Thursday, July 23, 2009

July 23 2009: Prime Rhyming Times

Detroit Publishing Co.My City of Ruins1910
French Market, New Orleans, N. Peters and Decatur streets

Stoneleigh: Readers have asked us recently for a guide to our primers, encapsulating our worldview in one place.

The first finance article I wrote online, The Resurgence of Risk, appeared at The Oil Drum:Canada in August 2007. It is by far the longest of the primers, and its purpose is to explain in some depth the nature of our credit bubble, the role of 'financial innovation', the distinction between currency inflation and credit hyper-expansion and the mechanism by which value disappears as a bubble deflates.

For further explanation of the ponzi nature of bubbles, the spectrum of ponzi dynamics underlying many economic phenomena and the implications of this for where we are headed see From the Top of the Great Pyramid.  This ties in with an earlier piece, Entropy and Empire , detailing the progression of hegemonic power from empire to empire, as each rises, over-reaches, falls and passes the mantle on to its successor.

When bubbles reach their maximum extent, they invariably deflate. Our explanation as to why this is inevitable can be found in Inflation Deflated, followed by The Unbearable Mightiness of Deflation, a rebuttal to inflationist Gary North.

We dispute classical economic theory and the received wisdom as to the nature of markets. Markets are not objective, mechanical and rational as the Efficient Market Hypothesis would have you believe. Our explanation of markets as human phenomena grounded in destabilizing positive feedback can be found in Markets and the Lemming Factor.

We have a number of articles on specific aspects of our current crisis. Our view of real estate can be found in Welcome to the Gingerbread Hotel, War in the Labour Markets covers employment, The Special Relativity of Currencies addresses our view of currency inter-relationships and the value of currency relative to available goods and services, our view of the intersection between peak oil and finance can be found in Energy, Finance and Hegemonic Power , and our view of the future of power systems is explained in Renewable Power? Not in Your Lifetime .

Our predictions for the future in a nutshell are available in point form in 40 Ways to Lose Your Future , and finally our prescription for facing the future is presented in How to Build a Lifeboat . This is our attempt to convey the big picture and what we as individuals can hope to do about it for ourselves, our families and friends. We cannot avoid living through a Greater Depression, we can take action, and, being forewarned, we can avoid many pitfalls. We can avoid becoming part of the herd that is determined to throw itself off a cliff.

Job Cuts Outpace GDP Fall
The job market is doing even worse than the overall economy, prompting concern inside and outside the government that deeper-than-expected joblessness could persist once the recession ends. Breaking from historical patterns, the unemployment rate -- currently at 9.5% -- is one to 1.5 percentage points higher than would be expected under one economic rule of thumb, says Lawrence Summers, President Barack Obama's top economic adviser. Since the recession began in December 2007, the economy has lost 6.5 million jobs, 4.7% of total employment. The unemployment rate has jumped five percentage points, while the economy has contracted by roughly 2.5%.

In recent days, Mr. Summers, White House budget director Peter Orszag and Fed Chairman Ben Bernanke have all talked publicly about the unusual disconnect between growth and employment. Stubborn unemployment could be a political problem for Mr. Obama, who pushed hard for a $787 billion stimulus plan this year and has already been criticized by Republicans for failing to stem the rise in the joblessness. Though today's disparity between growth and jobs is especially stark, a jobless recovery wouldn't be new: The past two recessions were marked by firms reluctant to resume hiring right away after demand recovered.

The current disconnect could reflect an unanticipated surge in productivity -- companies finding ways to increase output with fewer workers. That could set up the economy to grow rapidly in future years. Rising productivity is the linchpin of economic growth and rising living standards. But there are darker scenarios. Struggling workers, whose wages also are being squeezed, could drag a fragile economy back into deep recession. "Final demand and production have shown tentative signs of stabilization," Mr. Bernanke told lawmakers this week as part of the Fed chairman's semiannual report to Congress. "The labor market, however, has continued to weaken."

Job insecurity could lead consumers to further pull back spending, he said, calling it "an important risk to the outlook." The latest data imply productivity is pushing higher. Macroeconomic Advisers, a St. Louis forecaster, estimates productivity grew at a rapid 5% annual rate in the second quarter. While painful for workers who lose jobs, advances in productivity could help get the economy on steadier footing. When productivity rose in the 1990s -- thanks partly to technological advances -- the economy boomed, lifting wages.

Some companies are reaping gains as they clamp down on labor costs. While corporate profits are down from a year ago, many of the biggest companies reporting income figures for the second quarter are ahead of expectations because they have cut costs so aggressively. Caterpillar Inc. this week raised its profit forecast for the year, crediting cost-cutting efforts. The company's second-quarter profits were $371 million, down from $1.106 billion a year earlier, but it said it squeezed operating costs by $4.5 billion from a year earlier. Layoffs and early retirements have reduced its work force this year by 17,100, 15% of the total, and it is instituting "rolling layoffs" in which it has been furloughing workers a few weeks at a time.

"When the economy turns around and demand picks up, we're much better suited to ramp back up because we're not looking at bringing on many new people and getting them up to speed," says Jim Dugan, a Caterpillar spokesman. Kellogg Co. said in May that net income for its first quarter rose 1.3% as cost-cutting offset falling revenue. International Business Machines Corp. said second-quarter profit rose 12% despite falling revenue. The secret: It is cutting costs by $3.5 billion this year.

For now, administration officials are taking a wait-and-see approach, and they insist they have no plans to push new measures to counteract job losses. Officials say the $787 billion economic-stimulus package will have a bigger impact over the next six months. The "two-year program that we put in place was one that had gathering and increasing force over time," Mr. Summers said in an interview. The disparity between the job market and economic growth has other important implications. For Fed officials, it implies that there will be little upward pressure on prices and wages -- in other words, little inflationary pressure -- giving officials reason to hold off on raising interest rates any time soon.

Employers' unusual behavior seems to have intensified as the economy has stabilized. When the government releases its estimate of second-quarter gross domestic product next week, economists expect it will show a contraction of less than 2% at an inflation-adjusted annual rate. During the same three months, employers cut payrolls at an annual rate of more than 4%, eliminating 1.3 million more jobs. That kind of disconnect violates an economic rule of thumb called Okun's Law, after the late economist Arthur Okun, which holds that every two-percentage-point drop in the economic-growth rate corresponds with a one-percentage-point rise in the unemployment rate.

In most downturns since World War II, businesses were slow to reduce their work forces in response to inventory buildups or slowing sales. In the recessions of the early 1990s and the early 2000s, though, businesses moved more quickly to cut early in the downturn and were slow to rehire. "You certainly have the impression that businesses in general have learned to slash payrolls and employment faster than in the past," said Paul Volcker, the former Fed chairman and an economic adviser to Mr. Obama. "There's been a steep decline in business activity without the conventional impact on profits. Somehow, companies have managed to keep productivity higher than you might have thought given economic activity."

U.S. Initial Jobless Claims Rise by 30,000 to 554,000
The number of Americans filing claims for unemployment benefits jumped last week from a six- month low as distortions caused by shifts in the timing of auto- plant shutdowns subsided. Applications rose by 30,000 to 554,000 in the week ended July 18, in line with forecasts, figures from the Labor Department showed today in Washington. Claims had fallen by 93,000 over the previous two weeks. The number of people collecting unemployment insurance decreased to the lowest level in three months, also reflecting seasonal issues surrounding closures at carmakers.

“The numbers have come down but they still have a ways to go down before the bleeding of jobs is over,” said Andrew Gretzinger, a senior economist at MFC Global Investment Management in Toronto, who had forecast 555,000 claims. “The labor market is still weak and is going to remain that for some time to come.” Federal Reserve Chairman Ben S. Bernanke this week said unemployment was the “most pressing issue” facing policy makers aiming to stem the worst recession in five decades. The loss of jobs threatens to undermine consumer spending and represents a “downside risk” to the economy, he said. An analyst at Labor said claims will probably remain volatile for another week.

Economists forecast claims would increase to 557,000 from a previously reported 522,000 for the prior week, according to the median of 44 projections in a Bloomberg News survey. Estimates ranged from 500,000 to 600,000. Stock-index futures advanced as San Jose, California-based EBay Inc. and Dearborn, Michigan-based Ford Motor Co. reported better-than-estimated results and investors speculated a report today may show home resales increased. Futures on the Standard & Poor’s 500 Index rose 0.3 percent to 952.00 at 9 a.m. in New York. The four-week moving average of jobless claims, a less- volatile measure than weekly initial claims, declined to 566,000, the lowest level since January, from 585,000.

The level of continuing claims decreased by 88,000 to 6.23 million in the week ended July 11, the lowest since April, from 6.31 million. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 4.7 percent in the week ended July 11. Forty-one states and territories reported an increase in new claims, while 12 reported a decrease. These data are reported with a one-week lag. Today’s figures coincide with the week the Labor Department conducts its survey for the monthly payrolls report. U.S. employers have eliminated 6.5 million positions since the recession began in December 2007, the most of any downturn since the Great Depression.

Economists surveyed by Bloomberg earlier this month project the jobless rate will exceed 10 percent by early 2010, even as the worst of the job cuts may have passed. Bernanke this week said that while the economy is showing “tentative signs of stabilization” the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period.” “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Bernanke said in testimony before Congress. “The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

Air Products & Chemicals Inc., the world’s largest hydrogen producer, yesterday said it will cut more jobs and close more plants to reduce expenses. Chief Executive Officer John McGlade is eliminating an additional 1,150 jobs, or 6 percent of the workforce, as the global recession trims demand. “While we are still seeing the impact of the global recession on our volumes, we’ve seen signs of improvement during this quarter in some of our end markets, particularly in electronics and Asia,” McGlade said in a statement.

Jobless claims tend to be volatile in late June and July, when automakers typically halt production and idle workers to re-equip factories to build new models. General Motors Co. and Chrysler LLC halted production earlier than usual this year as they worked through bankruptcy proceedings. GM emerged from bankruptcy this month and Chrysler did the same in June.

Real Misery Index: Recalculating The Hard Times
The Huffington Post has developed a new feature that aims to provide a more accurate gauge of what is happening in the lives of millions of Americans as a result of the ongoing economic hard times. We're calling it the Real Misery Index The original Misery Index is a formula created by economist Arthur Okun that adds the current unemployment rate to the yearly increase in the consumer price index (a measure of inflation). It's an easily digestible number that the media loves to use to give a snapshot of how well or poorly the economy is doing.

Unfortunately, it's not a very useful statistic. For starters, the unemployment statistic traditionally used represents only a fraction of the jobless since it doesn't include part-time workers and those who have given up looking for work. Moreover, the consumer price index has been criticized for under-emphasizing essential goods such as food and gas. Also, the original Misery Index doesn't include a whole host of economic indicators that have a huge impact on the actual well-being of millions of Americans -- factors like the number of people losing their homes, losing their health care, and going bankrupt or defaulting on their credit cards. The rise in the cost of gas is important -- but what does it matter if you don't have a home to heat or a car to drive?

So, after consulting with experts who study economic trends, and receiving suggestions from many of our readers, we have created the Real Misery Index. It combines a more accurate unemployment statistic (the U6 formulation), with the inflation rate for three essentials (food and beverages, gas, medical costs), and year-over-year percent increases in credit card delinquencies, housing prices, food stamp participation, and home equity loan deficiencies. To formulate our index, we gave equal weight to the broad unemployment numbers and the combination of the other seven metrics. Thus, we added the broad unemployment U6 statistic to the average of the seven other statistics.

In the accompanying chart, we've compared the current recession to previous recessionary periods, including 1990-1991 and the 2000-2001 dot-com collapse. (Unfortunately, since some of the statistics we use for our formulation were not available at the time, we are not able to include 1980, during which the traditional misery index hit an all-time peak of 22.) The traditional Misery Index for the current recession is only 8.1, below the index for the 1991 downturn and barely higher than the 2001 dot-com collapse. But the Real Misery Index for 2009 -- at 29.9 -- is almost three times higher than the index for 2001, showing that the economy is in much worse shape.

We've also included three related charts, which provide additional snapshots of the state of the economy -- year-over-year increases in bank loan delinquencies (which includes credit cards, home equity loans, auto loans), foreclosures and auto repossessions. We've incorporated some suggestions from readers, including foreclosures and credit-card delinquencies. Other great suggestions, such as utility cut-offs and the number of homeless, are not tracked on a national level or are not accurately counted, and could not be included.

HuffPost's Real Misery Index will be updated each month, as soon as the relevant statistics become available. But this remains a work in progress so, by all means, feel free to make recommendations, suggest other statistics and point us in the direction of other useful resources. Send your suggestions to

Accountants Gain Courage to Stand Up to Bankers
Jonathan Weil

Turns out America’s accounting poobahs have some fight in them after all. Call them crazy, or maybe just brave. The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging. It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month. “They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan. This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits. The FASB’s approach is tougher on banks than the path taken by the London-based International Accounting Standards Board, which last week issued a proposal that would let companies continue carrying many financial assets at historical cost, including loans and debt securities. The two boards are scheduled to meet tomorrow in London to discuss their contrasting plans.

While balance sheets might be simplified, income statements would acquire new complexities. Some gains and losses would count in net income. These would include changes in the values of all equity securities and almost all derivatives. Interest payments, dividends and credit losses would go in net, too, as would realized gains and losses. So would fluctuations in all debt instruments with derivatives embedded in their structures. Other items, including fair-value fluctuations on certain loans and debt securities, would get steered to a section called comprehensive income, which would appear for the first time on the face of the income statement, below net income. Comprehensive income now appears on a company’s equity statement.

Another quirk is that the FASB doesn’t intend to require per-share figures for comprehensive income. Only net income would appear on a per-share basis. My guess is that means Wall Street securities analysts would be less likely to publish quarterly earnings estimates using comprehensive income. Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.

The debate over mark-to-market accounting is an ancient one. Many banks and insurers say market-value estimates often aren’t reliable and create misleading volatility in their numbers. Investors who prefer fair values for financial instruments say they are more useful, especially at providing early warnings of trouble in a company’s business. “It’s been a religious war,” FASB member Marc Siegel said at last week’s board meeting. “And it’s been very, very clear to me that neither side is going to give, in any way.”

So, the board devised a way to let readers of a company’s balance sheet see alternative values for loans and various other financial instruments -- at cost, or fair value -- without having to search through footnotes. At last week’s meeting, FASB member Tom Linsmeier called this a “very useful approach that addresses both sets of those constituents’ concerns.” This will not satisfy the banking lobby, which doesn’t want any significant expansion of fair-value accounting. “I guess the nicest thing I can say is it’s difficult to find the good in this,” Donna Fisher, the American Bankers Association’s tax and accounting director in Washington, told me. If the bankers don’t like it, that’s probably a good sign the FASB is doing something right.

Ignoring Watchdog Report, Treasury Gives Three Major Banks Sweetheart Deals
Four major banks have repurchased warrants from the Treasury Department since a congressional watchdog reported that the backroom deals where the prices were negotiated were ripping off the taxpayer.
In three of the subsequent four transactions, the deals have only gotten worse. The Congressional Oversight Panel report was based on 11 transactions with small banks and concluded that taxpayers walked away with about 66 percent of what they could have gotten. At a hearing on the warrant repurchase program in the House on Wednesday, Herbert Allison Jr., a senior Treasury official, insisted that the sweet deals the banks got were needed to aid the liquidity of the smaller institutions.

The four transactions since then have all been with major institutions. Three of them returned between 54 and 65 percent of what the taxpayer could have gotten on the open market. On June 17th, BB&T agreed to buy back its warrants for $67 million. The bank reported the transaction in a July 17th press release. On July 8th, the Treasury sold warrants back to State Street Corporation for $60 million. On July 15th, Treasury gave up warrants to U.S. Bancorp for $139 million. The latter two transactions are listed by the Treasury in its transactions report for the period ending July 17th.

