing GM, Ford, Chrysler, Big Three combined,
Toyota, and Honda.

Some interesting points from this chart comparison include:
* General Motors, Ford, and Chrysler had a combined US market share of 51.8% in December 2007. As of Oct. 2008, their market share declined by 5.1% to 46.5%. Toyota and Honda, during that same nine-month period, increased their US market shares by 3.1% to a combined 28.4%.
* In 2007, the Big Three sold 18 million autos for $387.5 billion. In 2007, Toyota and Honda sold 12.2 millions cars for $304 billion.
* In the US, the Big Three directly employ 242,000 people and an estimated 2.5 to 3 million indirectly.
* Ford received a $1.29 billion tax refund in 2007 while General Motors paid $37.16 billion in 2007 taxes.

GM, Chrysler Seek $11 Billion to Avert 2008 Collapse
General Motors Corp. and Chrysler LLC told Congress they need $11 billion in government loans just to survive the year. Democrats pledged to keep them out of bankruptcy without saying how. The aid requests delivered yesterday to U.S. lawmakers total $34 billion, more than a third larger than the plans they set aside last month, and heighten the pressure for action as a deepening auto slump quickens GM’s rush toward a default.

While President-elect Barack Obama has said he favors an industry rescue, GM and Chrysler said yesterday they won’t be operating through his January inauguration without the money stalled by a deadlock in Congress. Democrats want to use the $700 billion bank-bailout fund, and Republicans favor tapping an Energy Department loan program. “I believe that an intervention will happen,” House Speaker Nancy Pelosi, a California Democrat, told reporters at a briefing yesterday as GM, Chrysler and Ford Motor Co. sent their plans to Congress. “Everybody is disadvantaged by bankruptcy, including our economy, so that’s not an option.”

Still unresolved is how Pelosi and Senate Majority Leader Harry Reid propose to break the impasse with Republicans and President George W. Bush over the source of funds for a rescue. The $25 billion Energy Department loan program to retool factories is no longer enough to cover the three U.S.-based automakers’ needs after a worsening economy forced them to boost their aid requests. November auto sales plunged 37 percent to the lowest annual rate in 26 years.

GM is “in an emergency position,” Erich Merkle, an analyst at Crowe Horwath LLP in Grand Rapids, Michigan, said yesterday in a Bloomberg Television interview. “They need the cash. They need it very quickly.” The largest U.S. automaker said it must have $4 billion this month, while No. 3 Chrysler said it needs $7 billion right away. GM says it requires $4 billion more by the end of January as part of a total request of $18 billion. Chrysler’s total is $7 billion and Dearborn, Michigan-based Ford’s is $9 billion for a credit line it said it may not have to tap.

In exchange, the companies have agreed to slash their payrolls, shrink their dealership rosters and make other changes to ensure they’ll be able to pay the money back. The automaker chiefs will defend the plans at hearings tomorrow and on Dec. 5. GM is seeking to reduce total debt of $62 billion, including obligations related to a union retiree health-care fund, to about $30 billion, according to the plan. U.S. employment would fall to as little as 45,000 in 2012 from about 96,000 now under the plan, and Detroit-based GM’s main domestic brands would be pared to four from eight. GM will shrink Pontiac and may sell Saab and Saturn in addition to Hummer.

Chrysler called its request a “bridge loan” to cover immediate expenses. The Auburn Hills, Michigan-based company, owned by Cerberus Capital Management LP, said it expects an operating profit next year, while using up $2 billion in cash. Chrysler also says its plan assumes being awarded $6 billion in
government loans for upgrading plants to produce more fuel-efficient vehicles, and it forecast building 500,000 electric autos in 2013 after the first one debuts in 2010.

Ford’s proposal includes investing about $14 billion in the next seven years to improve fuel efficiency. The second-largest U.S. automaker also calls for focusing on its namesake brand through efforts such as exploring the sale of its Volvo unit. “There’s no question in my mind that the bridge loans make sense,” investor Mario Gabelli said today in a Bloomberg Television interview. The U.S. “cannot afford to lose” the auto industry, said Gabelli. His Gamco Investors Inc. held 3.7 million GM shares on Sept. 30, according to Bloomberg data.

GM fell 22 cents, or 4.5 percent, to $4.63 at 9:42 a.m. in New York Stock Exchange composite trading, while Ford dropped 1 cent to $2.69. GM’s 8.375 percent bonds due July 2033 slid 2.25 cents to 20.25 cents on the dollar, yielding 41.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Ford’s 7.45 percent bonds due July 2031 declined 0.54 cent to 25.56 cents on the dollar, yielding 29.2 percent. To help bolster automakers’ cost-cutting efforts, the United Auto Workers union called an emergency meeting for today in Detroit to consider concessions that make it less costly to cut jobs, people familiar with that session said.

Reid, a Nevada Democrat, said he will have legislation on the Senate floor Dec. 8 that can be used as a bailout measure if an agreement is reached. Pelosi, a California Democrat, stopped short of saying the House would meet, telling colleagues in a notice there was “the possibility” of a session next week. Commerce Secretary Carlos Gutierrez reiterated the Bush administration’s opposition to using the Troubled Asset Relief Program to pay for an industry bailout. “The intent of the TARP was to stabilize the financial system,” he said in an interview yesterday.

Representative Sander Levin, a Michigan Democrat, said lawmakers will find a way around the disagreements over funding now that automakers have detailed their needs. “The Big Three have mapped out more clearly what the future will be,” Levin said in an interview. “When these reports are analyzed I think the answer will be yes, it should be done, a bridge loan; and therefore it’s up to us to step up to the plate and figure out how it’s done.”

German car downturn 'worst ever'
The downturn in the German car market is "at a pace and magnitude that has never happened before", the country's main auto trade body has warned. As a result, the German Association of the Automotive Industry said new car sales in 2009 are expected to be the worst since reunification in 1990. It added that Volkswagen, Daimler and Porsche will all have to cut output, which will "impact" on workers.

Last week Porsche delayed its takeover of Volkswagen, blaming falling sales. Porsche said there were signs of a "serious slump" in global demand. Volkswagen itself has warned that the current sales environment is "difficult", while Daimler, owner of Mercedes-Benz, said the situation is "very challenging indeed".

German car sales are expected to slip to 2.9 million next year, down from the expected 3.1 million for 2008, says the trade body. Car sales are also lower across Europe, with Italy's Fiat warning that its 2009 profits could fall by 65%. Meanwhile Toyota, Honda and Nissan are all trimming production at their European plants.

In the US, the big three American car firms - General Motors (GM), Ford and Chrysler - have submitted proposals to Congress for multi-billion dollar loans they say are vital to their survival. They have asked for a combined total of $34bn (£22.8bn; 26.8bn euros). Meanwhile, the Swedish government has said it would be prepared to offer financial support to Ford subsidiary Volvo, and GM unit Saab. However, it said it would not be interested in nationalising the two companies.

How to avoid the horrors of ‘stag-deflation’
The US and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation. A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labour costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.

Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero – leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors’ problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions.

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary to reduce the rising spread between long-term interest rates on government bonds and policy rates and the high spread of short-term and long-term market rates (mortgage rates, commercial paper, consumer credit) relative to short-term and long-term government bonds. To reduce the former spread the central bank needs to commit to maintain policy rates close to zero for a long time and/or start outright purchases of government bonds; to reduce the latter it needs to spread massive liquidity, such as by direct purchases of commercial paper, mortgages, mortgage-backed securities (MBS) and other asset-backed securities. The Fed has already crossed that bridge with facilities that are aimed at reducing short-term market rates, such as Libor spreads; it has now moved to influence long-term mortgage rates by buying MBSs.

Traditionally, central banks are the lenders of last resort but they are becoming the lenders of first and only resort, as banks are not lending. Central banks are becoming the only lenders in the land. With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge. The financial crisis has already become global as financial links transmitted US shocks globally. The overall credit losses are likely to be close to a staggering $2,000bn. Thus, unless financial institutions are rapidly recapitalised by governments the credit crunch will become even more severe as losses mount faster than recapitalisation.

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government. In the next few months, the flow of macroeconomic and earnings news will be much worse than expected. The credit crunch will get worse, with deleveraging continuing as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, leading to further cascading falls in prices, other insolvent financial institutions going bust and a few emerging market economies entering a full-blown financial crisis. The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and co-ordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

Post-bubble realities
The textbooks have little to say about post-bubble economies. That makes the current prognosis all the more problematic. A profusion of asset bubbles has burst around the world – from property and credit to commodities and emerging market equities. That’s an especially rude awakening for a global economy that has become dependent on the very bubbles that are now imploding. It is as if the world has suddenly been turned inside out.

The American consumer is a case in point. Real personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008, at roughly a 3.5 per cent average annual rate. Since 1950 there have been only four instances when real consumer demand fell for two consecutive quarters. Declines will exceed 3 per cent in both quarters for the first time. Never before has there been such an extraordinary capitulation of the American consumer.

Similar extremes are evident elsewhere. Europe and Japan have joined the US in the first synchronous G3 recession of the post-second-world- war era. Nor has the developing world been spared. While most big developing economies should avoid outright contractions in overall output, sharp deceleration is evident in China, India and Russia. Hong Kong and Singapore – Asia’s two prosperous city states – are both in recession. Moreover, reminiscent of the Asian financial crisis of 1997-98, the currencies of South Korea, Indonesia and India are under severe pressure. As the commodity bubble implodes, a similar boom-bust pattern is unfolding in Australia, New Zealand, Canada and the Middle East.

Crises invariably trigger finger-pointing. This one is no exception. Global observers have been quick to blame the US, arguing that it’s all about the excesses of Wall Street and America’s subprime fiasco. Some would take it even further and condemn the freewheeling model of market-based capitalism. Let the record show, however, that while the US certainly made its fair share of mistakes, the rest of the world was more than happy to go along for the ride.

That’s especially the case in Asia. China and other producers upped the ante on their export-led impetus to economic growth. By 2007, the export share of Developing Asian gross domestic product exceeded 45 per cent – fully 10 percentage points higher than the share prevailing during the Asian crisis of the late 1990s. Moreover, the Chinese led the way in recycling a disproportionate share of their massive reservoir of foreign exchange reserves back into dollar-based assets. That kept the renminbi highly competitive, as any export-led economy likes, but also prevented US interest rates from rising – keeping the magic alive for bubble-dependent American consumers.