"We are very pleased to have completed the repurchase of the warrant, effectively concluding U.S. Bancorp's participation in the Capital Purchase Program," said Richard K. Davis, chairman, president and chief executive officer of U.S. Bancorp, when announcing the deal. As well they should be. The warrants that USB bought from the taxpayer for $139 million had a fair market value of $260 million, says an academic who has closely tracked the bailout and the warrant repurchase program.

Linus Wilson is an assistant professor of finance at the University of Louisiana at Lafayette's B. I. Moody III College of Business and he uses essentially the same methodology to calculate fair market value that the Congressional Oversight Panel used -- the Black-Scholes and Merton option pricing models. That methodology is signed off on in the report by Nobel-Prize-winning economist Robert Merton himself. According to Wilson's calculations, the State Street warrants, which paid the taxpayer $60 million, should have brought in $92 million at fair market value. And the value of BB&T's warrants was $114 million, meaning the Treasury left $47 million on the table.

Yet one bank did give the taxpayer a fair shake: Goldman Sachs. Yes, the Goldman Sachs that Rolling Stone reporter Matt Taibbi recently described as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Wilson speculated that Goldman Sachs decided to pay fair price to avoid more of the bad press that's been coming its way the last several months. The bank paid $1.1 billion for its warrants, which Wilson estimates have a fair market value of $1.12 billion based on Tuesday's closing price on shares of Goldman Sachs. Goldman could afford to pay it out, too, considering that it pulled down a $3.4 billion profit in the last quarter and the taxpayer gave it billions by funneling money through AIG to Goldman.

But if the only way the public has of getting full price is to put the history of the bank on the cover of a magazine, then most banks are likely to get better deals. A Treasury official said in a statement to the Huffington Post that the process it uses to determine the price of the warrants is fair: "The warrants for common stock held by Treasury do not trade on any market and therefore do not have observable market prices. Their values can only be estimated. Treasury follows a comprehensive approach to estimating these values, which involves using a variety of inputs including a set of well-known financial models.

These models will include, but will not be limited to, binomial and Black-Scholes option-pricing models, and are widely used in financial markets to value options and warrants. Treasury also relies on indications from market participants as to what they would be willing to pay for the warrants. We obtain quotes from three separate market participants who regularly invest in or trade similar securities. We also retain outside managers to provide full, independent valuations. Together, these various methods constitute a robust process for estimating value and protecting the taxpayers' interests."

The Treasury Department refuses to comment on negotiations until two days after they are completed, giving the public and outside investors no say in the process. Recently, a group of House Democrats began an effort to end the practice and introduced legislation to require the Treasury to hold public auctions. The specific flaw in the Treasury methodology, Wilson told the Huffington Post, is that it doesn't give enough weight to the bank's stock price in its calculation. "Treasury starts out with a very low price [that it offers in negotiations. Banks come back with an even lower price. Banks get a very good deal," said Wilson. "Taxpayers would be better served if the Treasury took an optimistic view of the warrants' value and moved most of them to auction."

But the more general flaw with the Treasury process is a simple lack of transparency. A public auction would "avoid congressional scrutiny and immunize banks and Treasury from any accusations of there being some sort of sweetheart deal," said Wilson. In several instances the banks have been more transparent about the transactions than the Treasury Department. The BB&T transaction has yet to appear on the Treasury report even though the deal was struck on July 17th, as the bank announced. The bank hasn't yet paid for the warrants, so Treasury won't comment on it. JPMorgan Chase & Co. has reportedly asked the Treasury to hold a public auction, unhappy with Treasury's offer. We know that because JPMorgan said so publicly, but a Treasury spokeswoman wouldn't confirm it, saying the department doesn't comment until two days after the transaction is complete.

The JPMorgan case is telling. Since Treasury has so far set the bar so low for the warrant repurchases, banks that are just now entering negotiations don't want to pay more than the nice deal the last guy got. Selling the warrants at auction would put an end to the game. There's still time, noted the oversight panel, chaired by Harvard Prof. Elizabeth Warren, stating that "the process is still at an early enough stage that the maximum benefit for the taxpayer could be realized if the open market process is enacted now." But the longer they wait, the more taxpayer money is left on the table. Treasury shows no signs of changing on its own. Rep. Mary Jo Kilroy (D-Ohio) hopes she can force it to with her House bill. "Other investors would want to get a return on their investment," she said. "There's no reason taxpayers shouldn't."

WATCH Kilroy challenge Treasury on the warrant deals:

Home Resales in U.S. Increased More Than Forecast
Home resales in the U.S. rose in June for a third consecutive month, spurred by tax incentives, lower borrowing costs and foreclosure-driven declines in prices. Purchases climbed 3.6 percent to an annual rate of 4.89 million, stronger than forecast and the highest level since October, the National Association of Realtors said today in Washington. Median prices fell 15 percent. The gain in sales confirms Federal Reserve Chairman Ben S. Bernanke’s remarks this week that the worst housing slump in eight decades appears to be moderating. A record drop in household wealth, due in part to the plunge in property values, and mounting unemployment are among the reasons rebounds in housing and the economy are likely to be drawn out.

“We have finally bottomed out,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. Improved affordability “is stalemating the drag from higher unemployment.” Hoffman forecast sales would rise to a 4.9 million pace. Economists forecast existing sales would rise to a 4.84 million rate from a previously reported 4.77 million for May, according to the median of 68 projections in a Bloomberg News survey. Estimates ranged from 4.7 million to 5 million.

The Labor Department earlier today reported that first-time applications for jobless benefits climbed by 30,000 to 554,000 in the week ended July 18. The number of workers filing claims had dropped by 93,000 over the previous two weeks, reflecting changes in the timing of mid-year auto shutdowns to retool for the new-model year. Stocks gained and Treasury securities fell after the report. The Standard & Poor’s 500 index rose 1.4 percent to 967.67 at 10:21 a.m. in New York.

June traditionally is one of the top sales months of the year as families prepare to move before the start of the next school term, according to the NAR. The group adjusts the figures for these seasonal variations in order to facilitate month-to- month comparisons. Sales were down 0.2 percent compared with a year earlier. The gain last month was based by a 14 percent jump in purchases of condominiums. Sales of single-family houses increased 2.4 percent and were up 0.2 percent from June 2008, the first year-over-year gain since September.

The number of houses on the market fell 0.7 percent to 3.82 million in June, NAR said. At the current sales pace, it would take 9.4 months to sell those homes, compared with 9.8 months in May. A 7 months supply is usually consistent with stabilization in prices, NAR chief economist Lawrence Yun, said in a press conference. It may take until the end of this year or early 2010 before property values steady, he said. The median price of an existing home fell to $181,800 from $215,000 a year earlier, the NAR said.

Existing sales reached a 4.49 million pace in January, their lowest level since comparable records began in 1999. The median price reached a six-year low the same month, extending the decline from July 2006’s record to 28 percent. Mounting foreclosures have accelerated the drop in prices. More than 1.5 million homeowners had their homes seized by banks or received default or auction notices in the first half of the year, a 15 percent increase from a year earlier and a record, Irvine, California-based RealtyTrac Inc. said July 16.

The share of homes sold as foreclosures or otherwise distressed properties fell to 31 percent last month, Yun said. The share is “declining measurably” from the 45 percent to 50 percent level seen earlier this year, he said. Falling property values have both helped and hurt demand. Some Americans who owe more on their mortgages than their homes are worth can’t sell their properties to trade up or to move to areas of the country where more jobs are available.

Seeking to stem the slump in sales and lower borrowing costs, Fed policy makers committed to a $1.25 trillion program to purchase securities backed by home loans. Those purchases, as well as direct government purchases of Treasuries, drove rates on 30-year mortgages to a record low 4.78 percent in April, according to figures from Freddie Mac. Rates have since gravitated above 5 percent. In addition, the Obama administration’s stimulus plan provided an $8,000 tax credit for first-time home buyers for purchases completed before Dec. 1.

Growing joblessness may be diluting the effectiveness of these government efforts. With unemployment at a quarter-century high of 9.5 percent and forecast to rise further, more Americans may not be willing to make big-ticket purchases. Banks have also made it harder to obtain loans for those without good credit. Wells Fargo & Co., the biggest U.S. home lender, yesterday said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. Assets no longer collecting interest climbed 45 percent as of June 30 from the first quarter, the San Francisco-based bank said. Chief Financial Officer Howard Atkins said in an interview nonaccrual loans from its acquisition of Wachovia Corp. will moderate in the coming quarters.

Americans not making money, much less saving it
The news out today told a story of Americans going back to their puritan fiscal roots.

Americans Pay Back Debts Most Since ‘52 as Jobless Spur Savings

(Bloomberg) -- For the first time since Harry S. Truman was in the White House, Americans are paying back their debts, a phenomenon that just might help keep interest rates low as the Treasury sells a record $2 trillion of bonds and rising unemployment increases U.S. savings.

The stable rock of the American citizen, repairing his balance sheet so that the Great American Economy can recharge with a clean slate, healthy and ready to take on the world. American Capitalism in action, continuing to work in the same way it has worked for hundreds of years.

At least that is what the first paragraph implies. Once you scratch the surface the story isn't nearly so pretty.

For instance, let's look at the second paragraph of this story.

While the proportion of consumers without jobs rose to 9.5 percent last month, household borrowing fell to 128 percent of the average family’s after-tax income in the first quarter from a record 133 percent in the same period a year earlier, according to data compiled by Bloomberg. The total debt of individuals, nonfinancial companies and federal, state and local governments grew at a 4.3 percent pace at the start of the year, down from a peak of 9.9 percent in the fourth quarter of 2005, Goldman Sachs Group Inc. estimated.

Uh, if total debt is increasing then how is the country supposedly paying down its debts?

Let's ignore that question for now, and look deeper at the Commerce Department numbers. Their claim is that the savings rate is 6.9% in May, the highest since 1993.

It sounds impressive until you put it into perspective, by looking at where we are coming from. For instance, in 2007 Americans saved $57.4 Billion. At the same time they gambled away $92.3 Billion. That's a far cry from our puritan roots.

Americans are being forced to save now because their net worth has taken a brutal double-punch from the housing bubble bust and stock market crash.

But have Americans really started saving at a 6.9% rate? Let's look at how the Commerce Department puts together their numbers.

The Commerce Department measures total personal income, then deducts personal spending to arrive at what was saved.


That's what happened in May: One-time federal stimulus payments of $250 each to retirees and others receiving government aid -- so-called transfer income -- drove total personal income up 1.4% from April, while spending rose a modest 0.3%.

That boosted what the government calculates was left in people's pockets. Savings as a percentage of total disposable income jumped to 6.9% from 5.6% in April.

That one-time event merely moved private debt to public debt. The debt didn't actually get paid off.

Of course that isn't the only way that the numbers are skewed.

Trimtabs broke the numbers down to more basic elements.

Our analysis based on real-time income tax deposits indicates the real savings rate is a paltry 0.9%. Consumers are in much worse shape than government statistics suggest and have little money left over to repair their tattered balance sheets.

Trimtabs attacks the Commerce Department's most basic assumptions about wages and salaries.

the BEA is overstating income from wages and salaries and income from non-wage sources, which inflates the savings rate. Income tax deposits to the U.S. Treasury, which are reported in the Daily Treasury Statement (DTS), show the economy is contracting much faster than the BEA is reporting. Using this real-time data, we estimate the savings rate was only 2.8% in May.

Trimtabs also subtracts both the short-term "Make Work Pay" tax credit, and the $250 one-time stimulus payment earlier this year, thus we arrive at a 0.9% savings rate.

Trimtabs criticizes the BEA for using the Quarterly Census of Employment and Wages (QCEW), which is based on quarterly tax reports. The problem being that many employers pay unemployment taxes on only a small portion of their workers' salaries, and many of these payments are made at the beginning of the year.

Using the DTS instead of the QCEW, personal income would have fallen 3.6% y-o-y in May, rather than the 0.3% that the BEA reported.

That's not to say that the BEA doesn't go back and revise their reports so they are more accurate. They just do after the numbers no longer have much meaning.

Once you look at real-time data, rather than BEA projections based on past quarterly data, the Green Shoots numbers wither and die.

Forecasts of positive economic growth by Q4 2009 are wishful thinking. Our real-time indicators show declines in wages and salaries are accelerating. Adjusting for the “Making Work Pay” tax credit, wages plunged 6.2% y-o-y in the past four weeks, worse than the 4.8% y-o-y decline in May and the 5.8% y-o-y decline in June.


July 4 was on Saturday this year and on Friday last year. Even with the boost from this additional withholding day, withholdings fell an adjusted 6.2% y-o-y in the past four weeks. “Other” taxes plunged 32.7% y-o-y in the past four weeks after falling 35.6% y-o-y in Q2 2009. Corporate income taxes fell 32.2% y-o-y in the past four weeks after dropping 36.7% y-o-y in Q2 2009. Incomes are dropping much faster than government statistics are measuring.

So why do BEA numbers showing a phantom, rising savings rate? The reason is largely due to the bursting of the housing bubble, which has cut off home equity withdraws.

$150 Billion of Assets May Return to BofA’s Balance Sheet in 2010
Bank of America may soon bring some $150bn of off-balance-sheet assets back onto its balance in Q110 with the implementation of a new accounting rule, FAS 167, potentially pressuring its capital reserves.
Of the assets the bank says it may bring to its balance sheet, home equity conduits account for an estimated $12bn, while card securitizations account for $85bn, and other variable interest entities make up the remaining $53bn, according to an equity research note by Keefe, Bruyette & Woods‘ (KBW) Jefferson Harralson.

“BAC will need to reserve for the lion’s share of these loans, but according to BAC, the accounting standards dictate that the reserving will come in the form of a capital adjustment rather than through the P/L (profit and loss),” Harralson noted in the research piece. Based on an estimated 11% annualized loss rate on the card book and 4% for the remaining loans coming onto the balance sheet, KBW estimates a capital adjustment of $7.9bn, or $0.91 per share, is needed. The firm said this estimate could be conservative if the Financial Accounting Standards Board (FASB) phases in the reserve requirements over time with the implementation of FAS 167 and if the reserve methodologies use less-than-peak expected loss rates.

Financial Accounting Standards (FAS) Statement 167 pertains to securitizations and special purpose entities, according to FASB. “Statement 167 will require a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement,” the Board said in a recent statement. “A company will be required to disclose how its involvement with a variable interest entity affects the company’s financial statements.”

Existing-Home Sales Rise; Prices Fall
Existing-home sales rose again in June from the previous month, but prices are still down sharply compared with last year. Home resales rose more than expected, by 3.6%, to a 4.89 million annual rate from a revised 4.72 million in May, the National Association of Realtors said Thursday. The NAR originally reported May sales up 2.4% to 4.77 million. Wall Street expected a sales rate of 4.85 million sales rate for previously owned homes.

Foreclosures and short sales reflect 31% of sales in June. Distressed property sales have pushed prices lower, year over year. The median price for an existing home last month was $181,800, a 15.4% decrease from June 2008. The average 30-year mortgage rate rose to 5.42% in June from 4.86% in May, Freddie Mac data show. Tighter credit and rising unemployment are also reducing sales. Previously owned home sales, year-over-year, were down 0.2% from the pace in June 2008, Thursday report said.

Weak demand has kept inventories of unsold homes high. Inventories of previously owned homes fell 0.7% at the end of June to 3.82 million available for sale. That represented a 9.4-month supply at the current sales pace, compared to 9.8 in May. Excess supply is depressing prices. Regionally, sales in June compared to May grew 2.5% in the Northeast, 4.0% in the South, 6.4% in the West, and 0.9% in the Midwest. Separately, the number of U.S. workers filing new claims for state jobless benefits began climbing back up last week, confirming that the dramatic declines reported earlier this month weren't necessarily signs of an economic revival.

Initial claims for jobless benefits rose by 30,000 to 554,000 on a seasonally adjusted basis in the week ended July 18, the Labor Department said Thursday. The four-week average of new claims, which aims to smooth volatility in the data, fell by 19,000 to 566,000, the lowest level since Jan. 24. The tally of continuing claims -- those drawn by workers for more than one week -- fell by 88,000 during the week ended July 11 to 6,225,000, the lowest level since April 11..

Real Estate: Commercial and Residential Prices
Here is a comparison of the Moody's / Real Capital Analytics CRE price index and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller.

CRE and Residential Price indexes Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

This shows residential leading CRE (although we usually talk about residential investment leading CRE investment, but in this case also for prices), and this also shows that prices tend to fall faster for CRE than for residential.

There has been some discussion recently of the “de-stickification” of house prices in areas of heavy foreclosure activity. Price behavior for foreclosure resales is probably similar to CRE because there is no emotional attachment to the property. But prices in bubble areas like coastal California, with little foreclosure activity, will probably exhibit more stickiness and decline, in real terms, over a longer period than the high foreclosure areas.

Jon Stewart Is America's Most Trusted Newsman
Well, in a result that he will probably accept as downright apocalyptic for America, The Daily Show's Jon Stewart has been selected, in an online poll conducted by Time Magazine, as America's Most Trusted Newscaster, post-Cronkite. Matched up against Brian Williams, Katie Couric and Charlie Gibson, Stewart prevailed with 44 percent of the vote. Now, if we're being honest, he probably managed to prevail as the winner precisely because he was the odd man out in a field of network news anchors. Nevertheless, I think Jim Cramer should feel free to SNACK ON THAT.

Brian Williams drew the second largest percentage of votes, with 29 percent. Gibson and Couric finished third and fourth, respectively, with 19 and 7 percent of the vote. Time has helpfully broken out the results, state-by-state, so if you want to muse on some anomalous results, feel free. Brian Williams won Arizona, Wyoming, Nebraska, North Dakota, Florida, South Carolina, Indiana, Delaware and Vermont, and tied in Kentucky and Alaska. Charlie Gibson was big in Tennessee and Montana. Katie Couric pulled off the Mondalian feat of winning one state: Iowa. Stewart finished no lower than second place in all states, except, curiously, Vermont.

Click here for interactive chart

Take the red pill, Mr. President
"If there's a blue pill and a red pill, and the blue pill is half the price of the red pill and works just as well, why not pay half price for the thing that's going to make you well?" -- President Obama

In last night's press conference, President Obama seemed to be reliving that famous scene from The Matrix. The main character is offered a choice between a red pill that makes him see reality for what it is, and a blue pill that allows him to continue living in a pleasant world of illusions. Last night, President Obama appeared to have taken the blue pill before his press conference.

How else could he convince himself, the Congressional Budget Office's numbers notwithstanding, that his health care reform bill will not increase both health care costs and the federal deficit? How else can he continue to make the argument that a massive expansion of government spending on health care will solve rather than exacerbate the current problems? How can he repeatedly express such absolute certainty that such a measure will easily pay for itself several times over in the long run? Why can he not at least acknowledge the possibility that it will become a costly and useless trillion-dollar boondoggle that follows in the footsteps of his stimulus package?

With his example of the red and blue pills, and another about whether a child's hypothetical tonsils should be removed, President Obama unwittingly presents the real problem with his plan for reform. Here is a well-meaning government official who so fails to grasp the problem in health care that he can present such absurd oversimplifications and suggest that this sort of thing is the real problem -- doctors simply lack the common sense to make obvious medical decisions.

President Obama wants us to solve this problem by putting himself and other government officials in charge of rescuing medicine from the medical profession. If medical doctors with a decade of schooling cannot distinguish between good cures and ineffective ones that must be discontinued, then by gosh, we're lucky that the good folks from the government can. President Obama thus frames the issue as a false choice between doing nothing at all and handing over to Washington complicated, case-by-case medical decisions that cannot possibly be legislated or dictated by government.

This transfer of medical authority to the bureaucracy is intended to curb costs. Unfortunately, there is exactly one thing that government can do to control costs in health care: it can insist on paying below cost. This shifts the cost burden to private insurance companies, which in turn pass along higher premiums to their patients. This is what government-run Medicare does today for many treatments, including cancer. Government will do more of this kind of "saving" when it assumes greater responsibility for funding citizens' health care, particularly if a government-option health care plan is established.

The Mayo Clinic which President Obama praised in his speech last night is the same Mayo Clinic whose president signed onto a letter to Congress yesterday, expressing fears that a government-option health care plan Obama wants to establish will do more of this cost-shifting. The letter states:
Under the current Medicare system, a majority of doctors and hospitals that care for Medicare patients are paid substantially less than it costs to treat them. Many providers are therefore already approaching a point where they can not afford to see Medicare patients. Expansion of a Medicare-type plan without a method to define, measure, and pay for healthy outcomes for patients will move many doctors and hospitals across this threshold, and ultimately hurt the patients who seek our care. We should not put more Americans into the current unsustainable system.

President Obama brushed off this concern last night near the end of his press conference, citing a hopeful but very vague blog post on Mayo's website that went up a day before the letter was sent. In addition to ignoring budgetary and medical concerns, he repeated his dubious promise that his plan will not force millions of Americans out of health insurance plans they already have and like. He had no comforting words to convince anyone of the wisdom of creating two new taxes on employers -- one of them a tax that punishes small businesses with a higher tax rate if they create more jobs -- in the middle of a recession.

The one thing President Obama did not do last night was address directly any of the concerns that Americans have about his pending reform proposals. With this sort of rhetorical detachment from reality, it is not surprising that public support for his vision of health care reform is gradually eroding. President Obama needs to take the red pill, even if it does cost twice as much.

Recession over, recovery ‘nascent,' Canada's central bank says
Canada's recession is over, and the country is beginning what will be a long reconstruction of the wealth destroyed by the financial crisis, the central bank said Thursday. Gross Domestic Product will expand at an annual rate of 1.3 per cent this quarter, compared with an earlier forecast for a contraction of 1 per cent between July and September, the Bank of Canada said in its latest monetary policy report. The dramatic shift is the result of stronger financial conditions, surprisingly high consumer and business confidence and a first-half contraction that was less severe than the economic catastrophe the central bank was bracing for when it last published its views on the economy in April.

If the Bank of Canada's new forecast proves correct, Canada's first recession since the early 1990's lasted three quarters, making it one of the shortest downturns on record. Short, but severe. Canada's economy was operating about 3.5 per cent below its production capacity, a hole that will take well into 2011 to fill, the central bank said. The automotive and forestry industries are restructuring, business investment is weak and unemployment continues to rise. All that will make the recovery fragile, and explains why the central bank recommitted Tuesday to keep the benchmark lending rate at a record low of 0.25 per cent until the middle of next year.

“The recovery is nascent,” the Bank of Canada said. “Effective and resolute policy implementation remains critical to sustained global growth.” The Bank of Canada's revisions are based on a domestic economy that has weathered the global recession better than policy makers expected and confidence that the rebounds in the United States and China are about to give a lift to exporters and commodity prices. In April, the central bank predicted the economy would collapse by 7.3 per cent in the first quarter, a reading that instead came in as a 5.4 per cent contraction. The former would have been the worst on record; the later is the biggest decline since the recession of the early 1990s.

“With the reiteration of the conditional commitment to keep rates unchanged, it seems like the compass continues to point to a slow, but eventual recovery,” said TD senior economics strategist Charmaine Buskas. The central bank left its second-quarter outlook unchanged, predicting GDP shrank 3.5 per cent between April and June. Consumer spending likely increased in the period, bringing forward purchases that policy makers originally assumed would occur later this year or even next, the report said. Household credit has remained surprisingly high, reflecting the central bank's efforts to lower borrowing costs to encourage purchases of houses and other big ticket items.

Over the months ahead, the Bank of Canada is counting on exporters to take over for consumers. The U.S. economy is “at its trough,” and Canadian exporters will benefit disproportionately from the rebound because of their tight trade links with the world's largest economy, the Bank of Canada said. China's growth also is remarkably strong, which will provide a boost to commodity prices, the report said. Still, risks remain. The biggest threat to the Bank of Canada's outlook is the dollar, which has surged more than 5 per cent this month, jumping over 90 U.S. cents.

Policy makers worry about persistent strength in the currency because it makes Canadian exports less competitive abroad. The central bank's forecast for economic growth of 3 per cent in 2010 and 3.5 per cent in 2011 is based on an assumption that the loonie's value will average 87 cents over that period. “A stronger and more volatile Canadian dollar could act as a significant drag on growth and put additional downward pressure on inflation,” the report said.

The central bank is mandated by law to keep inflation advancing at a pace of about 2 per cent a year. The Bank of Canada's inflation outlook remains largely unchanged from April. Policy makers predict the consumer price index declined in the second quarter, will drop 0.7 per cent this quarter and eventually reach 2 per cent in the second quarter of 2011. Financial conditions also could take longer to return to normal, since unexpected losses at financial institutions could trigger another crisis of confidence in credit markets or bond traders could demand higher yields because of concern over rising budget deficits, the report said. “Fragility in the global economy persists,” the central bank said. “Financial deleveraging by banks, households and firms is continuing, mirrored by ongoing adjustments on the real side of the economy.”

Bruce Power pulls plug on two planned nuclear stations
Bruce Power has pulled the plug on its ambitious plans to construct two new nuclear stations in Ontario. The company says the stations, which it had hoped to build at Nanticoke on Lake Erie and at its existing nuclear complex near Port Elgin on Lake Huron, are no longer needed because of plunging electricity demand in the province. The cancellations follow a similar decision late last month by the Ontario government to shelve a plan to build a new nuclear plant. The province cited the high costs of constructing the station as part of the reason for its decision.

Bruce Power currently operates two nuclear stations it is leasing from the Ontario government at the Port Elgin site. In a statement, the company said it will focus on refurbishing reactors at these stations rather than embarking on new construction. The decision will have no impact on the company's interest in building new atomic stations in Alberta or Saskatchewan. Both provinces are expected to issue policy statements on nuclear power later this year, according to the company.

“These are business decisions unique to Ontario and reflect the current realities of the market,” said Duncan Hawthorne, Bruce Power's president. “For more than five years, we've examined our options and refurbishing our existing units has emerged as the most economical.” Bruce Power says it has notified the Canadian Nuclear Safety Commission and the Canadian Environmental Assessment Agency that it will withdraw its site license applications and suspend its environmental assessments in Bruce County and Nanticoke.

Mr. Hawthorne said its research indicated both sites “held great promise for new build if the market conditions were more favourable” but the company has to take actions that were “ best for us, for Ontario and its ratepayers.” There have been hopes among nuclear energy proponents that interest in atomic power was about to undergo a revival, after worries over the Three Mile and Chernobyl accidents caused construction of new plants to cease in North America for the past two decades.

But recently, some of that optimism has faded. Besides the cancellations in Ontario, major utilities in the U.S., including Entergy Corp. and Exelon Corp., have temporarily suspended some of their plans for new nuclear power plants. And last month, Moody's Investors Service, a credit rating firm, warned that it was considering taking a more negative view on utilities considering new nuclear stations. Shawn-Patrick Stensil, a spokesman for Greenpeace, said the rapidly escalating price tag on new nuclear plants is undermining investor confidence in the technology. He contend that cost worries prompted Bruce Power to cancel its Ontario projects because it often takes 10 years or more to build a new plant and utilities normally don't cancel plans because a recession temporarily cuts electricity use.

“I think they're using that as an excuse,” Mr. Stensil said, who said he doubts that Bruce would “would be able to convince private investors to take on that kind of risk” that comes from building two new plants. But Murray Elston, Bruce Power's vice-president corporate affairs, rejected the claim, saying that “it really is the fact that right now the capacity of our system to generate is well beyond what our demand is.” He said the company had not yet sought pricing details for the two new plants.

The real estate roots of the crisis in the US
by Elena Panaritis

Two years after it began, there is now a coalescing of opinion about the causes of the U.S. financial crisis and what should be done to resolve it, yet there is a serious element missing both in the causation analysis as well as in the prescriptive solution. This crisis, which has infected the global economy so severely, is very much a non-traditional one that calls for a non-traditional solution.

The impact in the United States so far has been worse than anything since the Great Depression: unemployment reached 9.5 percent in June, up from 7.8 percent in January, home prices were down 27% at the end of the first quarter from their 2006 peak, and 1.5 million homes were in foreclosure.  After jumping by 30 percent in February, home foreclosure rates tapered off but are again on the rise. According to the New York Times, the loss in property value could total $500 billion.

There is general agreement that the financial crisis results from a variety of factors: an extremely low household saving rate in the United States; excessive public and private liquidity creation and a wave of cheap and easy credit which was directed into real estate speculation; proliferation of “subprime” mortgage loans to high-risk borrowers, interest rates kept too low for too long that further increased incentives to over-borrow; the failure of financial supervision and regulation.

However, there is a much less obvious element that everybody is missing, that of a poorly defined and weak underlying asset namely real estate/property. Indeed, it is at the heart of the crisis. A chain is only as strong as its weakest link and the weak link here is the system used to define the asset of real estate/property in terms of use and cash flow, its supply, and pricing. In this crisis, real estate assets were badly defined for the most part, making them less securely bankable and more susceptible to price manipulation and destabilizing speculation. That’s still true, yet no one is raising the issue.

Usually, economic crises result from bad regulation and over-liquidity in the financial markets (the first four of the five factors mentioned above). Economists usually address the demand side of the assets (i.e. how an asset is financed and the credit markets around it) (as opposed to the actual regulatory infrastructure that defines and creates assets to become securely tradable with reduced risk, that is, the supply side. In this crisis, the asset (real estate) was/is for the most part badly defined - and it is this side of the equation that needs to be examined rather than taken for granted.

The current economic crisis stems from the fact that the underpinnings of the market are either broken or rotted, and in some cases there are no underpinnings. That makes it a non-traditional crisis; what we are confronting is the direct result of inadequacies in upstream property rights. This crisis combines the original sin of badly valued properties with a financial system based on harmful, unproductive gambling and incentives to continue gambling. As a result, investors in mortgage-backed securities did not have enough, reliable information on the mortgage itself. They only had information on ratings of the derivative, but not of the actual underlying asset.

We cannot achieve secure derivative trading if the information on the underpinning asset is not standardized but oblique and difficult to find - because markets run on information. In the same way we understand the need to standardize derivatives, we must understand the need to do the same for the underlying real estate assets. While we have national and international trading in asset-based securities, the information on the assets themselves is localized, and the way it is collected and reported varies from county to county and state to state.

What, then, should be done? We need to treat this crisis as an opportunity not only to install a more rigorous regulatory regime for the financial sector, but also to listen to the non-traditional economists - that is practitioners of institutional economics. They will tell us that we need to overhaul the way property rights and property values are established in this country. We need a structural reform that establishes standards for how property is evaluated and how it is offered to the market.

We need a standardized repository of information about the asset of property, so that no one has to search multiple places to make sure a title is good and that there are no outstanding liens dating back decades.  We need to ensure that all buyers can access information about the pricing of property. Let’s start with a consolidation of information county by county, and use the best standardized information we can find - typically from registries of deeds and from title insurance companies - to get things going.

The U.S. property rights system is severely broken. The incorrect valuation of land, properties, and thus mortgages is at the center of our current crisis, and if we don’t fix things so that mortgages are valued correctly we will not have addressed the root cause of why things are the way they are today. Traditionally, economists are trained to assume that pricing in general is a point of equilibrium defined by almost perfect market forces, where the demand and supply meet and neither the buyer or seller has a huge informational advantage. The traditional model also assumes that markets are frictionless and transaction costs are near zero especially when we deal with the supply side.