In effect, the world’s bubbles fed off each other. Nor did anyone force the German Landesbanks and the Swiss universal banks to invest heavily in toxic assets. And the new mega-cities of the Gulf region – Dubai, Doha, Riyadh, and Abu Dhabi – owe their very existence to the oil bubble. Now all of these bubbles have burst, leaving a bubble- dependent world in the lurch.

A post-bubble shakeout is likely to be the defining feature of the global economic outlook over the next few years. Three conclusions are most apparent:
One, do not analyse a post-bubble recession as a normal business cycle. As economies that levered their asset bubbles to excess – especially the US – come to grips with tough post-bubble realities, a powerful deleveraging will ensue. That could prolong the duration of the downturn, as well as inhibit the vigour of the subsequent recovery.

Two, on the demand side, focus on the American consumer – the biggest and most over-extended consumer in the world. With personal saving rates still close to zero and debt loads remaining at all-time highs, US consumption is heading for a Japanese-style multi-year adjustment. After 14 years of nearly 4 per cent average growth in US real consumer spending, gains could slow to 1-2 per cent over the next 3-5 years. And no other consumer in the world is likely to step up and fill the void.

Three, on the supply side, focus on China. Industrial production growth has been cut in half in China – rising at just 8 per cent year on year in October following five years of average gains of about 16.5 per cent. With the global economy in recession, this outcome should hardly come as a surprise for a Chinese economy that has seen its export share of total gross domestic product rise from about 20 per cent to nearly 40 per cent over the past seven years. China is paying a price for its own imbalances – especially a lack of support from internal private consumption.

In short, look for a post-bubble world to remain in recession throughout 2009, followed by an anaemic recovery, at best, in 2010. In an era of globalisation, we became intoxicated with what cross-border linkages were able to deliver on the upside of a boom. But as that boom went to excess and spawned a lethal globalisation of asset bubbles, the inevitable bust now poses an exceedingly tough hangover.

Bleak outlook for U.S. oil refiners
Even by the standards of a deep-cyclical industry, the “golden age” of oil refining has proved remarkably brief, lasting no more than three years, before giving way to a new dark age. Particularly in the United States, refiners have returned to the state of chronic unprofitability that plagued the industry before 2005. U.S. refiners now have too much capacity and produce the wrong products (gasoline) in a fuel economy increasingly dominated by ethanol and diesel. Capacity cuts of as much as 0.5-1.0 million bpd (equivalent to 4-8 average refineries) and expensive investment to reconfigure the system to increase the diesel yield seem inevitable.

In May 2007, U.S. refiners paid an average of about $64 a barrel to acquire high quality West Texas Intermediate (WTI) crude (less for other grades) and sold gasoline for $97 per barrel - a margin of $33 per barrel or 52 percent. By November 2008, U.S. refiners were paying $62 to acquire WTI but selling gasoline at a loss for just $52 - a negative margin of $10 or 16 percent. Other outputs are still profitable (notably diesel and heating oil) and many refineries will have acquired lower-quality crudes for less than the WTI price. The overall gross margin was still (just) positive. But the NYMEX benchmark 3-2-1 crude oil-gasoline-heating oil has shrunk from $30 per barrel to just $3. Once operating costs (including natural gas, electricity, water and catalysts) as well as capital expenditures (building, maintaining and upgrading refineries) are taken into account, the industry is making little or no profit.

Demand for gasoline and other refined products has been falling for more than a year, initially in response to high prices and now as a result of a weakening economy, leaving refiners with a huge overhang of unused capacity. The total volume of refined products supplied to the domestic market averaged just 19.2 million barrels per day (bpd) in the four weeks ending Nov. 21, down 1.7 million bpd (8 percent) from 20.9 million bpd in the same period last year. The volume of motor gasoline supplied (9.0 million bpd) was down 300,000 bpd (3.3 percent) compared with last year (9.3 million bpd). Refiners have responded with run cuts and record exports of both gasoline and distillates to avoid flooding the domestic market and collapsing prices further.

Operating rates have been below year-ago levels since the start of 2008. Refineries processed 15.2 million bpd of crude and other inputs in the week ending Nov. 21 - using just 86.2 percent of their 17.6 million bpd maximum capacity, and leaving more than 2 million bpd of crude distillation capacity idle. Refiners also sent increasing volumes of refined products abroad to avoid flooding the domestic market. Refiners and merchants ramped up gasoline exports from 38 million barrels in Jan-Sep 2007 to 50 million in Jan-Sep 2008 (+32 percent) and distillate exports from 52 million barrels to 146 million (a massive increase of +182 percent). It has not been enough. By Nov. 21, reported gasoline inventories stood at 200 million barrels (22.3 days of supply) up from 197 million barrels (21.2 days cover) in 2007.

Refinery gasoline is increasingly squeezed out by ethanol. U.S. ethanol production has tripled from 260,000 bpd in Sep 2005 to 640,000 bpd in Sep 2008, with another 80,000 bpd of ethanol imported. As a result, ethanol is cutting almost 750,000 bpd of demand for fossil-fuel refinery-derived gasoline. In Sep 2005, some 8.9 million bpd of gasoline was supplied to the domestic market, of which 8.7 million bpd came from refineries and just 0.3 million bpd was sourced from ethanol distilleries. Three years later, in Sep 2008, the volume of gasoline supplied had fallen 400,000 bpd to 8.5 million bpd. But while the volume of ethanol sourced from distilleries had risen by 0.5 million bpd to 0.7 million bpd, the volume of gasoline sourced from refineries was down by a massive 1 million bpd to 7.7 million bpd. Roughly half the refinery demand lost over the last three years is due to increased ethanol (500,000 bpd), while the remainder is due to cyclical factors (400,000 bpd).

The displacement of refinery gasoline is an explicit objective of federal policy to reduce U.S. oil imports. It has been accelerated by the surge in crude oil prices during 2007-2008, encouraging widespread voluntary blending of cheaper ethanol into the domestic fuel supply. But increased blending volumes threaten to strand many U.S. oil refineries as white elephants with no long-term future. Refinery utilisation rates have been trending down since the start of the decade, but the loss of demand has accelerated notably since widespread ethanol blending commenced in 2005. As a result, there is an increasingly wide gap between system capacity and actual throughput. More than 2.0 million bpd of crude distillation capacity is sitting idle.

The last time the refining system had more than 1 million bpd of spare capacity was in the early 1990s, when refiners responded by mothballing facilities and closing plants, cutting capacity by more than 500,000 bpd between 1992 and 1994. Even with refinery shutdowns, the long-term outlook is bleak. The Energy Information Administration (EIA) projects gasoline consumption will increase from around 142 billion gallons in 2006 to 151 billion gallons in 2030 (based on an increasing population and rising car use, partly offset by improved fuel efficiency). But the fossil-fuel content of that gasoline is scheduled to drop from 136 billion gallons to just 125 billion gallons as the ethanol content rises from 5.5 billion gallons to 25.8 billion gallons to comply with Renewable Fuel Standard (RFS) targets.

As if falling demand and the increasing challenge for ethanol were not enough, U.S. refiners face a deeper structural problem. Most of the world relies on diesel rather than gasoline for transportation fuel and heating demand. According to the International Energy Agency (IEA) the world consumed just 0.75 gallons of gasoline for every gallon of diesel in 2005, and the refinery system was configured to produce the two fuels in roughly the same proportion. The U.S. petroleum economy is highly unusual in that it is tilted towards consumption and production of gasoline. The United States consumes almost two gallons of gasoline (1.97) for every gallon of diesel; the European Union consumes only 0.40 gallons and China consumes 0.48 gallons.

Until recently, that led to a mutually beneficial trade, with the United States exporting surplus diesel, while Europe and China exported surplus gasoline. But U.S. refiners now face the problem that in the fastest-growing parts of the petroleum economy (China, Asia, the Middle East and Africa) the marginal demand is for diesel, while their marginal supply is gasoline, for which demand is stagnating. The global economy now faces a structural surplus of gasoline and a structural shortfall of diesel. By implication, the world has too much capacity for producing gasoline (much of it concentrated in the United States) and not enough capacity for producing diesel (especially in Asia).

As a result, U.S. refiners face increased competition in their domestic market from imported gasoline, while they struggle to produce enough diesel to sell abroad. This mismatch explains why U.S. diesel exports have risen much faster in the past year than gasoline, even though it is the domestic gasoline market which is most oversupplied. The United States now has too many refineries for its increasingly ethanol-based economy, and they produce the wrong product mix for a dieselised global economy. U.S. refiners have begun to reduce gasoline production. But yield changes have been marginal (1-2 percentage points), reflecting the technical limitations of the existing refinery units.

In the short to medium term (12-24 months), it seems virtually certain U.S. refiners will have to cut total capacity sharply, perhaps as much as 0.5-1.0 million bpd, 4-8 average refineries. In the longer term, they have no choice but to undertake substantial capital expenditures to shift the system towards more diesel.

Merrill Said to Cut Bonuses by 50% as Revenue Slumps
Merrill Lynch & Co. plans to cut year- end bonuses in half after more than $20 billion of losses that forced the U.S. securities firm to sell itself to Bank of America Corp., two people with knowledge of the situation said. The average bonus reduction will be about 50 percent at the New York-based company, and some traders and investment bankers will face steeper cuts, said the people, who declined to be identified because the plans aren't public. While employees won't find out their bonuses until later this month, division managers are being told now how much they'll get to distribute.

Merrill's revenue through September fell 96 percent from a year earlier, forcing Chief Executive Officer John Thain to slash compensation -- the firm's biggest expense. Congressmen and regulators scrutinizing Wall Street pay have sought to ensure that economic-rescue funds from the U.S. government are used to stimulate lending and not to enrich executives. The drop in bonuses at Merrill would be less severe than the 70 percent average cut for senior Wall Street executives that compensation consultant Johnson Associates predicted last month. Bonuses for rank-and-file workers may fall by 10 percent to 45 percent, according to Johnson. Bonuses account for the bulk of a year's pay for most traders and investment bankers, and usually fall when markets sour. Merrill spokeswoman Selena Morris declined to comment. The shares slipped 4.3 percent to $11.06 in New York trading today.