From that they continue to assume that systems (rules, regulations, norms) that define the tradability of assets are given and near perfect. But this is rarely the case. In reality the systems that define supply of land and real estate tend to be full of transactions costs and information leakages, and that makes it really difficult to follow the old maxim that a price or value based on how much one is willing to pay is necessarily the right price.

These are the same economists who, faced with a crisis, would concentrate on the downstream usage of an asset - that is, the asset’s treatment in the financial markets. They would typically pay little or no attention to the upstream definition of the asset - that is, the actual system that structures the supply of the asset - the pool of all assets ready to be traded in the market - before it enters the market.

Their solutions would be all the traditional ones, that is, solutions that touch on the impacts of distorted financial markets, that is, markets for ‘downstream’ financial assets: macroeconomic stability, regulation of the financial sector, even labor regulations, and by taking these steps, they would consider transactions costs to be close to zero, and disregard societal and market wrinkles.

What about practitioners of institutional economics?  They would emphasize how the underlying asset is defined, whether all the characteristics that help determine its market price are clear, and how the original creation of the asset takes place. And so, to whom do the powers-that-be turn for solutions in this non-traditional crisis? They are following the lead of the traditional economists and the conventional path of economic analysis.

The Obama administration’s economics team came in determined to get a handle on this crisis. There has been a concerted effort to lift the fog and manage as much as possible the systemic risk that has been created by panic over a suddenly uncertain future. The team has focused on policies to reduce uncertainty about the derivatives markets and restore confidence, to return banks to healthy levels of capital and bring tighter oversight to the derivatives markets.

These steps are needed, but they are not enough. Everyone has pointed to the greed of the financial sector, the manic behavior of banks and new lending institutions that continued to leverage up to take advantage of the spreads between their securitized assets and their ever-shorter funding maturities, the lax regulation of the derivatives markets, and the fact that almost anything could be bundled with anything else, no matter how heterogeneous - one security could include consumer debt, credit cards and home mortgages. Also there is a wide acknowledgment that when banks stop lending it both brings about a cyclical contraction and fuels a weakening of long-term productivity in any economy.

But is it enough simply to reduce uncertainty regarding the capitalization of banks? Does lifting the fog of uncertainty about the complex derivatives also cure the core problem? No one is touching the roots of the crisis. When Timothy Geithner, US Treasury Secretary, is asked about the signs of improvement, he points to impacts of the systemic crisis, such as unemployment, lending rates, and so on. He has yet to point to a single indicator that goes to the roots.

Where is his explanation of what is being done to address the bad rules and regulations governing how property rights in real estate are established in the United States, which is the primary reason that all the systemic problems could bring us down the path to negative-equity mortgage loans? What does he have to say about long-term miscalculations of the value of mortgages on an asset - real property - that ought to be unambiguous and transparent in our market economy? What is going to be done to ensure that land valuations are not driven by guesswork?

Until the United States accepts that it has a badly flawed approach to establishing and verifying real estate property rights and to determining the valuation of property, until it puts in place a system that homogenizes and standardizes the underlying securitized assets of real estate and housing - the same way securities are required to be homogeneous prior to being traded in bundles - these underlying real estate assets will continue to be toxic. They may be less toxic, or more toxic, as the crisis ebbs and flows, but they will be toxic nonetheless - and they will be on the balance sheets of banks.

Let the traditional economists work on the things they understand. Meanwhile, let’s combine basic institutional economics with some practical reality and fix the broken system. It will take political will, strong leadership from a new and popular president, and a direct confrontation with the special interests that would like to maintain the status quo while continuing to get bailouts.

Hypo May Be Liable for Late Disclosure, Judge Says
Hypo Real Estate Holding AG may have informed the markets too late about the risks its subprime holdings presented and may be liable for compensating shareholders, a German judge said. Hypo, which disclosed 390 million euros ($554.5 million) in writedowns on the group’s collateralized-debt obligations on Jan. 15, 2008, needs to explain why it didn’t inform the markets earlier, Presiding Judge Matthias Ruderisch said at a Munich court hearing today. Shareholders have sued the lender and are seeking about 3.6 million euros in damages.

“It’s a fact that Hypo had 1.5 billion euros in CDOs, it’s a fact that in the second half of 2007 there was no market for these papers and it’s a fact that internal calculations found impairments of 13 million euros already in November 2007,” Ruderisch said. “We can’t believe the bank had reliable data for a disclosure only in January 2008.” Hypo Real Estate almost collapsed in September after its Irish Depfa unit failed to get short-term funding amid the credit crunch. Munich-based Hypo has since received a total of 102 billion euros in debt guarantees and credit lines. A parliamentary committee is examining whether Chancellor Angela Merkel’s government could have done more to prevent the bailout and Munich prosecutors are investigating former Hypo managers.

Hypo’s stock fell 38 percent on Jan. 15, 2008, on the disclosure. In a separate shareholder suit, the court in June ordered Hypo to pay a shareholder 4,000 euros in compensation. Lawyers for Hypo appealed that ruling and asked the court to also throw out today’s suits. Hypo had said in two press releases in 2007 that it hadn’t been hurt by the U.S. subprime turmoil. “We think the suits are unfounded,” Hypo spokesman Oliver Gruss said in an e-mail. “We still think we complied with the disclosure requirements.”

Ruderisch said the court’s assessment is preliminary. Only shareholders who bought the stock from November 26, 2007 through Jan. 15, 2008, could claim damages, he said. The judge asked Hypo’s lawyers to provide written documentation on how and when the lenders calculated the impairments and how the company leadership was informed. An Oct. 29 ruling is scheduled. mThe shareholders’ second claim -- that Hypo should have warned about the risks of Depfa’s business model in 2007 -- is likely to be dismissed, Ruderisch said. Depfa refinanced long- term government financing with short-term credit and failed to obtain funding when inter-banking lending dried up after Lehman Brothers Holdings Inc.’s bankruptcy in September.

“We don’t think the market didn’t know Depfa’s strategy in 2007 or that it would have seen that as a problem back then,” said Ruderisch. “The market only saw that as a risk much later when the interest rates structures changed dramatically.” In a separate suit that also targets former Hypo executives Georg Funke and Bo Heide-Ottosen, the court today said it’s unlikely that shareholders can claim damages from both men because it can’t be shown that they intended to harm investors. Lawyers for the pair asked the court to throw out the cases. Today’s suits are among several dozen cases pending in Munich against Hypo

Germany must waste no time in reforming its banks
Back in November 2008, Rahm Emanuel, then the White House chief of staff-designate, laid down a useful measuring rod for what lay ahead: "Never allow a crisis to go to waste." In the wake of the financial crisis, that dictum has direct application not just for the US, but the entire world. Alas, in the middle of 2009, it is not just American policymakers who are letting a great crisis go to waste. Things are not much better in Germany, where this crisis ought to have led to the long-overdue reform of the banking sector - the consolidation of the Landesbanken.

Germany has seven independent state banks, or Landesbanken, which are jointly owned by the state governments and the savings banks. Established to provide state guarantees for regional business development, this practice was essentially outlawed by the European Commission back in 2002. Since then, Landesbanken have faced corporate governance problems. For example, the advisory boards of Landesbanken are supposed to control the top management but professional expertise plays no role in the allocation of seats. In some Landesbanken, neither the management nor the board had reliable information about their holdings of subprime mortgage products when the crisis hit.

Worse, the already doubtful sustainability of their business model - international wholesale banking - has been shattered by the financial crisis. To compensate for their low rates of return compared with private banks of equal size, many Landesbanken before the crisis created structures to hold assets outside their balance sheets. Protected by state guarantees, they borrowed large sums of money in capital markets, which they invested in supposedly high-yielding subprime products with good credit ratings. When theproducts were subsequently downgraded, two state banks were forced to merge immediately. Four of the remaining seven state banks lost much of their equity and had to be bailed out by various state governments with tens of billions of euros.

This situation could get much worse: if the Landesbanken fail to clean up their balance sheets, the next decline in equity capital could prove lethal. To avert such an outcome, it is imperative to establish a "bad bank" to receive their toxic assets - and then continue the clean-up by reducing the number of Landesbanken through mergers.The total assets of Germany's state banks exceed €1,900bn ($2,695bn, £1,640bn). All Landesbanken rank among the 15 biggest German banks - with four of them in the top 10. These four account for about 23 per cent of total assets of the top 10.They are so big and interconnected with the entire banking sector that bankruptcy is not an option.

Due to the unsolved problem of toxic assets and the shortage of equity capital, Standard and Poor's recently downgraded most of the Landesbanken to a rather mediocre level of around BBB+. This has turned the crisis in German banking to a large extent into a crisis specific to the Landesbanken. Against this backdrop, the federal government and the savings banks, as the biggest shareholders, have called for the Landesbanken to merge, to a maximum of three. State governmentsoppose this strategy because the continued existence of the Landesbanken makes it easier for them to manage their cash flow and to implement industrial policy decisions without much publicity.

One way for the federal government to restructure the system would be to take the toxic assets at zero value from the four ailing Landesbanken and transfer them into the bad bank, with the losses covered by the shareholders - state governments and savings banks. The federal government could then recapitalise the good state banks, possibly in co-operation with the savings banks. Pressured by the new shareholders - federal government and savings banks - the remaining Landesbanken could hardly resist merging into a single good bank.

Reform is both needed and possible. While this process will evolve in stages, one can envision a world in which even the two state banks that are considered relatively stable - Helaba and Nord LB - would be privatised. That would be the logical conclusion of a process that has seen the idea of an explicit public purpose of the Landesbanken fall by the wayside.

The authors are president and research director of Financial Markets at DIW Berlin, the German Institute for Economic Research

Pubs closing at rate of 52 a week as hard-up drinkers shun their local
The rate of pub closures is accelerating, with 52 going out of business every week at a cost of 24,000 jobs over the past year, figures show. Almost 2,400 pubs and bars have vanished from villages and towns in the past 12 months, according to research for the British Beer & Pub Association (BBPA). Local pubs serving small communities have been the worst hit, the association said. The number of closures represents the steepest rate of decline since records began in 1990 and has risen by a third compared with the same period last year, when 36 pubs were closing every week.

A preference for drinking more cheaply at home, rather than going out, is thought to have contributed to closures. A BBPA spokesman said: “The biggest impact is the recession. There are fewer people out and fewer people spending money in pubs and bars. Pubs are diversifying but, unfortunately, if you are a community pub you can’t transform yourself into a trendy town centre bar.” The BBPA said that the total number of pubs and bars has fallen from a steady 60,000 “for years” to the 53,466 still trading. It added that of the 52 premises closing each week, 40 are local pubs and nine are high street bars. The recession is claiming about 461 bar jobs a week, according to the figures, compiled by CGA Strategy, the market information group.

The BBPA said that establishments that serve foods, such as gastropubs, were more resilient, closing at a rate of only one a week. By contrast, branded pubs and café-style bars are faring relatively well and are opening at a rate of two every seven days. The fall in spending in pubs and bars is the latest in a string of setbacks for publicans in recent years. Inflationary pressures cut drinkers’ spending power in 2007, resulting in a drop in revenue. The smoking ban in 2007 and changes to the licensing laws have dealt further blows. The BBPA said that higher taxes on beer imposed in the past two Budgets had contributed to the industry’s woes, adding about £600 million to the pub industry’s tax bill.

In addition, some of the larger pub companies, such as Punch Taverns and Enterprise Inns, have come under scrutiny this year, with an investigation by the Commons Business and Enterprise Committee into their tied-trade business models. The committee said in May that it had found evidence that the behaviour of such companies was contributing to the sharp rise in pub closures. The BBPA said that the closure of pubs had cost the Government an estimated £254 million in tax revenue in the past 12 months — a figure rising by £5.5 million every week. It added that job losses in the sector were costing the Government £1.53 million a week in jobseeker’s allowance.

David Long, the chief executive of the BBPA, said: “Closing pubs are not only a loss to communities, but a loss to the Treasury. The Government should look at valuing and rewarding pubs as community assets. Not only would this have social policy benefits by supporting a hub of community cohesion, but financial policy benefits in terms of tax revenues, particularly at a time when the public purse is stretched.” The BBPA said that, in the past, closed pubs had often been bought by property developers and turned into flats, but that since the decline of the property market, pubs that had shut had less appeal to prospective buyers and had been left boarded up.

A spokesman for the association said: “While some have been bought by other people — usually property developers rather than new landlords — since the downturn, pubs have become a lot less attractive to developers.” Estate agents said that pubs in villages, where local housing is in short supply, still made a compelling case for developers. Chris Coleman-Smith, head of auctions for Savills, said: “If it is in the back of beyond, where a pub might struggle for trade, it is probably better off as a residential development, either a house or a few units, for prospective homebuyers.”

Ilargi: Our highly regarded reader VK dug this up in response to a question from Australia, about how we think that part of the world is faring. Really, no-one will escape the deflation downfall but the very poorest, for whom it could not possibly make any difference anymore.

Australians have lost 36% of their wealth
Australian households have lost an extraordinary 36 per cent of their financial wealth since the economic crisis began. Estimates from the Australian Bureau of Statistics put combined household wealth at just short of $787 billion at the end of March, down from a peak of $1246 billion in September 2007. The total includes household wealth held in cash, bank deposits, bonds and shares, but net of borrowing. Significantly it excludes wealth held in the form of superannuation and real estate, and both of these have also dived since the crisis began.

Financial wealth per household as measured by the Australian Financial Accounts has slid from $159,000 to $98,000 - its lowest point for more than three years. Per person it has slipped from $58,900 to $36,200. "It's the result of the collapsing sharemarket," said Savanth Sebastian, a Commonwealth Securities economist. "Australians are more exposed to shares than the citizens of virtually any other country. "Up until March our share prices had dived 43 per cent."

In the early 1990s recession wealth collapsed sharply during the first quarter of 1991 and then bounced around rather than sliding relentlessly as it has done this time. "Back then our wealth wasn't so tied up in shares," said Mr Sebastian. "We weren't as exposed." The good news is that share prices are climbing again. Since March they have rebounded a further 10 per cent, leading CommSec to expect an end to the slide in financial wealth when the next figures come out in three months.

"We think household wealth will tread water for two quarters and then pick up towards the end of the year," Mr Sebastian said. As our sharemarket slid, more and more of our wealth has been switched into cash and bank deposits, with the total either held under beds, in safes or in banks and credit unions reaching a record $487 billion in March, roughly 60 per cent of household wealth. However the amount that we owe has continued to climb throughout the crisis, jumping a further $15 billion in the March quarter to a record $1306 billion. "Our ratio of debts to liquid assets has hit 154 per cent, meaning we don't have the readily available cash we would need to cover our debts in the event of a sharp downturn.

"We are vulnerable," Mr Sebastian said. In contrast, Australian companies have strengthened their balance sheets, reducing debt by a further $11 billion the March quarter. "As a result their net assets have climbed to their highest point in two years. This should give investors confidence," he said. The Australian Financial Accounts show foreign investors demonstrating that confidence, lifting their ownership of Australian shares to 42 per cent, the highest proportion in 12 years.

Stirrings in the Kenya slums
One by one, complying hesitantly with the odd request of their visitor, the 20 young men get up from the ridge of grass that forms an amphitheatre at the centre of their slum and sing the Kenyan national anthem. As its Swahili words begin to flow they praise bonds of unity, the shield of justice and the virtues of service. But the soaring sentiments jar cruelly with the reality of the singers' lives. Before the paean to the "glory of Kenya" as the "fruit of our labour" has left their thoughts, they are asked to say what they do. "Hustler," answers one. "Super idler," says another. "Minibus tout, without a minibus," says a third. Fifteen of the 20 are unemployed.