A crisis of confidence sent Merrill shares plunging 36 percent in a single week during September, forcing the firm to sell itself to Charlotte, North Carolina-based Bank of America. Shareholders of both companies are scheduled to vote on the deal this week, with the closing targeted for the end of December. Merrill and Bank of America were allotted a combined $25 billion of government money in October, when the Treasury Department agreed to invest $125 billion in nine of the biggest U.S. banks to bolster their dwindling capital.

Hit with mortgage-bond writedowns and plunging investment- banking fees, Merrill may report a loss this year of $13.3 billion, based on the average estimate of nine analysts surveyed by Bloomberg. That would be almost twice as wide as the $7.8 billion loss for 2007, then a record for the 94-year-old firm. The company has dropped 78 percent this year in New York Stock Exchange composite trading and closed yesterday at $11.56.

Merrill's costs for compensation and benefits this year through September totaled $11.2 billion, down 3 percent from a year earlier. Although bonuses aren't paid until the end of the year, Wall Street firms usually estimate them in advance and account for a portion of the payout costs in each quarter. Even if Merrill set aside nothing for compensation in the fourth quarter, the firm's 60,900 employees still would reap an average of $184,000 in compensation and benefits for the full year.

In 2007, Merrill paid out a total of $15.9 billion in compensation, or about $248,000 per employee. Merrill's net revenue for the first nine months of this year totaled $834 million, or $13,695 per employee, compared with $19.4 billion in the 2007 period. The plunge in revenue stemmed from trading losses on bonds and other assets. The bulk of Merrill's writedowns came in the fixed-income-trading division, which contributed negative net revenue of $21.4 billion. Investment-banking net revenue plunged 25 percent to $2.58 billion.

Merrill's brokerage division, the biggest of its kind in the U.S. with 16,850 financial advisers, generated $10.2 billion of net revenue during the first nine months, down 2 percent from the prior year. Brokers don't depend on bonuses as traders and investment-bankers do, because their annual pay is based on a formula that's linked to sales. Goldman Sachs Group Inc., Wall Street's most profitable firm, said last month Chief Executive Officer Lloyd Blankfein and six deputies would forgo year-end bonuses. Executives at Frankfurt-based Deutsche Bank AG and UBS AG in Zurich also have agreed to waive pay. Merrill officials have declined to comment on bonuses for top executives, saying the payouts hadn't been set. Thain, 53, a former Goldman Sachs executive, received a $15 million bonus when he joined Merrill last December.

Manulife, in red, raises new equity
Expecting to suffer its first loss as a public company, Manulife Financial Corp. is reluctantly tapping the market for equity, the second Canadian financial institution to do so in as many weeks because of investor pressure to boost softening capital levels. Chief executive officer Dominic D'Alessandro said in an interview Tuesday the equity move is “not what I would have preferred to do, but like everybody else, when the facts change maybe it's an indication you should change your position.”
The move will put Manulife in a position to not be left out of the race for acquisitions as the global life insurance industry goes through a round of consolidation.

Manulife is issuing at least $2.125-billion of common equity to raise its capital levels, which have been walloped because of the company's large exposure to stock markets.
It now expects to lose $1.5-billion in the fourth quarter, the first time it has not earned a profit since going public in 1999. On a mid-October conference call, Mr. D'Alessandro told analysts that the insurer remained very well capitalized and “we have no intention to issue equity capital, contrary to speculation that came to our attention.” Instead, Manulife went on to arrange a $3-billion loan from the big banks to bolster its financial cushion.

But stock markets continued to tank, eating away at the large investment portfolio that Manulife holds in its variable annuity and segregated funds business. As those investments sink, Manulife is required to put more money aside as capital. Its shareholders weren't satisfied. “We thought the $3-billion facility that we put in place had allayed the concerns that were out there, but it didn't do the job,” Mr. D'Alessandro said in Tuesday's interview. “Our stock price kept suffering from weakness and we kept hearing from investors and other people close to the company that maybe we should just bite the bullet and put it behind us because no one knows how long these uncertain times are going to be with us.”

The company would not have changed its tune if it were convinced that this was “a passing storm,” he said. “But it may endure for a while and we don't want to be in a position where there are all kinds of things happening in our business and we're on the sidelines.” Shane Jones, managing director of Canadian equities at Scotia Cassels, which owns Manulife shares, said the company should have taken action sooner. “Now they've come to market at the bottom. If they had raised equity a month ago they would have done it at a better price.”

Raising more equity will safeguard the insurer from further declines in stock markets as well as boost Mr. D'Alessandro's ability to snap up more assets before he leaves his post in May. Manulife chief investment officer Don Guloien, who will replace Mr. D'Alessandro when he retires next year, has met with bankers to examine parts of American International Group Inc., sources have told The Globe and Mail. Manulife is also believed to be keeping an eye on U.S. rivals whose share prices have been battered by the financial crisis.

Last week, Toronto-Dominion Bank CEO Ed Clark decided to issue $1.4-billion of common equity, days after suggesting he would do no such thing. Like Mr. D'Alessandro, Mr. Clark also said he faced pressure from investors. The sudden death of massive financial institutions such as Lehman Brothers has caused the market to attach a new importance to capital, which provides firms with a buffer in times of trouble. The capital ratios of all of Canada's largest banks and insurers have remained well above the minimum levels that regulators require, but that's no longer good enough.

Mr. D'Alessandro believes that the capital requirements for Canadian life insurers, dictated by the Office of the Superintendent of Financial Institutions, are still too strict. OSFI changed the rules in late October to give Manulife and its rivals more breathing room. But Manulife is still required to put aside large amounts of capital each time stock markets drop.

“Markets go down 10 per cent and you've lost 15 points of your elbow room,” Mr. D'Alessandro said. With the new equity, the insurer's capital ratio (called the MCCSR, or Minimum Continuing Capital and Surplus Requirements) will be about 235 per cent, one of the highest levels in the company's history. Manulife aims to keep the ratio between 180 and 200 per cent, and OSFI requires that it remain above 150 per cent.

Manulife will now pay back $1-billion of its bank loan and sell $1.125-billion of equity by way of a private placement to eight existing institutional investors such as the Caisse de dépôt et placement du Québec, the investment arms of big banks including Royal Bank of Canada and Toronto-Dominion Bank, and Jarislowsky Fraser Ltd. A further $1-billion is being sold to the public in a bought deal. The new equity is being issued at $19.40 a share.

This Season, Some Tempers Simmer
When Arnold Shokouhi, an attorney in Dallas, told his cousin that financial difficulties meant he and his fiancèe weren't going to make it to the family's Thanksgiving gathering in Florida this year, she said, "Oh, you don't care about us," says Mr. Shokouhi. He responded: "I love you, but I have to pay for my mortgage, my car, my food." Mr. Shokouhi says that some clients at his business-litigation firm haven't paid bills in several months, and that he and his fiancèe are saving for a summer wedding. The money crunch is "somewhat of a strain" on his family, says the 27-year-old, "because those trips you used to make you can't make."

As the holiday season sets in, a cloud of financial tension hangs heavy over this year's festivities. For many, it means deep cuts into holiday budgets for things like gifts, travel and special meals out -- but also extra helpings of guilt, negotiation and strain among family members. To be sure, the holidays are a stressful time for families in general. But recent layoffs and home foreclosures have left many people reeling. They are now grappling with unexpected situations, such as how to tell family members that they won't be buying gifts this year, or that they can't afford to travel as they had originally planned.

The National Foundation for Credit Counseling, a trade association for nonprofit credit-counseling services, says calls to its debt help line increased 87% during the second week of November, compared with last year. During the third week of November, call volume increased 170%, compared with the same week last year. Though "Black Friday" holiday sales were higher than expected, TNS Retail Forward, a retail research firm, predicts that the season's spending will be the weakest since 1991. The Commerce Department recently reported that U.S. retail sales dropped by 2.8% in October -- the largest monthly drop since records were compiled in 1992. Travel-industry associations predicted that fewer people would travel over Thanksgiving by both car and airplane, though definitive Thanksgiving travel data won't be available for weeks.

Police departments say domestic disputes, theft and alcohol-related incidents increase over the holidays anyway, but they are gearing up for an especially busy season this year because of financial stress. "A lot of parties argue on Christmas Day" about money spent on presents, says Julie Yingling, a detective and domestic-violence coordinator with the St. Mary's County Sheriff's Department in Leonardtown, Md. Domestic-disturbance calls are already up 30% year-to-date over last year in Leonardtown, and the common denominator "is parties began arguing about financial maters," says Ms. Yingling. The county police department is trying to get out the word that crisis hotlines, emergency shelters and community mediation services are available throughout the holidays.

Less extreme than crime, however, are the nagging conflicts created in families hit hard by the sour economy. Heather Epkins, a doctoral student in Edgewater, Md., says she canceled a Christmas trip to her husband's family in North Carolina in hopes of paying off debt with the savings. Now a trip to a cousin's Florida wedding in February is in jeopardy because of finances. Missing the wedding and Christmas "could become a source of contention in the family," says Ms. Epkins. "They understand about Christmas, but they want us at the wedding." Ms. Epkins and her husband will spend Christmas in Annapolis, Md., with her family, though the group decided to skip its long-standing tradition of Christmas Eve dinner at a nice restaurant downtown. Instead, a family member will host a potluck meal, and the group will take its traditional drive around the neighborhood to look at Christmas lights.

How money is allocated is a topic of family negotiations. Meghan Gaydos, a 28-year-old teacher in Phoenix, says she couldn't afford any trips home this year for the holidays, so she joined the 22-person Thanksgiving festivities in Cleveland via speaker phone. For Christmas, her family of five will fly to her home in Arizona. "It's rough because I prefer Thanksgiving over Christmas because it's more about just being together and not worrying about gifts," Ms. Gaydos says.

Gift-giving is also up for negotiation. To offset the expense of flying to Phoenix over Christmas, the family originally decided not to give each other gifts this year. But that plan didn't go down well for everyone. Now, Ms. Gaydos's mother Marianne says, "People are saying, 'You mean we really aren't going to get anything?' " The matter has been discussed again in the past few weeks, and the family has settled on gifts under $20 for each other. Marianne says she will likely get "cute little cosmetic things" for her daughters to stay under the $20 limit. Many families are shopping only for children, or they're opting for "secret Santa" -- where each member draws a name and buys one present for that person.

Gwendolyn Simon, a stay-at-home mom in Cape Carol, Fla., says that her husband's pest-control business has had a slow year. Even though finances aren't yet dire, the adults in her family agreed to forgo gifts for everyone but children this year. She estimates that she and her husband will spend about 25% less than in past years. She says the thing she will miss most is skipping an annual family December trip to Disney World. Missing this visit is "probably the thing that makes me the saddest. I've gone to Disney since I was a kid around the holiday," she says. The guilt of not being able to buy the same dollar amount of gifts this year weighs on many people, especially those with children, say therapists. Mike Bertrand lost a series of jobs over the past two years, and then his family lost their Thousand Oaks, Calif., home to foreclosure in May.

The 37-year-old Internet marketer and Web-page manager says that his family won't travel over the holidays, and that he and his wife will buy only a few presents for their children this year -- and none for the extended family. Instead, they have invited family to come to their rented home for the holidays. He says their two children and extended family understand, but he feels guilty about not buying gifts. "I had been providing for the family for a long time and it stresses me out." Of course many people see the holidays as a welcome reprieve from gloomy financial news, even if activities and gifts have been curtailed. Mr. Bertrand says he is looking forward to his brother's Christmas visit from Las Vegas. And Ms. Simon says her two sons were thrilled to be putting up their Christmas tree the day after Thanksgiving. "It will be nice to have time off together" as a family over the holidays, says Ms. Simon.

For families, the key to an enjoyable holiday season is avoiding the temptation to pass judgment over financial setbacks. Jack Doman, a marriage and family therapist in Thousand Oaks, Calif., says, "I have one couple who says being with one side of the family is stressful. Being with the other side is not." That's because "one side is supportive, understands the financial situation. The other side says things like, 'You know, if you had really been a little bit more careful with your money...maybe you wouldn't be in this situation.' " A guilt-trip could ensure a family member in financial distress stays away for the holidays, says Mr. Doman. "Even if they are the most functional family, if they are not supportive, you don't want to spend time with them."

Local arts feel economic pinch
When the credit crisis went into full swing in September, financial institutions weren't the only ones that felt the crunch. “Come September, you can almost clock it,” said David A. White III, executive director of the Missouri Theatre Center for the Arts. White said that when the economy took a dive, the theater began to see a thinning in crowds. “We are more than busy in regard to the use of the hall,” White said. Since reopening in May, the theater is booked 25 days per month, on average. “What I am seeing is a decline in some events’ audience attendance,” White said. “I’ve also noticed that charitable gifts to the arts have closed down.”

Jennifer Perlow of Perlow-Stevens Gallery hopes that even as budgets tighten, people keep arts organizations and businesses in mind. “If people have the means, they need to make sure they are spending their money locally,” Perlow said. She and her husband, Chris Stevens, own the gallery. The Missouri Theatre, as well as the gallery and other downtown businesses, are local examples of a nationwide downturn in arts spending. For months, the arts communities in such cultural meccas as New York, Los Angeles and London have been abuzz about the effects of the economy on the arts world. Many people are saying that, much like the housing market, the recent success of the market for visual art was a bubble might have already burst.

For evidence, look no further than the current condition of the major auction houses. On Sept. 15, the day the Dow Jones Industrial Average dropped more than 500 points, initiating a decline, Sotheby's began its ground-breaking auction of works by Damien Hirst, one of the world's most influential living artists. Sotheby's reported that the sale netted $200.8 million, setting a record for an auction of works by a single artist. But since that auction, which has been seen as the pinnacle of the art market's excess, London-based Sotheby's has fallen on hard times. In a filing with the U.S. Securities and Exchange Commission on Nov. 14, the company reported that its losses for the third quarter were $10.6 million more than originally estimated because of guarantees in auctions that weren't met. Guarantees act as reserve prices that ensure the seller a certain sale price. The filing attributes the larger-than-expected loss to the "reevaluation of its estimates in the wake of the recent turbulence in the global financial and credit markets."

But financial woes aren't limited to the world's largest art dealers. Arts communities at many levels are seeing a drop in business, though it can be hard to quantify. The Missouri Arts Council, a state agency that handles much of the grant money given to cultural organizations, has recently seen an increase in grant applications. But the council also received a huge bump in funding over the summer. Gov. Matt Blunt approved more than $6.6 million in new grant money in August, which allowed the organization to solicit more applications. It is unclear whether the increase in applications from Missouri arts organizations is because of those solicitation efforts or because of the economy. And in Columbia, the Office of Cultural Affairs has no hard data to indicate the economy's effects on the arts.

Some businesses in the arts community admit to feeling the pinch. The downturn has already cut into the Missouri Theatre’s budget. "We’ve had to adjust our spending," White said. "We’re trying to do things on a more viral level and finding the free ways to communicate our message without investing money." White said the drop in attendance might not translate to other forms of entertainment. But the Missouri Theatre hosts performances as varied as ballet, movies and rock shows, and White said he has seen smaller audiences across the board.

The Perlow-Stevens Gallery, which exhibits and sells art in downtown Columbia, has also taken a hit since September. "We have certainly been affected," said Perlow, who co-owns the gallery. "I think that the action that’s being taken now is really a fear-based action. It’s not necessarily what people are seeing in their personal economic situation, but what they see overall."

Still, other organizations have not yet seen any effect. Alex Innecco, director of music ministries at the Missouri United Methodist Church, said that both donations and attendance at the church’s concerts have remained steady. He thanks the low ticket prices of the church's concert series for that. "For everything that we do, the price is very accessible. It is $10 (in advance), and that is not going to change," Innecco said. Tickets at the door are $20. Innecco likened the trend to what happened during the Great Depression, when cheaper forms of entertainment thrived. In 1929, "the stock market crashed. That’s when Broadway really came on as a strong cultural outlet because the tickets at the time were very cheap. People needed a release from everything that was going on," Innecco said. "Of course, with Broadway, it’s not the case anymore. But things like movies and things that are accessible, I don’t think that they will suffer because people will need relief from what is going on."

Poppy, a downtown crafts and fine arts store, has even seen a recent boost in business. "Our sales overall for the year have been strong, and they’re up from last year," owner Barbara McCormick said. She listed several reasons for why Poppy could be insulated from the economic downturn, including a loyal customer base, a selection of goods that isn’t available anywhere else in Columbia and a wide range of prices. "We have things that are extremely affordable, and we have things that are extremely collectible," McCormick said. Still, the shop needs a strong holiday season to maintain a good year of sales. McCormick said she expects to meet that goal, though she can't be sure.

Mary Benjamin, one of five owners of Bluestem Missouri Crafts, said much the same thing as McCormick. The store hasn’t felt any stress from the economy, and she cites its ability to appeal to any pocketbook as one reason. “As a small business, we can become more nimble, so we’re making sure we have things that are moderately priced,” Benjamin said. Benjamin has heard varying reports of success from mid-Missouri artists. She belongs to an artisans association called The Best of Missouri Hands, through which she has heard from some artists that their sales are beginning to reflect the down economy. “Their sales are not what they have been in the past, but they are still optimistic about things,” Benjamin said. But "there are some artists that have never had better years, which is surprising."

Bluestem deals with a potter, Benjamin said, who was supposed to bring back some works after two shows in Florida. But the artist did so well that after the shows, there was no pottery left to sell to the gallery. Benjamin said she thinks the artists who were selling well had work that was priced at a good value. Some members of the arts community expressed concern that the hard economic times could have lasting effects on Columbia's vibrant culture. “If people do not financially support the arts, if they do not buy into art, when the economy recovers, the arts organization won’t be there,” Perlow said.

White agreed, and said that while he understands if people choose to donate to social service (rather than arts-based) organizations during tough times, it is still important to support community art. “The arts are always a vital part of the culture, and some organizations may have tougher times that others, but music will be played and dancers will dance and actors will act, because we can’t live without it,” White said. “A community without culture is a community without a soul, and we can’t lose our soul, can we?”

What Really Matters
Anyway I'd rather talk about a few things of greater interest than the next government, which is not looking too hot, whatever flavour it ends up being. For example, one of the country's biggest banks has just had a profit crisis. Scotia's earnings in the latest quarter have fallen by two-thirds – horrible news which was behind the drop on Bay Street today even as Wall Street was soaring.

Worse, Scotia is now letting it be known that if you want a loan, well, shop elsewhere. "Bank of Nova Scotia is pulling back on lending to consumers and warning investors to brace for softer earnings next year as the economy slides into recession," says a story in the current Financial Post. "The third-largest bank in the country provided the clearest signal yet of any major Canadian financial institution that it is reining in offers of loans to customers for big-ticket items like homes."

Hmmm. Not good, especially with what's going on with CIBC. But that's not all. Then there's Manulife Financial which is about to post its first loss in corporate history – a smashing $1.5 billion dump in just a three-month period. To rescue its festive goose, the company will be issuing stock – more than $2 billion of it, at a time where markets are terrible. That shows desperation, of the kind we saw a few days ago over in the big black tower at King & Bay, where TD Bank also went to the equity well for $1.4 billion. Make no mistake about it, smart guys like bankers do not flog pieces of their company when share values have tanked. Kinda like burning the Renoirs.

But there's more to worry about than the banking system. Oil is now at $46.76 a barrel, which I guess means every jar of crude coming out of Fort Mac is now losing money for the big guys there. And worse is coming. Because while I forecast $50 oil some months ago, once again I was too conservative. Expect $30, as fears mount of a global recession just too far gone to stop. And that's a shame after the US and other countries have spent unheralded amounts of money trying to reflate. Sadly, Lassie's dead.

But there's more. Investors sucked $1.1 billion out of mutual funds last month, which is another reason to worry about Bay Street and the financial markets. The automakers have said they need almost $30 billion or they will be wheels up by the time Obama gets his new airplane, and then there's Vancouver. The real estate board in that city announced today that home sales last month dropped a tad – 70%. So, about 800 houses sold, and there are more than 18,000 others on the market. I guess that means you get to sell your house in two years. Prices, by the board's count, fell 13% between May and November, but in some areas the decline far exceeded that – especially where there are holes instead of new condos going up. The average price for SFH, I heard, is down about $175,000.

So, I'd say, we have other things to worry about rather than who gets a limo and driver on Parliament Hill. And this downturn has only just begun. Another few days, and we'll be breaking out the squirrel recipes again. However, I hear they're also feeling defensive this time of year.