The men from Nairobi's Kawangware slum represent the five biggest tribes of Kenya. They are united in agreeing that their biggest problem is a lack of income and that the blame for their predicament lies in one place: the country's failing multi-tribal coalition government. The power-sharing government was formed in February last year to end a post-election wave of intercommunal violence that killed 1,100 people, displaced more than 300,000 and shattered Kenya's reputation as a haven of stability in a rough neighbourhood.

US President Barack Obama's paternal homeland plays a crucial role as east Africa's manufacturing base and a transport hub for a vast region: Uganda, Rwanda, eastern Congo and southern Sudan all rely on its road and rail links and its port at Mombasa for access to the rest of the world. Kenya is home to the biggest United Nations offices in Africa and is the base for agencies doing aid and development work across one of world's most troubled, conflict-prone zones.

Kenya's leaders signed up last year to an ambitious reform agenda that promised the most dramatic transformation of the country since the end of colonialism in 1963 by tackling the underlying causes of the crisis: land disputes, inequality and a skewed distribution of political power. Instead, the government has been paralysed by corruption, in-fighting and a poisonous lack of goodwill - as even some of its own more straight-talking members admit.
"The coalition is dysfunctional," says James Orengo, lands minister. "If it had committed to a clear vision and agreed on structures for decision-making, then all these problems would not be there." mGeorge Nyongesa, the visiting political activist who was urging the 20 young men on, says he asked them to sing the anthem to hammer home a point: "That there is a complete contradiction between the founding ideals of Kenya and the present operation of our politics."

Eighteen months ago, slum residents like those gathering to listen to Mr Nyongesa - a community organiser from a group called the People's Parliament - were hacking each other to death in the inter-ethnic violence sparked by a disputed outcome to the election. Now, popular anger at the failings of the cross-tribe government appears, with a degree of irony, to be prompting some of Kenya's urban poor to question the role of ethnicity in politics. This is not to say that tribal affiliations themselves are dying away: they remain rooted in language, customs and neighbourhood support networks. Those bonds are at their strongest in rural areas. Even in the most deprived areas of the capital - many of which abruptly segregated during last year's violence - citizens are becoming more united by their loathing of the government than they are divided along tribal lines.

Unscrupulous demagogues could still whip up ethnic animosity. But equally, the popular discontent could be harnessed to build a political reform movement that transcends tribes. David Njogu, one of the young Kawangware men, offers a blanket indictment of the government that owes nothing to his ethnicity or theirs. "They're not performing. Just looking after their own stuff. Not looking at the basic things we need," he says. "This country has a lot of money but we don't see it. This is the time for the youth to rise up." John Githongo, a top anticorruption official turned whistleblower, says it is too early to talk of class "solidarity" but notes: "Right now, what we have is a growing awareness: it is inarticulate, could be violent, disorganised and anarchic. There is no template for what's happening in Kenya."

If the sentiments are allowed to smoulder without structure, they could explode into violence just as gruesome as last year's. If they are organised into a political force, they could make the 2012 presidential election the one in which a cabal of leaders, some with their political roots stretching back to the independence struggle, are ejected from power. To explain the context, Mr Nyongesa points to a dilapidated minibus that honks at a stray goat before swerving close to a row of roadside kiosks. Across its front are emblazoned the words: "Our problem, Kiraka."

Kiraka is a term derived from the names of the three men, each from a different tribe, who were rival presidential candidates in the 2007 election and are now united in power - Mwai Kibaki, the president; Raila Odinga, prime minister; and Kalonzo Musyoka, vice-president. But the word doubles up as a derogatory play on the Swahili for patch. "The cloth is torn so you bring a patch," says Mr Nyongesa. "They are the old patch, hanging on. What we need are new clothes."

This is not the first time in Kenya that a government's performance has generated huge popular discontent. But several factors make the country different today, not least that Kenyans are better informed and enjoy more political freedom than in the past. Moreover, the cabinet for the first time explicitly accommodates all of the biggest tribes. This undermines an assumption that has been a linchpin of post-colonial politics in Africa: that the poor will back a member of their own tribe seeking power because patronage will repay the community.

"We've always said, 'my man will win and he'll give me a job, I'll have food, I can pay rent, I can take my child to school'," says Mr Nyongesa. "But now all tribes are in the ruling class and it's not brought any relief on our side."
Mr Githongo says the coalition "has been sadly helpful" in showing that "the ruling class becomes a tribe once they ascend to power, and it is a tribe that guards what it has jealously and accumulates corruptly with a voraciousness born of impunity".

Helping to raise the potency of the divide is growing resentment at politicians who have manipulated Kenyans over the course of decades by stirring "us versus them" tribal hatreds. "When the youth went into the streets they were shot, killed, used by the politicians," says Mr Njogu, the young man in the slum. "We have learnt that these guys are going to psych us to fight. Then they just go off and leave us. So it is better to be together against them." Mwalimu Mati, head of the Mars Group, an anti-corruption organisation, says: "A lot of the youth are waiting for someone to tell them the next big idea. What is the plan? Sometimes it can be a criminal enterprise, sometimes religion, sometimes a political movement."

It could also even bring the ethnic militias, who played such a strong role in last year's violence, back to the forefront. An illegal gang called Mungiki, which has harnessed the disillusionment of young men in Mr Kibaki's Kikuyu community, is running extortion rackets and bullying members of its own tribe into compliance. Other ethnic militias have proliferated across the country. Ngunjiri Wambugu from the Kikuyus for Change activist group says: "Violence is usually the output of a lack of dialogue. The issue is, can we have a non-violent confrontation with the political leaders?" To make that possible, his organisation is working with others from the Kalenjin, Luo and Kamba communities to turn shared anti-government feelings into a constructive political force.

Mr Nyongesa, who is trying to do similar things with the People's Parliament, says that if the grievances of the urban poor are to play a part in 2012, they need a leader who can transcend tribalism. "People still ask me: who will be our Obama?" he says. "I say: it's up to you to identify him." A movement would also need a set of values linked to basic livelihood issues. But Mr Mati worries about the emergence of a demagogue: "You could dupe the population into a massive vote by promising unga [maize flour] at Ks20 [$26 US cents, 16p, 18 eurocents] per kilogram and then do what you like."

Sceptics say any attempt to build a political structure around signs of class identity will quickly reveal that the sentiment is shallow and not wired into people's instincts in the way notions of the tribe are after decades of conditioning by politicians. "If there's a crunch and confrontation my guess is that the more important rallying point will be ethnicity rather than class - at this time," says Maina Kiai, former head of the Kenya National Commission on Human Rights. He believes that the most significant socioeconomic divisions will turn out to be within ethnic groups rather than across them. "They will fight each other, but also say 'Let's get something to eat'. So you'll see looting and people crossing from the slums into the wealthiest neighbourhoods."

Renewed violence could be triggered at any day by a crisis in the coalition, be it over land reform, a new constitution or prosecuting the masterminds of the post-election clashes at the International Criminal Court. In rural areas such as the Rift Valley - where the violence was at its worst, grievances remain intense on all sides and tribal militias are rearming - it is hard to imagine a coalition of the downtrodden. But it is the Kikuyu youth - including those in groups such as Mungiki - who are likely to have a decisive impact on Kenya's future, because last year's crisis was as much about anger over their tribe's perceived monopoly on power and wealth as it was about a rigged election.

If they ditch their own tribal elite to join forces with other poor young men that will mark a turning point for Kenyan politics. If they buy into one of their community's most powerful narratives - that Kikuyu survival is being threatened by every other tribe - then little will change. The actions of the president's closest Kikuyu allies, the so-called Mount Kenya mafia, suggest they perceive the grassroots threat, but are also digging deep into their ethnic bunker. Jimmy Kibaki, the president's 46-year-old son, was recently dispatched to talk about "we, the youth" and position himself as a leader of the disenfranchised poor. He was greeted with derision by youth groups.

Mr Nyongesa says he and People's Parliament members have been harassed by the authorities ahead of public meetings. Non-Kikuyus complain of being stripped out of the upper echelons of the police and the army in anticipation of another conflagration. These are reminders that any bottom-up movement that gains traction is likely to be met by the full force of the state. But the young slum dwellers of Kawangware who sang the national anthem in the rain know they have one big advantage. "There are two tribes, the rich and the poor, and we the poor have the numbers," says Sam Onchwari, an underemployed barber. "It's the numbers that can put pressure on the government, and we have more than enough."

During the crisis last year that saw Kenya pushed to the brink of civil war President Mwai Kibaki could count on no more fierce an ally or tougher negotiator than Martha Karua. The former magistrate was at the tally centre defending the integrity of an election her party was accused of stealing, and then at the negotiating table securing the most powerful jobs in the coalition for its ministers. So when, this April, the 51-year-old said she was ditching Mr Kibaki - a fellow member of the Kikuyu tribe, Kenya's largest - and quitting in disgust as justice minister, her about-turn shocked the country.

To Kenyans her resignation confirmed that power-sharing was not working. Ms Karua is now trying to capitalise on their discontent and position herself for the 2012 presidential election in which she is likely to run on a reform ticket.
The coalition is inefficient and riddled with rivalries, she says. It is "a system where you are given the work minus the support to do it, where there are intrigues and you are being undermined continuously after you are given a job to do," she tells the FT.

Citing her thwarted efforts to tackle police death squads, an ineffective judiciary and corruption within the coalition, she says: "I think the nexus in all of them is impunity . . . The unwillingness to change anything." She attributes the inertia to the self-interest of ministers. "If you have people who feel exposed by reforms they are going to fight them. There are those who feel the police reforms are going to expose the wrong things they have done previously. There are those who feel the fight against impunity will find them, whether it's with regard to violence or corruption."

Mr Kibaki and Raila Odinga, prime minister - foes in the 2007 election - are equally to blame for the lack of action, she says. She also rejects the idea that the coalition has been paralysed by in-fighting between their parties, describing it as a "clever ploy" used as a decoy by both sides. Yet in spite of her damning assessment of the coalition, she has "no regrets" about her role in creating it. "I stood up at [the tally centre] for what is right, for me and my country, not just for the president," she says.


Anonymous said...

Have I missed something I see no point where ilargi has actually said that Scepticus was banned? As far as I can see he has merely implied a ban.

ilargi is Scepticus in fact banned or not, I think it is important to know this in plain words.


Anonymous said...

“"I'm seeing an enthusiastic group of young people all across the country who want to get into farming," says Fred Kirschenmann, a longtime farmer and fellow at the Leopold Center for Sustainable Agriculture at Iowa State University in Ames.

The wave of young farmers on tiny farms is too new and too small to have turned up significantly in USDA statistics, but people in the farming world acknowledge there's something afoot.”

On tiny plots, a new generation of farmers emerges

Erin Winthrope said...

Re: How to cope with our predicament

The 7 minute youtube clip below (18 min 40sec - 26min) put everything into perspective for me. I love the "circling the drain" metaphor.

Like the speaker, I'm a "notebook guy" with a ticket to the freak-show, and I admit to being one of the freaks occasionally.

Judging from the entertaining and enlightening comments that I read here everyday, I think we're all notebook guys/gals of one kind or another.

Watch from 18min 40sec - 26 min

Circling The Drain

el gallinazo said...


Our new found friends magically believe that if they can discredit our hosts, then the repo company will not take away their plasma TV and their electricity will not be shut off. This magical thinking is a strong motivation to draw from Karl Rove's toolbox. St. Stoneleigh will put up with it because she believes that a few can be helped. I am more primitive, but what does one expect from a vulture?

On another note, I think the market will peak between 1100 and 1200. I feel the crash will be in October. Why? Tradition! (as sung to the Fiddler on the Roof). I think I'm looking at Sep 1-10 to place my shorts. Maybe half on Sep 1 and half on Sep 20 - but all subject to change and re-evaluation. I see Karl is also holding off but locked and loaded.

Jeez, St. Stoneleigh really called this one. We haven't quite reached the euphoria stage yet but it's heating up. I was planning to take the ride up as well, but I bailed - just didn't have the balls :-(

And for you new found friends clutching your plasma TV's, why am I lauding Stoneleigh before the fact? Because the fundamentals are simply terrible. When Wile E. Coyote can fly by flapping his paws, I'll believe this is a true bull market.

Re Draino

I think Ilargi should give Scepticus one more very short post here - namely the URL of his new blog site. Hopefully Scepticus will prove to be a new Pied Piper.

institutionalized said...

Ilargi, the first article links back to TAE. Cheers

Anonymous said...

Intelligent, respectful and open-minded debate will not get you banned, especially if you manage not dominate the comment threads or drown out other discussions. If you have something to bring to the table that you think we could learn from then by all means bring it.

Are you serious? Maybe you can explain why scepticus was banned. Scepticus was intelligent, respectful, and open-minded and provided some very good reasons as to why your scenarios may not play out as you describe. Yet, he was banned.

I just don't get it.

ric said...

Small comment:

"We can avoid becoming part of the herd that is determned to through itself off a cliff."

should be...

"...that is determined to throw itself off a cliff."

Sumbytes said...

Anon 12:49

I view the banning as more of a case of "we are going to have to agree to disagree".

Erin Winthrope said...

@ El G

I thought TPTB wouldn't allow the crash to begin until after healthcare legislation was passed in August. Now it looks like healthcare is off the table until the fall. This throws off my timing for market entry with SDS.

The way I figured things, Healthcare legislation would be passed in August. Then, the peons would enjoy a leisurely Labor Day weekend. By the time September rolled around, it would be time to introduce a new product -- financial crisis.

How? How about, the ratings agencies suddenly receive permission to rate reality vs. fantasy or, FASB starts to enforce basic accounting standards. Our leaders need another crisis in the stock market before it becomes politically possible to offload more toxic waste onto the peons. The logic will be the same as last fall: Give us more bailouts or we crash the stock markets and take your 401ks with it!

It's helpful to remember the revealing words of President Bush's chief of staff, Andrew Card, who told New York Times during the summer of 2002, during the quiet build-up to Gulf War II:

"From a marketing point of view, you don't introduce new products in August"

Bush made his war declaration speech at the UN on Sept. 12, 2002.

rapier said...

The first article "Job cuts..." links back to AE so I can't tell the source but it's quite interesting and I think a sort of landmark. While it's been percolating for awhile that jobs aren't on the way this is the fist time I've seen the MSM starting to try to come to grips with it.

I remain agnostic on the economic devolution that I&S espouse,and bless them for standing by their beliefs and defending them, because I can forsee exactly the thing the cheerleaders see today. See and measured in the (nominal) breakout in stocks. That is corporate profits can be maintained as 10% to 20% of the populace is separated from the economy. If corporate profits are maintained, every by accounting legerdemain, then money and credit growth could stabilize and if they do then so too can the political economy.

I'm not predicting such,just saying it has to be considered a possibility. I think the probability declines as time passes but time itself allows people to adjust and perhaps that could mitigate so many of the things we fear. I am intimate with most every aspect of I&S's beliefs and I agree with them, but only to a degree. A degree of probability. The future is not determined is my motto.

The growing underclass that is all but explicit in the jobless prediction is going to be hard to finesse however. Especially since it's obvious that little or no help is on the way in any manner that implies welfare as government finances on all levels deteriorates. I've always thought that when the crack up came the right would take some solace if not glee in trying to re enact the Great Depression sans the New Deal.

Of course politics and economics are the same thing. Seeing how this new underclass is going to be handled, to start rhetorically and then policy wise in the next couple of months is story one I think. Baring some other crackup.

Stoneleigh said...

Rapier (from the last thread),

Doesn't Hydro Quebec have enough capacity to make Ontario fat and happy electricity wise for a long time to come even assuming what you don't assume, growth?

Quebec has a power surplus, partly as a result of Newfoundland having made a disastrous deal with them over Churchill Falls. However, power can only go where adequate transmission capacity can take it. Quebec would rather sell their surplus to the US for more than Ontarians care to pay, so there's no incentive to increase inter-provincial transmission. Ontario imports power from Quebec, Manitoba and the US, but could only meet a fraction of demand through imports due to limited transmission capacity.