'Revolution, food riots in America by 2012'
The man who predicted the 1987 stock market crash and the fall of the Soviet Union is now forecasting revolution in America, food riots and tax rebellions - all within four years, while cautioning that putting food on the table will be a more pressing concern than buying Christmas gifts by 2012. Gerald Celente, the CEO of Trends Research Institute, is renowned for his accuracy in predicting future world and economic events, which will send a chill down your spine considering what he told Fox News this week.

Celente says that by 2012 America will become an undeveloped nation, that there will be a revolution marked by food riots, squatter rebellions, tax revolts and job marches, and that holidays will be more about obtaining food, not gifts. "We're going to see the end of the retail Christmas....we're going to see a fundamental shift take place....putting food on the table is going to be more important that putting gifts under the Christmas tree," said Celente, adding that the situation would be "worse than the great depression. America's going to go through a transition the likes of which no one is prepared for," said Celente, noting that people's refusal to acknowledge that America was even in a recession highlights how big a problem denial is in being ready for the true scale of the crisis.

Celente, who successfully predicted the 1997 Asian Currency Crisis, the subprime mortgage collapse and the massive devaluation of the U.S. dollar, told UPI in November last year that the following year would be known as "The Panic of 2008," adding that "giants (would) tumble to their deaths," which is exactly what we have witnessed with the collapse of Lehman Brothers, Bear Stearns and others. He also said that the dollar would eventually be devalued by as much as 90 percent.

The prospect of revolution was a concept echoed by a British Ministry of Defence report last year, which predicted that within 30 years, the growing gap between the super rich and the middle class, along with an urban underclass threatening social order would mean, "The world's middle classes might unite, using access to knowledge, resources and skills to shape transnational processes in their own class interest," and that, "The middle classes could become a revolutionary class."

In a separate recent interview, Celente went further on the subject of revolution in America."There will be a revolution in this country," he said. "It's not going to come yet, but it's going to come down the line and we're going to see a third party and this was the catalyst for it: the takeover of Washington, D. C., in broad daylight by Wall Street in this bloodless coup. And it will happen as conditions continue to worsen." "The first thing to do is organize with tax revolts. That's going to be the big one because people can't afford to pay more school tax, property tax, any kind of tax. You're going to start seeing those kinds of protests start to develop."

"It's going to be very bleak. Very sad. And there is going to be a lot of homeless, the likes of which we have never seen before. Tent cities are already sprouting up around the country and we're going to see many more." "We're going to start seeing huge areas of vacant real estate and squatters living in them as well. It's going to be a picture the likes of which Americans are not going to be used to. It's going to come as a shock and with it, there's going to be a lot of crime. And the crime is going to be a lot worse than it was before because in the last 1929 Depression, people's minds weren't wrecked on all these modern drugs - over-the-counter drugs, or crystal meth or whatever it might be. So, you have a huge underclass of very desperate people with their minds chemically blown beyond anybody's comprehension."

The George Washington blog has compiled a list of quotes attesting to Celente's accuracy as a trend forecaster. "The Trends Research Institute is the Standard and Poors of Popular Culture." - The Los Angeles Times. "If Nostradamus were alive today, he'd have a hard time keeping up with Gerald Celente."- New York Post. So there you have it - hardly a nutjob conspiracy theorist blowhard now is he? The price of not heeding his warnings will be far greater than the cost of preparing for the future now.

Somali Pirates to acquire Citigroup
The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup. The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned from hijacking numerous ships, including most recently a $100 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ”You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything,” said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS’s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody’s and S&P have already issued a AAA investment grade rating for the PRBS’s.

Head pirate, Ubu Kalid Shandu, said “We need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets have allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster.” Shandu added, “We don’t call ourselves pirates. We are coast guards and this will just allow us to guard our coasts better.”


Patrick said...

I wanted to leave a general sense of life here in southeastern TN. Everyone in my family, and mind you these are all gainfully employed relatively successful people, have voluntarily decided they need to trim their Christmas budgets. My own employer, a hospital no less, is having severe trouble replacing basic equipment and is planning on a large scale staff reduction. My employer has not met budget since February of this year. Our friends and distant relatives have all mentioned that they seriously think twice now before any material purchase and that their trust in our "system" is at an all time low. This is brief, but it still gives me the impression that a lot of people in this country are tired of the old way of doing things, not to mention believing the fact that the old way is simply no longer an option. I couldn't agree more.

Anonymous said...

Ilargi --

Could you indicate which points made by Dan W. you disagree with?

Thank you

Ilargi said...

"Ilargi - Could you indicate which points made by Dan W. you disagree with?"

I might try for the non-anonymous. Besides, I already gave a hint in my pre pre intro. Thing is, this is about Dan, not me.

~J~ said...

While we, like Patrick's family, are watching every penny we spend, I am always amazed at the other end of the spectrum.
A good friend called this morning after spending yesterday car shopping. Mind you they have three cars that all work just fine.
A local dealership has marked their last 08 model Suburban down to $30k and she said she 'just has to have it'

Dan, fantastic post

Anonymous said...


Just wanted to let you know that I feel that I have learned a great deal by doing my small bit of research while you're away. At many times I have thought your stances were too extreme. But, now that I do daily research, I am more aware of how extensive the crisis is and this has made me more appreciative of your intros and work.

To anyone who is willing to give time to helping with research, I can assure you that it is time well spent.

Thanks again. Hope all is well by you.

Also, thanks to Stoneleigh and to OC who have been doing a great job while you are away.

Linda S.

Anonymous said...

The comic at the end of today's debt rattle is from, and ought to be attributed to that site.

Anonymous said...

Damn, Dan. Where's my Kleenex? That jeremiad of yours made me pop off.

"Good" going. I say "good" ironically. It's really quite awful. The cabbages in my cellar never looked so good.

Anonymous said...


I have long wondered about "Debt, Diesel and Dämmerung" and still do not see a specific link between Dämmerung and the environment (by that, I mean that Dämmerung could apply to all three, no?).


Anonymous said...

FB yeah can we think of a better environmental D?

Debt, Diesel, and Depletion? - Maybe

Debt, Diesel, and Deforestation - nah

Debt, Diesel, and Dieoff?


Brian M. AKA JediDaddy

The Lizard said...

"Debt, Diesel, and Dieoff?"

No, Dämmerung. It carries that weighty, generalized, sense of horrendousness needed.

The times, not just the interest rates, are a'changin'.

The Lizard said...

"The times, not just the interest rates, are a'changin'."

That's not meant as a self-indulgent aphorism, mind you.

No, no.

Anonymous said...

I am finally moved to post here after having read quietly for months. In our discussions about how to handle whatever nastiness is headed our way, the one big question for us is timing. How can you anticipate when to jump this way or that way? When is it time to take money out of the bank, hire someone to turn a couple acres of our woods into pasture for planting, etc. This is the one area where there doesn't seem to be much advice, so we watch the small signs around us to try to predict what is happening.

We had a small sign today that I found interesting. Our neighbor has a tiny business with his father, making skylights. They're currently shut down because they can't get the aluminum parts they need to make the skylights.

Being true country people, they've instantly gone into the firewood business, and may actually be ahead of the curve here.

Just wanted to pass that along, along with a thank you to Ilargi and Stoneleigh and the regular commenters for providing SO much information, even though finance is not my forte. I attempt to understand and to act.

Anonymous said...

I think they want us to "slow down" or crash down. That way they can squeeze out the honest, hard working American companies so the crooks can buy it cheap.

It's a power struggle, the good vs the evil. And the evil is winning it so far.

Anonymous said...

Treasury Considers Plan to Stem Home-Price Decline

The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.


I wonder how much that would really help? Buyers would probably still need to put down many people have 20% in cash now-a-days?

Anonymous said...

"The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans, according to people familiar with the matter."


No edit button :( I forgot to add for new loans it would not help...

Anonymous said...

Who is Dan W?

Ilargi said...

" NightBlogger said...
Who is Dan W?"

Who is nightblogger?

el gallinazo said...


"I wonder how much that would really help?"

It would help slightly less than lowering the Fed funds rate to zero and the price of a Cadillac SUV to $30,000.

That the market can rally in the wake of such overwhelmingly, unceasing, and unprecedented bad news fills me with an awed respect for the mind numbing stupidity of the American investor. Stoneleigh refers to herd behavior, but even the herd runs for the hills when the wolf is nipping at its heels.

Anonymous said...

el gallinazo said...

Stoneleigh refers to herd behavior, but even the herd runs for the hills when the wolf is nipping at its heels.

Sheeple :)

Sheeple is a term of disparagement, a portmanteau created by combining the words "sheep" and "people."

It is often used to denote persons who voluntarily acquiesce to a perceived authority, or suggestion without sufficient research to fully understand the scope of the ramifications involved in that decision, and thus undermine their own human individuality or in other cases give up certain rights. The implication of sheeple is that as a collective, people believe whatever they are told, especially if told so by a perceived authority figure believed to be trustworthy, without processing it or doing adequate research to be sure that it is an accurate representation of the real world around them.


We have sheep (first year), they stick together -- one jumps they all jump. We should have lambs this spring.

Just ordered seeds, we will be have a larger garden than last year. Basics like corn beans, cucumbers etc. Going to try to grow some dried beans and to try to dry some tomatoes for storage instead of canning. I wonder if there is anything else one should grow? We grew winter wheat last year. Pain to harvest by hand but makes tasty bread. I Like to grow some alfalfa for the sheep.

Anyone else planning a larger garden next year?

Anonymous said...

I had a question for S & I. Where does money come from? If there is only $700 billion in cold cash, does the gov just "create" out of thin air?

The Lizard said...

Ilargi: "Who is nightblogger?"

Night Blogger

el gallinazo said...


I think sheeple are a product of "civilization" for both species. We have large herds of both sheep and sheep-like goats on my island. Many of the goats are feral in as much as nobody seems to own them. I have made the prediction that these feral herds along with the 3-500 feral burros will be ancient history in three years. The feral donkeys are a product of the pick-up truck becoming ubiquitous. Since we have twice as much holidays here as official Federal ones, I have proposed that we celebrate this event in the form of Donkey Emancipation Day, but the response has not been overwhelming. Hopefully, they will not all be eaten when the pick-ups run out of gasoline and things revert back to their natural order.

Back to the sheeple issue. It is my understanding that the remaining wild species of sheep do not act in this fashion. They are reputedly very wary and difficult to hunt. The domesticated sheep and people have been dumbed down.

Unknown said...

Greg asked: I had a question for S & I. Where does money come from? If there is only $700 billion in cold cash, does the gov just "create" out of thin air?

Hi Greg,
On the recommended reading list is I believe "Web of Debt". I have just started reading this and it explains in eye opening fashion the answer to your question.

In short, the central banks (and other financial institutions) create money most of the time by providing loans. At the moment that is not happening much for individuals or businesses but is no doubt happening at a massive scale to the government as loans are extended so that the Government can provide bailouts back to the industry providing the loans. I think you can see the futility of this.

Every bit of economic value is being gouged from the real economy to feed the rapacious appetites of the central banks.

Anonymous said...

Hey, Illargi, I just wondered if he was a regular reader, a writer, or what. Innocent question.

Anonymous said...

You'll get used to Ilargi's answers once you get to know him. He actually answered your question, but not in the way a person with an IQ in the normal range would answer the question.

Greenpa said...

Clues- timing. That's really difficult.

Today my wife asked me, after reading TAE, "so what do you think is really going to happen?"

This is what popped out of my mouth- "We're way past Great Depression, and into... The Fall of Rome kind of thing."

I'm very much afraid that's true. Then, if that's at all a model, one thing to remember is that Rome fell, and continued to fall, for several hundred years. And many Romans never realized or admitted it.

It's a massive phenomenon; sometimes dispersed, sometimes acute; always slippery.

Anonymous said...

Anonymous said: "You'll get used to Ilargi's answers..."

K, as long as he doesn't pass out any Kool-aide.

Unknown said...

I wanted to comment on Dan's points.
1. Agreed. It angers me that something that is as blatantly fraudulent and enslaving of the populace has not been overturned by governments. It shows only too clearly how just about ALL of the world's governments are in the bankers pockets.
2. I stand contrary on this one. I am a confessed 'climate skeptic', because I simply do not believe the propaganda vomitted up by government agencies in various countries. When you look at the details and check methodologies and the assumptions that are required to reach their conclusions, you realize that most of these documents are 'faith' statements and not evidenced fact.
I guess a defining moment for me happened when in 1975 at a science forum for senior school students we were told by 'experts' that the world only had 15 years worth of fossil fuels left. 1990 came and went and oil consuption increased greatly and millions of barrels are produced continually.
Also there are a very large amount of deposits that have been capped and are not currently in production.
I couldn't believe those 'experts' so why should I believe the current batch of climate 'experts' whose finding are very self serving. They carry as much weight as our national leaders telling us that our economies are fundamentally sound. Don't just accept the propaganda. Go check the facts.
3. It will indeed by scary and interesting to watch. What amazes me is that the size of these defaults are usually only 1%-10% the size of USA corporate defaults. I think that says something.
4. The Baltic Dry Index historic average is however only about 1200-1500. It blew out exponentially over the last 2-3 years. That was a bubble that had to burst. A major factor in that would also have been the high price of fuel. It really does show just how over-heated by credit explosion the global economy was. So it's current level is only down about 45% from its long term average. It is very bad and likely to go lower, but it doesn't need to climb back to 2007/2008 levels, only back to its longer term norm.
5. It is not unexpected though. House prices have for a long time now born no reality to people's incomes. In the 1970's you could afford a house on a single income, by the 1990's you needed a double income. In 2007/2008 banks wanted mortages not only over the purchased property of a young couple but also over their parents home. Since family units can't easily go to a triple income and that 2nd income is often temorarily suspended for several years at a time, the reasonable price for homes absolutely HAS to return to more reasonable levels. There is only so much interest people can afford to pay.
6.The current crisis is shining a spotlight on the activities of these groups, that have for so long lurked behind closed boardroom doors. When trust in banks is lost it takes a very long time for it to be regained. Many years ago at a children's camp for about 100 kids we ran a rainy day indoor game. It involved about 10 groups selling their trade items to others for a price and banking for interest gain their profits with me the bank. At a point in the game I declared the bank bankrupt and all deposits lost. The out-cry was deafening. From that point on, no matter how high I offer the interest rate, not one of the groups would trust their profits with me(the bank). The future of lending will need to reside with either the government directly, or trusted community organizations.
7. This is the BIG one. When it happens it is lights out. As soon as there is the slightest weakness in the US Dollar there is going to be a flight of capital from US Bonds.
8. I've never failed to be amazed at the stupidity of the electorate and their memory span of a gnat. Our politicians will continue to reflect the morality (or lack thereof) of the super ambitious. The best leaders are usually the ones who don't want to be, but step up to plate through a sense of duty. These have been few and far between. One example MIGHT be Winston Churchill during WW2.
9. Since it is all speculation and risk management. It could be possible for all contracts to declared null and void. The losses then would only be the premiums already paid and not the leveraged liabilities.
10. GDP Growth should be a function of workforce growth, technology improvement, efficiency gains. You don't produce more by owing more. You also don't PRODUCE more by exporting your production (jobs) offshore.

el gallinazo said...

Re the FT article:

I hate the term "stag-deflation." Makes me want to prescribe Viagra to the herd. It is wussy and inaccurate. Stagnation implies zero GDP growth - not minus 10% growth. They invented this stupid term instead of just using deflation, because deflation and depression are so closely linked.

Also, the BSL (Bureau of Lying Statistics) is going to have to do some fancy footwork. As Kevin Philips pointed out in an article this fall, they have rigged the game to minimize real price growth, which in turns maximizes bogus GDP growth. But with the machine running in reverse, it will do the exact opposite.

My suggestion is that they simply use the absolute value of price changes, thus keeping them positive for decreases as well.

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

I read it on his blog -- without the editing. Well-written post. Thanks.

el gallinazo said...

Comment on Kerrysl's comments on Dan W's comments:

"2. I stand contrary on this one. I am a confessed 'climate skeptic', because I simply do not believe the propaganda vomitted up by government agencies in various countries."

Well we are all entitled to our belief systems. I, for one, don't believe in gravity or electricity. I had a similar experience to your 1975 epiphany as a senior in high school. It came at a much younger age when the purported expert, my mother, explained to me about Santa Claus. Shortly thereafter, my older sister debunked the theory, and I have never recovered my faith in experts.

However, the foremost expert, the King in fact, (Hubbert, not Elvis), didn't predict peak global oil until the first decade of the new century. It seems that your science forum may have skimped on their expert budget.

My background is in the physical sciences, and I have been looking into this climate change business in some detail, and I do agree that it is not an established fact any more than that there is a correlation between smoking and lung cancer. One can see how self serving these scientists are. Take James E. Hansen of NASA for example and how he was so amply rewarded by the Bush administration.

Farmerod said...

I hate the term "stag-deflation."

Moi aussi. Stag-flation is a term main stream economists use to describe the first several months of deflation, when everything but the CPI has gone negative.

el gallinazo said...

Comment on Kerrysl's comments on Dan W's comments:

"7. This is the BIG one. When it happens it is lights out. As soon as there is the slightest weakness in the US Dollar there is going to be a flight of capital from US Bonds."

Where is the money going to flee to? This is not a tongue-in-beak question. I have most of my savings right now in T-Bills, and I would really like to know.

Anonymous said...

kerrysl, to add to what the esteemed chicken said, your conclusions are fairly faulty.

Hubbert predicted pretty accurately when global oil production would peak, it was off by about 5 years or so because of the various recessions in the 80s and 90s, but not a bad job.

So whatever experts you decided to base your skepticism on were poorly chosen.

The climate change stuff, however isn't at all in this area.

Despite what you are trying to say, that scenario is simply false. It has been the governments who have consistently tried to quiet all discussion of climate change issues, this is a myth I see repeatedly in especially what passes for intellectual discussion in right wing American circles.

The reason these findings are now starting to hit so fast and hard is because basically the entire global climate change research establishment had consistently been terrified of actually telling the truth, year after year, for fear of losing funding, their jobs, whatever, because the funding sources (corporations, the government) would pull back if you produced findings not in accord with what they want to hear.

Now, finally, the cat is largely out of the bag, and the truth about these issues is getting harder and harder to ignore, so the researchers are now of course starting to be freed to finally face the overwhelming seriousness of these matters.

For what it's worth, another thing that people who do not understand modern scientific method get hung up on, and I include the Exxon funded pseudo researchers who have been exposed as being a major component of the so called 'other side' of this, in this, is the notion of scientific certainty.

Such certainty has almost nothing to do with what you or I would call certainty, but is used to say, for example, that only 90% of the data has been collected so far, so they cannot say with absolute certainty that x or y is 'true', but again, this 'true' is a special type as well, referring to something that has been proven to whatever percent of doubt they need to make that statement.

In other words, when they said, for example, 8 years or so ago, that there was 90% certainty that global warming is man made, that didn't mean they had 10% conflicting evidence, it meant they were only 90% of the way to compiling and collecting all the data required to say this with absolute certainty. That certainty was achieved I believe around 5 years ago, in the scientifically technical sense of certainty.

The thing that makes me sad about 'skeptics' such as yourself is that you are falling for corporate anti global warming spin, often paid for directly by the major corporations who will have to change their business practices if climate change legislation had been enacted.

This is fairly analogous to trumpeting how 'skeptical' you are being by repeating other corporate spin, say, re lung cancer not being caused by smoking (something even they finally came out and admitted, after decades), or what have you.

The thing I've always really wondered about is how anyone so utterly non-skeptical of the propaganda they blithely repeat almost word for word, down to the current favorite talking points of the day (what is it today, let me think, oh, yes, I remember.. the climate is actually cooling...), generated by fairly scummy, usually corporate funded, researchers, better known as 'intellectual whores'.

Not company I'd care to align myself with, but that's just me.

Try now, this is a tough one, now, follow the money on all the anti climate change stuff, there's a lot of money involved, now, this is, again, tough, who benefits, and how much, from spreading such nonsense?

The only real discussion in real climate change research today is related to the factors like speed of change, time to recover (latest are looking VERY bad).