In 2005 demand was regularly exceeding what we could produce ourselves, hence expensive imports were required to fill the gap during an exceptionally hot summer. Now that demand has fallen, we are actually in a position where power prices are often negative at night, when demand doesn't even reach the level of baseload supply.

Anonymous said...

I view the banning as more of a case of "we are going to have to agree to disagree".

So this forum becomes nothing better than a television pundit show where one side talks and then the other and neither side listens or agrees and the conclusion is "we are going to have to agree to disagree".

That is not how problems are solved. That is not how common ground is formed.

“Stubborn and ardent clinging to one's opinion is the best proof of stupidity”

--- Michel de Montaigne

Sumbytes said...

Anon 1:13

Are we talking about the same thing. The comments went on and on and on. It got boring and repetitive. Ya know there are other sites espousing all viewpoints under the sun. I read the few I like. Not all blogs have to entertain all views till infinity. Everyone knows both sides. Time to move on.

Johanna said...

oops - I didn't realise the poster asking the question about how NZ and Australia are faring actually was from Australia! Wouldn't have ranted in the way I did about the NZ experience if I had! :)

As ever, thanks to I&S - and also to the many regulars here whose comments I get a lot from.

Anonymous said...

There must be a lot of new people here. Ilargi's standard approach is to dismiss comments he doesn't like with childish putdowns (he's proven incapable of intelligent debate), followed by banning.

This is the standard operating procedure here.

IIRC, after the last person was banned, Stoneleigh had the gall to proclaim that they DO believe in the Second Amendment. That was really warped.

This general level of dishonesty must mean that they are practicing to go into politics.

Toddman said...


Many thanks for the primer on primers! What a nice surprise.

Erin Winthrope said...

What are the board's thoughts on Obama's health care legislation.

Ilargi and Stoneleigh have argued that health insurance will be virtually non-existent within a few years. Operations and medical exams will be paid for entirely by the patient. No cash, no service. If that means folks die from easily treatable staph infections, then so be it.

If that's the case, then what's the point of all this debate regarding national health care legislation. Is it merely a Trojan Horse to permit further tax increases with less political opposition in the near term?

It seems to me the government needs to offer the citizens something, even if it's an empty gesture. Otherwise, when further bank bailouts are required within the next few months, the populace will scream, "What have you done for me lately?"

Toddman said...

Lots of heat in the comments section the last few days. A few thoughts:

1. At some level, it means that people care about this site and our hosts; and that the core message of Ilargi and that of Stoneleigh (not the same IMO) speaks to folks to some degree.

2. Building on point 1, I think that's why folks get upset when Ilargi acts like a dick. When KD acts like a dick (frequently), I just conclude that he's fundamentally a toolbag and stop reading his site. Easy. Done. (To be clear, I don't think Ilargi is a dick; certainly he can lack patience.)

Who am I to venture a guess, but I will anyway...Ilargi's erratic behavior looks to me like a possible blood sugar issue. I suffer from that myself, as do quite a few family members, and low blood sugar can turn me and others quickly into a real reactionary ass. Also from experience (I develop IE for MSFT), spending many hours a day in front of a computer screen is not healthy. My guess is that Ilargi is borderlne addicted to his reading/writing routine on the net (as am I, in addition to my daily work routine).

3. Something relatively new is the number of snarky jabs at Stoneleigh, mostly accusations of a wooden inflexibility in her thinking. My take here is that folks are grasping for understanding what's happening in the world, but don't have nearly enough information to form such a solid framework (we are Orlov's "Factory Farmed Humans".) Therefore we rely on the positions of others, hoping we pick the right theorists.

From this point of view, Scepticus' ideas might seem as valid as Stoneleigh's, and the best we could hope for is some sort of dialectic that would resolve the disagreement and identify the real truth, which we assume might be somewhere between the two positions. It's less comfortable to consider that one side is mostly correct, and one side is mostly mistaken - who to believe then?

Personally, I take what Stoneleigh has to say seriously because she acknowledges and incorporates the thinking of several others' work that I find highly relevant and convincing (Tainter, Greer, Heinberg, Prechter, etc..)

Another valuable aspect of Stoneleigh's thinking is that it is largely constraint based - i.e. the realm of what is possible (and what is likely) is reduced from the realm of infinite possibility by compiling understandings of key constraints from the political, economic, ecological, psychological, energy, etc. spheres. Constraint, or invariant, based thinking is really just about the only way to competently think about extremely complex systems (at least that's the way it works in computer science.)

Could she be wrong? Of course. But risk mitigation needs to be based on both the likelihood of an event occurring and its severity.

I often wonder would Nassim Taleb scoff at the faith that the good track record of I&S generates in many readers - are they fooled by randomness? I tend to think not, at least not entirely.

Lots of thoughts flowing tonight as I sit here waiting for an important email. More to follow.

Anonymous said...

From the Bloom article:

"June traditionally is one of the top sales months of the year as families prepare to move before the start of the next school term, according to the NAR. The group adjusts the figures for these seasonal variations in order to facilitate month-to- month comparisons. Sales were down 0.2 percent compared with a year earlier."

Home sales down 0.2% from a year earlier, eh? Or do they mean that when comparing June to May they dropped that much from a year earlier? Either way, misdirection to the extreme...

Glennjeff said...

From a few of the commenters over the last couple of days, especially the optimistic ones, I am wondering if folks are aware that the relationship between GDP and "Energy Use" is almost directly proportional.

@ el-gal

I don't know what "putting shorts" means exactly, but Sept 20 might be too late for anything, just a feeling.

Anonymous said...

Toddman @ 3:09

Good post.

Brunswickian said...

Could she be wrong? Of course.

They call that rhetoric aka misdirection. Specific to general dodge = disingenuous.

+ other presumptive crapola

But risk mitigation needs to be based on both the likelihood of an event occurring and its severity.

Toddy sounds rather like septy don't you think?

Toddman said...

-- A tribute to Ilargi's writing --

It's not hard to see that most of the high-level, primer-like material this site offers, as summarized in the post today, is written by Stoneleigh.

It might be tempting to assign higher value to this work than the writing of Ilargi. Certainly I think the clarity of Stoneleigh's writing is reflective of a clarity in her thought process that is remarkable and rare.

Ilargi's work has occasionally been pejoratively described as rhetoric. I think that's a mistake. Here, briefly, is how I conceptualize Ilargi's major contributions:

1. He bears emotional witness to the pain of the (partly in-progess, and partly pending) destruction of the American middle class. The complete loss of "normalcy" as we have come to think of life in the last 60 years, a la Kunstler. I don't think Ilargi fetishizes the American middle class, I think he identifies with it.

One might be tempted to scoff at the project of mourning the loss of the incredible privilege that Americans enjoyed relative to a good bit of the rest of humanity, but that's also a mistake. The loss is quite real, and on a psychological level, quite destructive.

Ilargi is able to fully feel this loss, see it with his mind's eye, and communicate it in his writing. I believe it is these efforts that connect him most deeply to a lot of his readers. In this respect he is perhaps a student of Joe Bageant.

2. Ilargi does the legwork on housing - crunching the numbers, reading between the li(n)es, consistently putting the message out there that debt-based home ownership is a trap. This still isn't clear to a lot of people, and was even less so 18 months ago when this blog began. It is also often what people need to hear the most, and the most quickly, when they arrive here. A valuable service indeed.

3. Ilargi deconstructs the daily financial news - peels back the doublespeak, shows how the numbers have been tweaked or fudged or misrepresented, etc.

4. Ilargi points out the daily failures, and culpability, of our political, business, financial, and media elite. A realtime view of the empirial conveyor belts moving resources toward the center of the empire. He's also pretty good, ironically, at frequently pointing out that focusing blame and derision upwards is ultimately a cop out, a refusal to examine one's own role in the mess the world is in.

IMHO, points 1 and 2 are much more valuable than are 3 and 4. Maybe I just read a few too many dozen Chomsky and Herman books in the 90s, but I think there are diminishing returns on deconstructing the daily doublespeak. The broad brushstrokes of these realities are important to grasp, but the daily minutae probably distract us from more important work more than anything else.

More than that, the daily routine of reacting to the financial news is a bit of a trap - it can constrain the type of thinking that can be done, and also can to a large degree determine the types of folks that are attracted to this site - folks Orlov would probably deride as "the arithmeticians."

I agree that you have to survive financial and economic collapse before worrying about other forms of collapse, and that groking what's happening economically and financially is important; but the focus on the daily numbers means that we rarely explore here financial collapse as a symptom of deeper forms of collapse - ultimately forms that involve energy, ecology, and resources.

I understand that Ilargi "gets" all this - note for example his recent remark that real understanding could be had by working one's way through all the material on But the choice to focus so exclusively in finance means that this site attracts a large number of folks that probably haven't deeply worked through even 5% of the information on


Toddman said...

-- A tribute to Ilargi's writing --

The format of this blog invites number crunchers like scepticus, and others that hop over from mish and KD, because the discussion is largely limited (or reduced) to the sphere of finance and economics.

(No offense to scepticus, who I'm sure thinks he's digested all the doomer arguments and still has the magic arithmetic plan to effectively kick the can down the road 20 years into the future.)

Ultimately, I think most of the "challenges" to the vision of I&S are based on a shallow understanding of the current financial/economic crisis, one that does not connect to the deeper problems mentioned above. Therefore the counter arguments in favor is the I&S view are often a) long, and b) made from realms other than finance, and therefore quickly tend to remove the common ground assumptions between those involved (consider the snarky "those silly peak oilers" comment froma reader the other day as an example.) It's therefore little wonder that these differences aren't resolved with dialog - they boil down to something analagous to Christians (hi Terry!) arguing with athiests, essentially.

In a nutshell, I think the bedrock of a lot of I&S thinking is based on assumptions that are, by and large, neither frequently nor prominently stated on TAE, and that is the source of a lot of disagreement.

Brunswickian said...

Toddy sounds rather like septy don't you think?

Anybody feel like an informal poll?

Toddman said...

One more for tonight. An excellent post by John Michael Greer this week:

The Anti-Ecology of Money

Very nicely worded argument, in close alignment with Stoneleigh's work.

Toddman said...


Toddy sounds rather like septy don't you think?

Anybody feel like an informal poll?

I'm some combination of tired and dense, and totally don't get what you're on about. Care to elaborate?


Brunswickian said...

I'm some combination of tired and dense, and totally don't get what you're on about. Care to elaborate?

I'm much more interested that you should address my earlier comment:

Could she be wrong? Of course.

They call that rhetoric aka misdirection. Specific to general dodge = disingenuous.

+ other presumptive crapola

CS said...


Homonym alert in intro - last sentence, throw over cliff not through over cliff.

Are you going to stick that as a permanent "route map" prior to the primers?


Toddman said...

I'm much more interested that you should address my earlier comment:

"Could she be wrong? Of course."

They call that rhetoric aka misdirection. Specific to general dodge = disingenuous.

+ other presumptive crapola

Sure, I'll try, but since I can't connect what I said to your reaction, I'll just try to state more clearly what I was trying to communicate:

In the preceding paragraphs, I was summarizing why I think Stoneleigh's writings are valuable, and why I take seriously her dark vision of the future.

What I was trying to say with "Could she be wrong? Of course." is that I acknowledge room for error in her thinking, and also room for my inability to spot such error. This was not in regard to anything specific, such as the details of the argument with scepticus, or anything else.

Heinberg's vision of the future is similarly dark, and he claims that it is based on likelihood, not on remote probability.

What I meant by the comment about risk mitigation is that even if I were to think that the Stoneleigh future was probabilistically small (and I don't, I think it likely), that it is sufficiently severe that a rational person would heavily weigh mitigating against such a future to the extent possible.

Make any sense? If not, you'll have to elaborate, because I meant no misdirection, disengenuity, or presumptive crappola.

Nassim said...

Greetings VK,

It sure sounds strange reading you're heading off to Melbourne to prepare for the worst there. I used to live there, did my University course there. Beautiful city, very European, cafe culture, artsy etc.

I note that there have been a lot of queries about Australia and New Zealand and some great charts and here

I am expecting the crash in Australia to be, if anything, even worse than in many other places - initially. However, long-term, they seem to export food and have lots of natural gas and they are way behind the curve. Hopefully, they will learn from what is happening earlier elsewhere and face up to reality before their system falls apart. It should be a lot easier to run a country of 22 million than one of 300 million. Countries like India and China will be quite impossible to manage - they will fly apart eventually IMHO. BTW that is one real advantage that Norway does have.

As for the UK, the idea that one can live on other peoples' wealth and effort is so thoroughly entrenched that I really cannot see anything positive about it. I mean, India was the first great "investment" and the City of London has been the liquidation centre for so many other countries for so long that a lot of people think that is the natural order of things. I have a pretty good idea of how the elites in the UK think - I went to a well-known school and Richard Branson (no friend/unfriend of mine) was a classmate for a while. I looked him up and it seems that we were born 16 days apart. There were lots of others whose parents were very much part of the business elites at that time - most of them have fallen by the wayside as the country deskilled. I went to a leading university and studied civil engineering there and one of my classmates turned out much later to be one of the biggest landlords of Hong Kong. I would say that knowledge, effort and persistence accounted for less than 10% of these peoples' commercial success. The more I look around and learn from what I see, the more convinced I am that luck is by far the most important ingredient.

Certainly, I would never try to encourage any others to follow my example. There is no such thing as a "solution". There are lots of choices and there is no one "correct" path. When you study mathematics at university level for a while, you find out that the formulae that can be solved are a tiny subset of the problems out there. Maths teachers don't seem to point this rather obvious fact out, they just concentrate on showing you the problems that do have solutions. Strange.

Brunswickian said...

What I was trying to say with "Could she be wrong? Of course." is that I acknowledge room for error in her thinking,

Hilarious, hahaha

Caith said...

Someone asked a couple of days ago about taking cash out of the banks, and it got drowned in everything else going on.

I can see that there is a bank crash/currency crisis coming. What I don't see is why we're sure physical currency is going to keep its value when electronic currency doesn't. I'm in Britain; one of my earliest memories is decimalisation, when they replaced the currency in 1971. There are people in the Cabinet now who still want us to join the Euro, though I don't see why the Euro would want to take us. Currency changes are part of the national political discourse, in a way that they may not be in the US.

So if/when the banks and/or pound crash, what is to stop them instituting an Emergency Declaration of a Newer Pound or British Euro or whatnot, and converting electronic holdings at some arbitrary exchange rate, and "not having the infrastructure" to change physical currency "in this unforeseen crisis"? If most people don't have significant holdings of physical currency and have already lost most of their assets there's not going to be political sympathy for people who "were trying to game the system by hoarding currency and contributing to the bank crashes".

Why can't they un-fiat physical currency? China presumably holds its cash in bonds rather than coins, or could be made an exception for, but people trying to preserve cash in mattresses would be taken out along with everyone else.

Brunswickian said...

So if/when the banks and/or pound crash, what is to stop them instituting an Emergency Declaration of a Newer Pound or British Euro or whatnot, and converting electronic holdings at some arbitrary exchange rate, and "not having the infrastructure" to change physical currency "in this unforeseen crisis"? If most people don't have significant holdings of physical currency and have already lost most of their assets there's not going to be political sympathy for people who "were trying to game the system by hoarding currency and contributing to the bank crashes".

Very astute point, Caith. I have wondered the same thing myself. Maybe that is why Panzner recommends PM.

Collapse may be like TOTAL.

Actually, what I think is going to happen is that the Red Horse is going to ride..........fairly soon by the look of things.

Anonymous said...

re: Australia/NZ

No, I'm not from Australia (from NY). I was simply asking about how it was holding up because I don't recall seeing any articles on TAE about those locals. Wasn't sure if that was because they were not being affected or for other reasons...