Again, pointing to some government conspiracy is uninformed at best, and willfully ignorant at worst. The Bush group, repeatedly, forced climate change researchers to change the wording of their documents, they pressured them, they threatened their careers. Those are the facts, and anyone even remotely interested in a claim of objectivity or skepticism, would look a bit closer at reality and then apply that skepticism where it belongs, in dismantling corporate generated propaganda, often disseminated through, here in the USA, right wing talk radio, whose audiences tend to have the critical faculties of rocks or low level shell fish.

Again, not a group I'd show much pride in aligning myself with, but each to their own.

Anonymous said...

RE: Somali Pirates & PR BS

The first time I heard the Nigerian 419 scam was on a network news broadcast way-way back before wire transfers and cashier's checks. At the time, it involved an affluent American victim buying gold from Africa that turned out to be painted bricks.

I vividly pictured the scene when listening to NPR's story 'The Giant Pool of Money' as my crash course introduction to economics.

Anonymous said...
This comment has been removed by the author.
Anonymous said...

Before more myths are presented from our past, I'd also remind anyone about to point to the Limits to Growth being 'wrong' re timelines that they were not at all wrong, worst case scenario in the original book had global population versus resources hitting a tipping point about 20 years ago, right when, if you recall, oil produced per day crossed the oil discovered per day line for the first time, and when, no surprise here, when the current credit bubble really started to get constructed.

But you have to read the stuff, the real books, not uneducated second hand biased criticisms that don't even discuss the real work.

For those counting, we are currently pursuing, no surprise here, the worst of the 5 or so possible courses outlined in that first book in the 70s.

Which leads us right to where we are right now. Sad. And as long as the human mind is tricked into believing itself 'skeptical' when it repeats verbatim whatever corporate propaganda it's been fed, there's not a lot of hope for real change. There is hope, just not a lot.

el gallinazo said...


¡Rat on! Excellent and thoughtful comments.

Anonymous said...

Its starting to show...the ragged edge I mean.Only in corners,a shelf empty,a smaller at a counter weighed out in creamer for the coffee.

I don't know how "fast" it will happen though.

I think one day we wake up and say "Holy shit,what happened?".

Its like what some say the transformation into Nazi Germany was like for those rational folk who suddenly found themselves in a country they did not recognize.A world that had changed "in a blink of an eye"though it took longer than that in reality.Realizing that their reality had changed when they were not paying attention.

I think that is what many will experience,though. Those like us ,gentle readers,who are fully aware of the onrushing history that is soon to engulf us,will have the misfortune of knowing its NOT going to get better.Not for a long time,if ever. [Better,may be steady food,medical/dental care and a safe place to sleep.]


Anonymous said...

el gallinazo, a bird who can laugh at himself and not put forth a hypocritical series of excuses like our friends on Wall Street are currently doing re his own activities is a rare bird indeed, one to be admired, whether that bird is a chicken or a vulture.

Farmerod said...

no creamer for the coffee

WTF! Did China run out of melamine?

el gallinazo said...

"The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS’s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody’s and S&P have already issued a AAA investment grade rating for the PRBS’s."


Did they achieve their AAA rating by tranching their PRBS's from orphans to oil tankers?

Farmerod said...

Greg: If there is only $700 billion in cold cash, does the gov just "create" out of thin air?.


Anonymous said...

I have to wonder at how different the local economy is here compared to the US. Government debt is down and GDP is up. Unemployment is down and help wanted signs are common. The government is even proposing reducing the minimum working age to 14, which I disagree with completely. The local Wal-Mart stores are struggling to keep shelves stocked due to lack of workers. It's common to find the isles choked with unpacked stock waiting to be put on shelves. Shoppers are more discouraged by the long checkout lines than prices. Real estate has cooled off but prices are still increasing and so are wages. I'm not bragging, I just have to wonder if in the midst of all this economic turmoil if there might not be pockets of economic stability to be found.

BTW, I live in Canada in the province of Saskatchewan.

Anonymous said...

"BTW, I live in Canada in the province of Saskatchewan."
Your story can be repeated in Alberta, and B.C..
"Its starting to show...the ragged edge I mean.Only in corners,a shelf empty,a smaller at a counter weighed out in creamer for the coffee.

I don't know how "fast" it will happen though.

I think one day we wake up and say "Holy shit,what happened?".

Everywhere will be different.
Keep informed of what is happening around the world.
1. Iceland ... 3rd world countries not getting aid ... Haiti ... Cuba ...
2. Unemployment going over 10% in USA and heading for 25%.
(Local unemployment numbers not indicators. Forestry towns, mining towns are used to that)
3. Social services being cut back. (welfare, unemployment, gov pensions)
4. And yes,eventually, Foreign gov. slowly withdrawing out of t-bills
5. Watch out for "bank holidays"

Farmerod said...

BTW, I live in Canada in the province of Saskatchewan

Saskatchewan is to Canada like China is to the developed world. Just cracked its first beer when the cops showed up.

Anonymous said...

From Edmonton Alberta Canada:

No sign the populace has a clue. Our economy is clearly some months behind changes elsewhere. Construction has slowed, not stopped. Oilsands developments on hold, but labor was limiting before so plenty of work yet.

A few cracks appear... my son drives a heavy truck moving containers (off rail) to points in the city. Massive slowdown. His boss says in 30 years it has never been so slow. Winter tires are hard to get... puzzled consumers turned away. Tried to get a motorcycle part from Japan, maybe this is not going to happen? 3 weeks wait.... interesting. Same day delivery of your bauble or flash good of choice is slipping a touch. The machine is no longer responding quite right, people are puzzled, uncertain. However as I say in Alberta we are probably buffered as much as anywhere on the globe.

The surprise will be immense.


Anonymous said...

A Canadian conspiracy story???? (dirty tricks???)

This is for the Canadians out there.

The set up:

Tonight Stephen Harper made his speech to the nation about the goings on in parliament these last few weeks and set forth his case on how he should remain leader / his party stay in power etc. This statement was pre-taped and was to be followed by a statement from Stephane Dion stating his case for the coalition. This statement was also pre-taped. Both statements were to be supplied to the media central clearing house before they were given to the television various networks for broadcast and had to be in on time.

Harper's statement was broadcast on time and was followed by some commentary. Then a problem arose – for some reason Dion's statement wasn't there yet and they had to kill time. CBC stuck with it and finally broadcast the Dion's tape. (I believe CTV may have gone to regular programing because Dion's tape had missed the window for broadcast)

Now here's where it gets interesting

The Dion tape seemed to be of very poor quality (think youtube video here). I was trying to pay attention to what he was saying but something on the video was making me crazy – It just seemed wrong. Dion was sitting at a desk with a bookcase behind him but he wasn't centered in the shot. He was towards the right of the screen with more space on the left. It was just weird. Luckily my wife was watching also and finally she says – what's that book in the corner that says 'HOT AIR' I look and yup there in the upper left corner of the shot in the book case is a book that says 'HOT AIR' as the title on the binding! Now it all makes sense. Dion is shifted to the right on purpose to get this title in. Also the binding title doesn't look quite right and doesn't seem to match the title (which you can't quite read) on the front of the book. This is crazy – are the liberals that incompetent or is something else going on here?

After listening to the follow up commentary this video thing is still driving me nuts so I go to check it out online – I can't find it anywhere. On the CBC site they have Harper's, Duceppe's and Layton's videos and they all work. They have something there for Dion's but it won't play,

Later I go back to the CBC and now they have the Dion video up but it is not the video that was broadcast. The quality on the CBC site is better than what was shown on nationwide tv. Dion is now in the centre of the frame. There are flags on both sides of him now. When it was broadcast you could only see part of the flag on the right of the screen and none of the flag on the left. Now there is no book on the upper left that says 'HOT AIR'. (it had been to the left of the one that has 365 on the binding.)

There is only one logical conclusion that I can come up with. Someone got a hold of the Dion video cropped it down and inserted the 'HOT AIR' on the book binding. (This is a nice subliminal message here) Then they supplied this doctored tape to the networks and it was broadcast..

I'm serious – this is the one of the craziest things I've ever seen.

Living in strange times indeed:

team10tim said...


RE: Climate change skepticism.

I imagine that you are tired of reading the response to your post on this topic, so rather than trying to bludgeon you into submission with recent studies or news articles I would like to present two points for you to consider.

1) The precautionary principle. You should be concerned about climate change for the same reason you buy fire insurance, because it is possible that there will be an event with devastating consequences.*1 (Note at the bottom)

However, if your uninsured house burns down you can move in with your friends or family, but if the whole world burns down there is nowhere left to go.

2) Look at this from a different perspective. Rather than dwelling on whether or not climate change will happen you should think about what absolutely can't happen.

The world's population is growing at an exponential rate and has been for some time. Additionally, our individual level of consumption is growing measured in energy, resources, waste, and arable land. Our collective requirements of and impact on the planet are steadily increasing. In a finite world this trend is unsustainable. And unsustainable, by definition, means that it absolutely can not last.

If you dismiss climate change as unfounded, politically motivated, crack pot, fear mongering, then there are still numerous problems left to address from resource depletion and energy scarcity to the collapse of the world's oceans and loss of biodiversity. Anyway you look at it we find ourselves in a hole and while we should stop digging the resounding call has been "drill baby, drill"

*1 Framing the debate. The climate change issue has been presented in the US as an unsubstantiated theory where the experts disagree. The burden of proof falling on the climate scientists to conclusively demonstrate their models. This is consistent with the American stance that something must be demonstrated harmful in order to regulate it. While it is equally valid to require that something be proven safe before allowing it.

Farmerod said...

Someone got a hold of the Dion video cropped it down and inserted the 'HOT AIR' on the book binding.

And, 7 hours later, the Liberals haven't complained because...?

EBrown said...

I have only one quick point to add to the list that 'Uncertain' threw your way. I wonder, how long ago you read anything in depth on climate change? I have an intelligent cousin who decided to be skeptical of climate change back in 10th grade because her intelligent, well read chemistry teacher was skeptical. My cousin read little bit here and there and decided that skepticism was warranted. The thing is, my cousin was in 10th grade back in 1992. The corpus of scientific literature now extant that documents ongoing climtate change with probable human induced forcing is vastly larger than back then, despite alert scientists were saying there is reason to take global warming seriously. So even if skepticism was understanble in the late 80s and early 90s today it is much more difficult to fathom. The only sources presenting evidence to the contrary are funded by fossil fuel companies! Sorry, no need to rehash 'Uncertain's' post. The point is my cousin is still a "skeptic" because she read a few articles questioning the basis of global warming research in 1992. If you haven't revisited your skepticism in a few years I invite you to do so.