Persephone said...

Thank you, Stoneleigh

Stoneleigh said...

Thanks for the long and thoughtful contribution Todd :)

Stoneleigh said...


This is indeed an important point, and one of the reasons why there are no 'no risk' scenarios. There no such thing as a completely safe option, but there are options that are more and less safe. Cash and cash equivalents are the safest options for ordinary people, as they must preserve what purchasing power they have or risk having none when it matters. For the wealthy it is possible to hedge their bets by investing at today's high prices in property and all manner of hard goods debt-free, as well as having plenty of purchasing power left over. As always, the choices are harder for those of limited means (ie most of us).

Cash will not be a panacea forever, and neither will short term bonds. They are a short-term vehicle to ride out an approaching storm of asset price destruction. At some point people will need to exercise the choices that cash represents and get into hard assets. Some of these will be available for longer than others, some are more important than others, some represent a bigger investment than others and some have a substantial built in learning curve. All these factors need to be weighed when deciding what to use one's precious purchasing power on and when.

Governments could certainly decide to reissue the currency and make it difficult for people to convert from old to new. Russia did this and beggared the middle class. Argentina converted short-term bonds to long term and then defaulted on them later. The US declared precious metals ownership illegal and confiscated them during the last depression. We are moving into a world of risk the like of which almost none of us in developed countries have ever experienced.

I don't think a currency conversion is an imminent threat here in the way it was in Russia because of quite different circumstances. In Russia banks were not widely trusted, hence money under the bed was a very common phenomenon. Also, it was not a credit economy, so for purchasing power to be grabbed from periphery by the central elite cash had to be targeted. Here the money supply crash will largely occur as a result of credit contraction, as credit represents the vast majority of the money supply. What people have is mostly tied up in what they think of as investments (that are going to plummet in value) or in bank accounts (that will disappear at some point). There is little need to target physical cash when physical cash holdings are very minor.

I generally suggest holding at least several months worth of cash, and preferably a year if you can manage it. When push comes to shove you will probably find that what you thought was several months cash will actually last a lot longer, as you will probably find it very difficult to let go of cash for anything that isn't absolutely essential. When the prospects of earning any more of it are very limited, you will probably develop a very tight-fisted streak.

For those with a lot more money, holding it as cash won't be practical, firstly because of the timeframe required for cashing out without ending up red-flagged as some kind of criminal, and partly because that could leave you too vulnerable to government whim in relation to fiat currency. I generally suggest short-term bonds for the remainder of one's liquid assets that one can't practically store outside of the system. Short-term is important, as you wouldn't be dependent on a secondary market and would likely get some notice if you were going to need to withdraw your funds. Storm clouds would be gathering, the most obvious symptom of which would be very high short-term interest rates, as a government is forced to borrow only short-term and at punitive rates. That is a sure sign of a death spiral (check out Russian GKOs from 1998).

Stoneleigh said...


As for the UK, the idea that one can live on other peoples' wealth and effort is so thoroughly entrenched that I really cannot see anything positive about it. I mean, India was the first great "investment" and the City of London has been the liquidation centre for so many other countries for so long that a lot of people think that is the natural order of things.

This is so true. In England they call it 'punching above our weight', but what it really means is reliance on sucking wealth out of the rest of the world as a result of being a centre of high finance. Life in the British Isles was not a comfortable prospect before Britain developed the ability to pick the pockets of the rest of the world, first through empire and later through globalization. For a relatively recent view of real poverty in the British Isles, try Angela's Ashes by Frank McCourt. He died recently at the age of about 80, but the story of his early life in Ireland is truly eye-opening.

I have a pretty good idea of how the elites in the UK think.... There were lots of others whose parents were very much part of the business elites at that time - most of them have fallen by the wayside as the country deskilled.... I would say that knowledge, effort and persistence accounted for less than 10% of these peoples' commercial success.

True again. I remember a talk I went to when I was at Oxford, given by Sir Marrak Goulding, who had a considerable reputation at the UN. Well, the first few minutes were spent showing off his very much younger trophy wife, and nothing he said subsequently had any substance to it at all, yet everyone applauded sagely. I was disgusted at the spectacle.

There were so many people I met there whose parents must have had a lot of money and connections, because there was no other way they could have won admission. There were also some really amazing people from all over the world of course, but the deadwood was pretty obvious too. The old boys network was quite something to see in action as well, although it was never overtly referred to in polite society.

Anonymous said...

Thanks for posting the one stop shopping Primer Round Up.

I probably can't get most friends and family to tackle the whole lot but they will read selected (shorter) ones.

Hopefully this will 'peak' their interest.

Peak Everything, Aye.

Zaphod said...

There are many ways to plan for the future, and each of inherently carries emotional/psychological baggage that colors our predictions.

Each of tends to be a carpenter with his hammer, looking for nails. Some have a group psychology, a la "group think", while others see that and compensate for "herding behavior". Still others are game theorists, or economists, or systems engineers, and each brings their unique perspective to bear. We as humans are amazing predictive machines (many, including me, believe that's really the core of how the brain perceives reality), but we also have a "texturing" capability that both makes reality feel rich and detailed but also helps paint over inconsistencies and logical fallacies.

It is these bits of novelty in a world awash with data that we need to pay attention to. As an analogy we must shift our world-views from simple linear projection (a Newtonian view of the world) to one that encompasses complexity (such as chaos, relativity, and quantum theory).

For me, that leaves scenario planning, with as much objectivity as I can muster. Sure, things might meander along flat for the rest of my life, in which case I have zero worries other than Black Swans. More likely we'll face a long slowdown, hoping each year for miracles in energy generation and food production to stem the slide. Maybe we'll have fast crashes and wars, with a rapid descent to a 10% world. Possibly the swine flu will blow through lethally with a 75% death rate, and all of our energy and financial worries and fears will be postponed 50 years.

I think it's worth looking at Black Swan events and having a rudimentary plan for those, but put effort into those which are most likely to you. To follow another analogy, we now know we're in hurricane season. All of us should have our basic storm supplies and bug-out rations ready -- it's just common sense. Some of us believe we're in the center-track of the cone, based on our personal models -- those people need to head for higher ground. Many others will be boarding up the windowns already. Some may feel that the storm is yet distant, and may pass to one side. Even those people should have a plan, and know what they'll do if they're wrong.

A few will choose to believe that storms never hit here, and those are the ones who risk crying out for help once it's too late, and being found in the wreckage of their lives.

Me, I'm a quasi-doomer. I think things will get worse but crashes will be mitigated in the short-term by human ingenuity and foolish energy. This will make the long term worse than it might have been. I think we'll do better with alt energy and cut-backs/efficiency than many believe, but it'll always be lagging and too little, too late. Personally I hope to be ahead of the curve on preps and planning, but with some significant risk for Black Swans and reality coming in worse than I expect. My model is about like this:

2% positive Black Swan (fusion breakthrough, etc.)
13% muddle through short term with too much fossil fuel use and too much debt -- good for me, bad for my kids.
40% long slow slide -- 20 years of "nobody expected" followed by 20 years of "harsh reality". Hard for me, hard for my kids. That's life.
30% painful steps down, war, hunger. Harsh for me, hard for my kids, esp short term.
10% negative Black Swan - nuclear war, deadly epidemic(s), rapid climate shift, war in my locale. Dangerous for me, OK for my kids if they survive.

el gallinazo said...

Caith asks some good questions about Sterling. Of course, the same questions could be asked of the USD. My feeling though is that its reserve currency status (along with the implied threat of the overdeveloped US military) are the last trump cards that the USA has. I think that drastically "reformulating" the USD would would destroy its reserve status overnight while this would probably take several years with BAU. Also, it would add even more turmoil to the deleveraging of the derivatives market. KD pointed out yesterday that a carry trade was developing with the USD. Interesting.


Thanks for your contributions today. Interesting and well structured and expressed. I am begining to look back with nostalgia when this page was primarily composed of comments from people with your acuity. Despite the fact that Ilargi does most of the grunt work, his contribution is often overlooked to some extent. Part of the reason for this is Stoneleigh's truly exceptional ability to express the ideas of this blog clearly.

Stoneleigh has stated repeatedly that they left TOD because they saw the financial crisis hitting first, and wanted to help people prepare for it. They are well aware and well informed on the "boxcars of pain" behind it.

Occasional Summary made a little fun on my flip-flop of the Sceptiicus issue. My knee jerk reaction was against banning him. But the more I thought about it, the more I realized it was the best thing to do. First, a blog like this is not a town meeting hall - it is more like a private house where a bunch of people come over for free classes. I&S have every right to ask people to leave if they become disruptive to the intension of the class. I have kicked people out of my house all the time. Of course rum here cost $3 a liter.

Septcus dominated the comment section for days on end. This was the first time that a poster had done this, He had every opportunity to express and debate his ideas, and he did. He published his article in "the magazine." Many (mainly new and anon) posters feel that he is entitled to usurp the magazine. Well, to put it politely, fuck off.

A: 1:54

"IIRC, after the last person was banned, Stoneleigh had the gall to proclaim that they DO believe in the Second Amendment. "

I think that would enable St. Stoneleigh to eject them at gun point. Cute image.

Brunswickian calls for a poll. I agree but the first question should be whether everyone here should feel free to move into his house.

Why doesn't Scepticus invite all the disgruntled people here over to his virtual house? Since he is invested with Hugh Hendry, it must be a spacious one. I am sure you could party hearty. My last comment on this issue.

Re Ed Gorey and Obama health care.

It's an attempt to shore up his credentials with the progressives who put him in office and to counter his bagman status with the giant banks. It is total Kubuki theatre. It is a tale told by an idiot, full of sound and fury, signifying nothing. We'll be lucky to steal an aspirin in five years.

re Crash v. 2.0

TPTB don't have this under their total control. There are two major factors. One is the herd. The other is manipulation whose major components are propaganda from the MSM and the government, and program trading manipulation, primarily from Gollum Sucks. Regard that latter as Clint Eastwood and his rawhide boys. But when the herd really decides to stampede, they are near helpless to keep it under control. I know this for a definite fact. I used to watch Rawhide all the time as a teenager.

Stoneleigh said...


Something relatively new is the number of snarky jabs at Stoneleigh, mostly accusations of a wooden inflexibility in her thinking. My take here is that folks are grasping for understanding what's happening in the world, but don't have nearly enough information to form such a solid framework.

There certainly is a lot of background information from a lot of different fields that goes into my world view that it would take a very long time to explain to people. I can't really convey the extent of my big picture in a few blog posts. I would need to write books, but sadly there isn't enough time to do that and warn people here and raise a family and work for a living. I'd rather warn people while there's still time for them to do something rather than write a book that would explain to them why they were screwed after that fact.

There's also a strong element of 'shoot the messenger' when the message isn't a very pleasant one. That comes with the territory, especially when a counter-trend move is making the message seem less credible. Some of the carping should end once the mood changes and people become more receptive to the message again. The inflexibility they point to is mostly my refusal to shift my position with the herd. The impression this gives people is that I am impervious to evidence, but they are being very selective as to what constitutes evidence. The green shoots are gangrenous.

Zaphod said...

Not that my opinion much matters, but I like Ilargi and Stoneleigh just the way the are. Turbulent versus laminar. Fire versus water. Whiskey vs wine. Pick your similes -- complements they are, and I'm thankful for it.

I find it entertaining that anonymous posters ridicule how the site is run, and talk about 2nd amendment rights as though they pertain to blogs. The 2nd amendment didn't say you were guaranteed anonymity while you spouted bile, or that you couldn't be denigrated by society and pilloried for your statements; it just said the state mostly couldn't imprison you for what you said.

I haven't seen a Constitution here, and I don't think it's a democracy. It's more like a mostly-benevolent dictatorship with tight borders but generous visitation visa policies. Live and let live seems to go a long way here. Let's enjoy it as it is and stick to economic discussions, shall we?

Zaphod said...

Except, as noted, it should be the 1st amendment instead!

Anonymous said...

this site seems to focus on the crisis developments in the US. Things seem quite different in Canada, which surprises me given its dependance on its Southern neighbour. For example the housing bubble here has been successfully reflated, which I thought was impossible to do. I was hoping that someone could shed some light on these developments.
ps: thanks for the great work...

Stoneleigh said...

Anon @9:29,

Things seem quite different in Canada, which surprises me given its dependance on its Southern neighbour. For example the housing bubble here has been successfully reflated, which I thought was impossible to do.

It is impossible to do. What we're seeing here in Canada is the effects of a large rally at a point when we hadn't got that far into the decline, being about two years behind the US. That makes it look like things are taking off again after the briefest of interruptions, but just wait until the rally is over. We'll be playing catch-up with the US and it won't be pretty.

Zaphod said...

Doesn't Canada have looming pension issues to match the US's 401K, stocks, and pensions combined?

I imagine we'll get to watch CA pensions dissolve before long. The story of a CA firechief who made $185K but bulked up his last year to $210K (selling back his generous vacation) to earn a larger pension, and then after retiring with 20 or 25 years in he's working contract for $175K. The state of CA is currently paying him $375K a year to be a firechief!

In 10 years I think he'll be lucky to have a pension at all. Most of will need to work our retirement years, and the real question is whether there will be viable work for us to do. I tend to think "mostly yes", but low-paid, and after a long period of high unemployment reduces expectations.

The minimum wage will have to go away too, as plenty of workers will do stuff for $5 an hour or less to eat.

Greenpa said...

sigh. Ok; only going to say this once, really. Everybody really should just move on, don't you think?

"Scepticus was intelligent, respectful, and open-minded and provided some very good reasons as to why your scenarios may not play out as you describe."

Uh; no, he wasn't. a) he, and you, are 98% sure to be the same person, along with the other very rude fabricated identities. b) he was just copying crap he found on various whacko blogs from the other directions. Nonsense, that sounds reasonable. Until you dissect it; which our hosts did.

Then you'd post it again, along with a couple anonymous bits about how wonderful septic ass was.

It's just really easy to make up identities, on different servers, so it can look like they're different people. Standard tool.

End. Over. Get a life.

Brunswickian said...

Are real people like you and me a bit weirded out about the pod people here?

Anonymous said...

Financial chaos and unraveling, deleveraging as all the greedy lying bankers, politicians, wolves and crooks try and hide, steal and tax every last honest dollar out the good hard working people. Well we're onto you MFs and you're days of banging old mary jane rotten crotch thru her purty pink panties are OVER!

Iconoclast421 said...

The problem is that before the herd throws itself off the cliff, it will find someone to blame, throw them off first, and use them as a cushion.

ps: there is a nasty grammatical error in the last paragraph. "we can be take action"

VK said...

Brazil’s June Jobless Rate Unexpectedly Drops to 8.1%

The jobless rate in Brazil’s six main metropolitan regions fell to 8.1 percent in June, a six-month low, from 8.8 percent in May, the statistics agency said today. Economists expected the rate to rise to 8.9 percent, according to the median of 27 forecasts in a Bloomberg survey.

Argentina massaging statistics

Argentina's economy ministry will have increased control over the national statistics agency, the government said on Tuesday in a bid to restore credibility to the country's consumer price data.

But Economy Minister Amado Boudou told reporters he is not planning to replace the current price index, which the government is accused of massaging for political gain to save money on debt payments.

Hope dries up: India's food bowl empty, cup of woes full

Indeed, depression is the prevalent mood everywhere, from Punjab and Haryana to Uttar Pradesh and Bihar. Whereas Punjab’s villages are seeing up to 60% rain shortfall, UP and Bihar are no better. The plight of landless farmers, who can’t afford to sow paddy this time, is worse. ‘‘ I know six farmers, who returned the leased land to the panchayat due to water and power crisis,’’ says Bhushan Kumar, a farmer near Barnala . The resultant power crisis has been unprecedented. Punjab has been assured additional 100 mw from the Centre’s un-allotted pool to tide over the crisis.