Mr. Moto,
That is CRAZY!. WTF? That's like out of a novel or a stunt Il would pull in N. Korea... We live in interesting times, that's for sure.

EBrown said...
This comment has been removed by the author.
EBrown said...

Sorry, I just read the post I wrote and there's a nasty sentence in the middle of the paragraph.

I meant to say that some back in the early 90s some alert scientists were ringing the alarm bells. There's a heck of a lot more support for their concerns today than there was back then. Looks like they were right to sound the alarm when they did, not that it did much good.

Anonymous said...

Re just the common sense approach, here's how I prefer to look at it: rephrase the question:

Why would burning about 1/2 the world's entire supply of fossil fuels in about 200 years NOT alter our environment? It's patently absurd to ever have posed the question in any other way.

Re the understanding and history: CO2 emissions were I believe first noted to be rising around 1900, by I think Swedish reseachers.

The last studies of the major antarctic and greenland ice cores have now pushed the known climate data points back to I believe 650,000 years, which is why they can now unequivocally state that the warming we are now experiencing is most definitely caused by burning all the world's supply of carbon fuels in a very short time span.

But, again, simple logic really never had any other question than what I said: why would burning this much junk and packing the atmosphere not be expected to have a major affect? You can easily see how strong the forces have been against climate change researchers by noting that at all times, simple common sense pointed to the problem. Just like with Oil production peaking, etc.

I don't want to flog this horse either, but I do find this view very sad, and I see it frequently, always coupled with the words "I'm a skeptic", but that skepticism is sadly never applied to the actual sources of the information being uncritically absorbed then repeated without any serious inquiry at all.

Here's to well applied skepticism, ilargi/stoneleigh have been practicing it, and they do it well because they reject the propaganda and do the real research, and of course don't lose sight of simple common sense, which has always told anyone willing to apply it that any bubble with no material foundation must pop. All the research does is confirm that common sense is right again.

Slumlord said...

For the record, this is my first post to TAE even though I have been following Ilargi and Stoneleigh since their days on The Oil Drum.


I started a garden in 2005 and have been expanding it each year since. My approach combines short term and highly productive crops such as potatoes with a long-term strategy that I hope will pay off. Specifically, I am counting on climate change, to which I can say that only the most stubborn of fools can still deny that weather is becoming more volatile. I hope to be around for a while, so part of my long-term part of my strategy is to plant fruit trees that are more successful in drier and warmer climates, because drier and warmer is what most of the climate models predict for my area. This may not help me if there are food shortages tomorrow, but I hope to have some real advantages in crop yield when old age limits my usefulness for manual labor.


I would like to offer a couple of new sources for the Debt Rattle. Australian Financial Review,, offers another excellent perspective on global business issues in addition to reporting on their home country. For real estate analysis, I find to be the best analysis for what is happening in my area. While their scope is local, their methods could be applied anywhere.

scandia said...

Pirates investing in Citigroup is a joke, right?
So many unexpected things happening( add Mr. Moto's comments on the Dion tape)it is difficult to sort truth from fantasy.

Stoneleigh said...


Yes, that one is a spoof. In some ways reality is not much less unbelievable though.

Anonymous said...

Dion Video Hack

OK so it's the next day and I don't see anything in the media about this hack. Just got up though.
Last night there were a lot comments on the Globe & Mail site about the poor quality and a few people picked up on the 'Hot Air' thing but I didn't see anything about a hack.

Today there is a CP video of the speech on the Toronto Star site that looks more like what was shown but better quality and no 'hot air'. This thing is still bugging me so I'm going to do some more checking around.

OC said
And, 7 hours later, the Liberals haven't complained because...?

Good question
Because they are too embarrassed?
Because it wasn't Harper - someone in the party did it?
Because it was a prank.
Because there was no hack and it was pure incompetence on their part?

Ok – as I.'ve been writing this I've been looking around and this video is the closest to what was shown on national tv last night.

'Hot Air' is on the upper left – the quality here seems better here than what was broadcast - but this is the tight shot that was shown.

A closer look this morning on the CBC video shows the book there may say 'hot air' but I still think this whole thing is pretty weird.

Why were they late with the video?
Why was the quality so bad?
Why was the shot so tight and Dion off centre.
Was the book title really “Hot Air” and if so why was it left on the shelf.
Why was it so prominent in the video that was broadcast?
Dion is bad enough on tv but this certainly made things worse.

On one of my first comments here I quoted the following:
1) "Never ascribe to malice, that which can be explained by incompetence."
2) "Any sufficiently advanced stupidity is indistinguishable from malice."

Could this be the case here?


el gallinazo said...

Mr. Moto

The following is far more operationally accurate aphorisms than the ones you presented,

1) "Never ascribe to incompetence, that which can be explained by malice."
2) "Any sufficiently advanced form of malice is indistinguishable from stupidity."

I read somewhere that over 50% of all USA federal prosecutions were for conspiracy to commit a crime. Yet when our noble leaders are accused of these criminal conspiracies, there is a run on the supermarkets for aluminum foil to supply the accusers with tin foil hats.

Anonymous said...

Dion Video Hack

OK last post on this - I promise.

There really is a book 'Hot Air' – actually many but this one could indeed be on Dion's bookshelf.
Hot Air: Meeting Canada's Climate Change Challenge by
by Jeffrey Simpson (Author), Mark Jaccard (Author), Nic Rivers (Author)
It makes perfect sense that Dion would have read this and may have it on his bookshelf. Still I wonder.
Life is indeed too strange at times.

el gallinazo
Yes indeed - both these versions are oh so true – the trick is figuring out which applies when and sometimes it's impossible.


Anonymous said...


Excellent comments! Thanks.

Kerrysl, please use reason and research the topic of climate change thoroughly. The world scientific community has reached a consensus on this topic. There is no question that human-induced catastrophic climate change is a reality.


Farmerod said..., offers another excellent perspective on global business issues

OK, I need a tech geek to tell me how I can copy text from that site.

Anonymous said...

While I'm on a roll here -

Reactions to DanW's spiel

1) move along now - nothing new here
2) this reminds me of the incessant droning by Gail the Actuary over at TOD
3)Flashbacks to when the kids that got the gold stars were the ones that did the best job of parroting the teachers words.

Now I know this sounds like an overly harsh personal attack on DanW but it's not. - and I mean that. It is an attack on group-think though. One of the great things about the internet is that you can find such a diversity of opinion some of which is well informed and some of it not. One of the bad things about the internet is that people can segregate themselves into like minded groups and never hear a differing opinion.

On kerrysl's remarks.
Good points on the BDI
On climate change well he's entitled to his opinion and for all we know he could well be right. Any one who has read Diamond's Collapse would know that it was warmer in Greenland when the Vikings were there than it is now and even Lovelock who is convinced that we've gone pass the point of no return – that theres nothing we can do now – we are doomed! (good doomer stuff there) says 'I could be wrong though – I have been wrong before'. Although I personally believe that there is enough evidence on the warming side to take action, the first time I saw the skeptics referred to as “Global Warming Deniers' warning bells went off for me.

That bit on Lovelock reminds of the 'doomer mantra'.

So repeat after me

'There's a Problem!
It's a really big Problem!
There's Nothing we can do!

And repeat ad nauseum?

Praise the lord and pass the koolaid.


Anonymous said...

"HOT AIR" and the book with a number is clearly visible on Global TV rerun of the news.

I bet that nobody would have ever dreamt that Canadian politics could be so much fun. hehehhe
"Only in Canada"

scandia said...

Harper wins round one. I feel so we are out on the stormy seas and there is no skipper on board.

Anonymous said...

"Praise the lord and pass the koolaid. - MrMoto"

Tuttavia, si muove.

Anonymous said...

Slumlord said...
"I started a garden in 2005 and have been expanding it each year since. My approach combines short term and highly productive crops such as potatoes with a long-term strategy that I hope will pay off. ..."

It seems like a good idea to produce some food on your own. If the ag system is as fragile as the finance system you may need the food!

kerrysl said...

Hi Greg,
On the recommended reading list is I believe "Web of Debt". I have just started reading this and it explains in eye opening fashion the answer to your question.

I'll check it out. Seems like a fragile system we have!

OC said...


I'm on my Linux machine, no sound I'll have to look at it when I turn on my PC.

Anonymous said...


Look on the bright side -

all kinds of Canadians learned a new word - PROROGUE

with no skipper we may be washed upon the rocks but then again we won't be steered upon the rocks

anonymous at 12:40
indeed it does


Anonymous said...

Found this link:

Web of Debt Blog

Farmerod said...

with no skipper we may be washed upon the rocks but then again we won't be steered upon the rocks

Alas, the rudderman is steering a paper boat.

Anonymous said...

scandia said...
Harper wins round one. I feel so we are out on the stormy seas and there is no skipper on board.

I think the Liberals and NDP might have won too, as they don't really want to be in charge right now. If one of the Big 3 collapses before Jan 20 as Ilargi predicts, Canadian politicians will be able to join in on the ensuing blame game. The coalition parties can argue that their proposed 'stimulus' plan would have saved everything, while the conservatives can argue that the other parties forced the prorogue.

The next few weeks will certainly be interesting...

Anonymous said...

anonymous at 12:40

and thanks for the reminder

- our strengths are also our weaknesses


The Lizard said...

Many Canadians are just discovering that their system of government wasn't completely or accurately described by reruns of The West Wing.

Welcome to a Westminster Parliament - it seems to have more ways to govern and ungovern that a federal state does.

(Isn't Pro Rogue just a politician's job description?)

Anonymous said...

Am I misunderstanding item 4 in Dan's main article: "...A 90+% drop in just 6 months means ships are not moving goods because the ship-owners cannot make a profit in doing so. As such, much needed bulk commodities (wheat, steel, etc.) are not being shipped to market.."

The way I understood it, the index has dropped because ships aren't in demand. While shipping costs have declined such that the shippers aren't making a profit, that is due to the wider economic situation. The commodities aren't being shipped, either due to lack of demand, or lack of trust with the letters of credit.

Anonymous said...


on the BDI - that what i get from it