Malaysian Economy Contracting faster then previously thought

Southeast Asia’s third-largest economy will probably contract 4.2 percent in 2009, the institute said in a report released in Kuala Lumpur today, cutting its forecast from an April prediction for a 2.2 percent decline in gross domestic product. It lowered the 2010 growth forecast to 2.8 percent from 3.3 percent.

Financial Crisis threatens Egyptian Reforms

During the past five years, more than 1.5 million workers in the civil service, state-owned enterprises, and privatized companies have gone on strike for higher wages and bonuses. The pain of reform has been magnified by the global economic crisis, which left Egypt’s conservative financial sector unscathed but has delivered a major blow to tourism, real estate, and manufactured exports. These industries have extensive linkages to other parts of the Egyptian economy, particularly through the small business and informal sectors that employ much of the population.

Canadian optimism invades Australia

"We believe the economic recovery will be much quicker and much greater than the existing consensus and that the profit recovery, boosted by a sharp inventory cycle, will drive share prices much higher over the next year or so," says Macquarie equities strategist Neale Goldston-Morris.

Minutes released this week from the RBA's monthly board meeting — the key forum that reviews interest rate settings each month — noted strength across a basket of Australian economic indicators. These ranged from March-quarter figures on gross domestic product to the nation's export performance in the six months to the end of March, particularly helped by continued strong growth in demand from China.

Gaia's evil twin: Is life it's own worst enemy?

Life seems to be pursuing its own demise, moving Earth ever closer to the day it returns to being sterile

Stoneleigh said...

Thanks to those who pointed out spelling errors and the like. They're fixed. I should learn not to put fingers to keyboard at midnight :)

Greenpa said...

As the Kingston Trio sang, decades ago:

They're rioting in Africa (la la la lala la la)
There's strife in Iran (la la la lala la la)
What Nature doesn't do to us (la la la lala la la)
Will be done by our fellow man.

Old truths.

Possibly helpful to remember; much of our predicament is not new. Bigger this time; plus peak oil and climate; but lots of the human dynamics have happened before.

Anonymous said...

Thought this inspiring piece by one of my favorite authors, Robert Jensen, might be of interest:

"Life in a Dead Culture"

Punxsutawney said...

Productivity is up, but wages and hours worked are falling. To me this means that the value of this extra productivity is going to corporate profits where it most likely will be concentrated in the hands of the few.

Sure, investors, pension funds, and those with 401k’s and IRA’s will benefit some, but only after upper management and Wall Street have skimmed off their cut. What this means is fewer $ for the general populace to spend and more demand destruction, debt defaults and such. I don’t see how we can have a real recovery until average wages start rising, and at that point, there will be all the energy issues staring us right in the face.


Anonymous said...

El galenazo says about shorting the market:

I see Karl is also holding off but locked and loaded.

So did Karl say publicly he would drop those shorts, of his, that he mentioned on Kudlow's show last Saturday, or did he drop them just for you? If so, I can only imagine that must have been quite an experience :-0


Anonymous said...

Oh really, both orifices you say?!

VK said...

@ Punx

Productivity has been rising for 4 decades! But real wages in the US have stagnated for atleast 30-35 years.

Productivity and Real Income 1964-2008

Anonymous said...

Toddman -- Thanks for your thoughtful posts today.

Stoneleigh -- Thanks for your primer on primers!


el gallinazo said...

@ Greenpa

"sigh. Ok; only going to say this once, really. Everybody really should just move on, don't you think?"

Yeah, it's a whole different mentality. Can't really relate to it. I was never tempted to post on say The Skinheads for Genocide website. I read Mish and Denniger because they are good analysts despite their personal politics, but I am not even tempted to post on those comment sections.

Whatever. This island is full of roosters that crow at anytime of day or night. But the crowing of these turkeys doesn't even get them laid. Anyway, I am used to it.

Anonymous said...

@ VK

Very interesting that productivity and real wages/median income began to diverge in earnest right around the time of Peak Oil in the lower 48 states.

It also coincided with the Oil embargo in the early 70's and giving up the gold standard.

Also women began to enter the work force in large numbers starting at this time which masked the declining hourly wages of men. A perfect smoke screen engineered by the Ruling Class at the time. "Family" income actually rose because of two wage earners per family starting then but it was a total fake out on most working people. Single women who previously had nothing to compare their wages to seemed happy to be in the work force for the first time in great numbers. Married men actually thought their lifestyle got a bump up with the wife working. It was single men who felt their purchasing power declining because each year and each new job brought lower inflation adjusted wages.

Now,just about everyone is going to witness a real drop in real income.

Should be interesting to say the least.

Moe on the Chain Gang

Brian M. said...

I've read (and posted occasionally) here for well over a year. I have valued both the main page, and the comments section (with a hefty dose of skimming, and ignoring folk once a pattern is set). But it was a lot easier and more rewarding at 60 posts a day, than at 180 posts a day. 60 posts a day, maybe 20 of which are high quality and 20 are good matured blowing off steam, and maybe 20 are worthless or counter-productive is a very different enterprise that 180 where, 20 are genuinely trying to be productive, 20 are good matured but not very valuable to all, and 140 are fights about whose dick is bigger, whose the bigger asshole, whose inflexible, who should or shouldn't be banned etc. We may have avoided a flame war, but a dozen little flame battles with no overall theme is almost as bad. I don't know the best solution, I'm just mentioning the issue. Delegating moderation duties to someone other than I&S (who seem pretty overworked already), moving to a threaded or forum format, disabling anonymous posting, or just kicking off people more aggressively have all been suggested. Heck, maybe it will calm down on its own in a few days. Here's another suggestion, maybe having a comment section etiquette post or primer or link or something that codified the formal and informal ground rules would help. Probably a primer isn't exactly right, but something that we can ask newcomers to read before getting into fights. An honestly inquiring newcomer, might accidentally talk about diet, or 9-11 conspiracy theories, without realizing that these are topics that are basically forbidden here now (based on past experience).

Zaphod said...

So we had assembly lines in the 20s and 30s, war and oil in the 40s and 50s, nukes and women workers in the 60s and 70s, globabilization in the 80s and early 90s, and debt since then.

Seems like all we need is another game-changer for our economy. Let's see -- the only added efficiency would be robot workers (and Japan already did that, so now they have idle robots too).

The only remaining laborers would be children and retirees - I think we'll give that a shot.

Best other hopes would be a visit by aliens (so we can go galactic versus global) or the rapture. Some believe free energy will appear, but I think that's a little less likely than the other hopes.

rapier said...

From the almost MSM comes some mainstream almost bomb throwers, at Salon.

I'll give all the links because they can't seem to do it well.

In the form of paired emails over 3 days.

They aren't doomers but it's pretty provocative as these things go. Like calling our elites corrupt. It doesn't mean much but it means a little something.

el gallinazo said...


We could get free limitless non-polluting energy tomorrow (if somehow TPTB didn't torpedo it) and it still wouldn't solve the immediate meltdown. Because of the irrationality of the current system, enhanced productivity and production are part of the problem. Our immediate problem is debt and it has little to do, at the moment, with energy. The fact that hypothetical free energy wouldn't solve our immediate financial problems shows just how screwed up the system is. Like the creosote dumps of oranges in CA during the last depression while the Joads were starving.

Anonymous said...

There are still a few untapped 'free' labor sources left for the Parasite Class to exploit.

The Chinese Red Army actually runs some of the prison system in China and it is a 'free' captive labor pool that they really do work quite hard and profitably.

The old 'chain gang' model in the U.S was more punitive than truly productive. That could change as the prison/industrial/corporate complex sees their payout per head from the States disappearing as State budgets disintegrate. Proposals for fascist style 'labor camps' where the politically incorrect and 'welfare cheats' could be sent to 'pay back' their 'debt' to society could be revived up quite quickly.

Free Labor, the dream of every Capitalist Robber Baron all coming into view now, all potentially within reach.

Hombre said...

El G - "We could get free limitless non-polluting energy tomorrow (if somehow TPTB didn't torpedo it) and it still wouldn't solve the immediate meltdown."

Yup. That seems to be more evident each day. That's point 1 of this epochal transition.

point 2 - This economic meltdown has occurred at a time when energy has peaked, population has peaked, globalisation has peaked (shipping of goods, etc.) and (inversely stated) lack of hands-on earthy skills has peaked.

point 3 - communication speed has peaked, which could be utilized in a positive way, or conversely, may continue to be used to dumb down and desensitize the populace.

A part of any fix is communicating the truth economic and political(TAE? etc.)
Another part is learning and sharing primitive life sustaining skills. (community)

Back to work...

Zaphod said...

Free energy addresses quite a number of ills (not the current downturn short-term, but it would medium-term). The real problem is that free energy (and oil is pretty much that!) makes it easy to convert resources to capital and waste, and we're rapidly getting short of resources while getting way too much waste, and the capital is increasingly short-lived.

And of course the underlying issue is we end up with way too many people. I'm admittedly negative, but I see no path to a sustainable existence that doesn't transit the Valley of Death first.

Ian said...

VK @ 12:19

There's a problem with the chart of "real wages".

It's that from the Reagan era and onwards (but especially Clinton) the inflation statistics were manipulated.

If you refer to

you'll see that there's now a gap of up to 8% or so between annual reported inflation and real inflation.

Surely that means a very substantial fall in US real wages in recent years? This would be less noticeable because of the availability of cheap Chinese and other imported products.

Please correct me if I'm wrong.

Dr J said...

I had a chuckle when reading in the "Red Pill" piece on Obama's health care plan:

"If medical doctors with a decade of schooling cannot distinguish between good cures and ineffective ones that must be discontinued, then by gosh, we're lucky that the good folks from the government can."

A few years back I ran one of the largest pharmacy benefit plans in the country. I had access to a very detailed database on the prescribing of thousands of my physician colleagues. What I found there horrified me. We went to work developing mechanisms to limit the things we would pay for because of the wildly inappropriate prescribing we were seeing. I also studied the pharmaceutical industry's capacity to influence prescribing behaviour solely for their own financial gain. It was amazing. In Canada, at the time, their expenditures on advertising to physicians alone exceeded the combined budgets of all the medical schools in the country. Can and should government, as a payor, influence this inappropriate behaviour. Hell yes!

I have to run to catch a flight now so will end the rant here.

Stoneleigh said...

Thanks for that Dr J. I remember when I was studying statistics and experimental design that an awful lot of medical and psychological practitioners didn't have a clue about statistics, and therefore routinely violated the assumptions of their statistical studies. Of course this invalidated the results and their interpretation.

I'm not surprised that wildly inappropriate prescription was going on, or that the advertising budget was so large. This field has been of great interest to me for a long time.

Sam Dug said...


You stated:
"...At some point people will need to exercise the choices that cash represents and get into hard assets. Some of these will be available for longer than others, some are more important than others, some represent a bigger investment than others and some have a substantial built in learning curve..."

Can you give us some basic examples of what hard assets might be worth purchasing? Or will this all be dependent on unknowable events that will occur rapidly?

I'm trying to determine what hard assets will likely be most needed and/ or in demand.

VK said...

Via David Rosenberg

Perhaps the best leading indicator of global equities is China — it peaked in 2007 ahead of the pack and then bottomed in late 2008 a full four months ahead of the U.S. trough. In addition, the Shanghai index leads the CRB by two months and with an 80%+ historical correlation. There is no doubt that China’s fiscal stimulus is percolating and that the economy has turned higher, but the equity market there has surged 85% so far this year, so how much is priced in at this point is a concern. It looks like speculative fervor is back — the volume of credit that has flowed into the economy this year has amounted to one-third of GDP. Not only that, individual investors opened 484,799 accounts in China last week — the most since January 2008 and five times as many that were opened last January. This may be one sign of … irrational exuberance.

Greenpa said...

For those who doubt Mad Max is possible:

Villagers stealing meat from lions

Standard primate behavior, actually- from about the time of Homo erectus.

Punxsutawney said...


Agreed, it fits the pattern I have seen my entire adult life, and at the moment my wife is part of this statistic, the reality of it if you may at the moment. Hence the added US household debt to maintain the illusion of prosperity. Fortunately we made a very conscious decision to live well within our means and stay out of debt. It’s looking like a pretty good decision at the moment. I’m afraid the choices going forward are going to be a lot more difficult. I agree with what Stoneleigh mentioned earlier, there is no risk free strategy.

el gallinazo said...

But no matter how frugal we have been, the government gollum complex steals our money, charges us for the theft, and puts us in debt. And the beauty of the system is that this debt gets passed to our progeny. Tails they win, head we lose. Preciousssssss!!!!

Hombre said...

Paleocon said - "The real problem is that free energy (and oil is pretty much that!) makes it easy to convert resources to capital and waste"

You're not so much a pessimist as you are a REALIST!

But hey, (for example) we just sent the shuttle up again... and... there is considerable talk about another moon landing! Look how smart we are! (not)

Hombre said...

ahimsa - From the Jensen article
"What if the human species has failed, finally? Can we move forward, even when we recognize we may face insurmountable obstacles? Can we work for justice and sustainability within a dead culture?

Thanks for the link to the article.

Of course, even if we find ourselves a mile from the nearest land, will we just fold our arms and sink? I think not.

I was an electrical troubleshooter for 29.9 years. Often I analyzed a problem that looked insurmountable. But I went to work on it anyway and sometimes... not always... got it fixed!

Gravity said...

At some point physical currency could be abolished, removing a small amount of thermal drag from the system.

It should then be feasible to enforce negative interest rates while eliminating cash hoarding, decoupling the mass moment of monetary inertia and violating the conservation of angular momentum in capital substances.

The procedure ought to be viewed as a transitional phase towards sublime happiness, of which totalitarian monetarism is an integral part.

Johanna said...

Signs of impending irrational exuberance are beginning to show in New Zealand as well. Headlines in the last two days:

'Recession nearly over, says BNZ economist who called recession first'


'Recession more or less over - AMP'

And often in conversation people talk proudly about our 'good, strong, sensible Australian-owned banks, who didn't get into all that dodgy stuff that the US banks did ...'

No one wants to talk too much about the small matter of NZ's enormous dependence on foreign investment ...

Anonymous said...

No one wants to talk too much about the small matter of NZ's enormous dependence on foreign investment ...

Denial is a good coping mechanism for grief.

PKP said...

Stock Traders Find Speed Pays, in Milliseconds

Anonymous said...

The Wall Street Rally: Watch Your Wallets

Dr J said...

Toddman - if you are having hypoglycemia or any other blood sugar problems, it means you are developing insulin resistance. You need to cut out all sugars and refined carbs for sure and maybe carbs altogether (except fibre and non-starchy veggies). If you are interested, we can discuss off-line so as not to clutter up the comments here: wortmandotmd at the mail service provided by googol.

Ilargi - I know this is horribly presumptive of me, but when I heard your voice in the last interview I wondered if you might also be verging on metabolic syndrome and therefore able to benefit from a very low-carb diet. Feel free to contact me if you want to discuss. You can also tell me to pi**-off and mind my own business, too, which I would gladly do so long as you don't ban me.

Anonymous said...

Scepticus was a major addition.

A dozen like posters and this blog would become the center of the financial Internet universe.

Bring him back and apologize Ilargi.

Do it. Suck down the ego and just do it.

gregfb said...


You mention short term treasuries as a safe place to invest remaining real liquidity. Does that require constant monitoring and can you convert that into real money when cashing out? Wouldn't payment be in the form of a check which would then have to be deposited into a bank ( which I detest )and then withdraw it in cash. Wouldn't that set of red flags if the amount is over $10,000? Thank you for the blessing you offer to all who will receive.

Anonymous said...


A dozen posters like scep would be unendurable. This site is not a philosophical free-for-all. It is literally sophomoric to believe that every viewpoint must be parsed and considered to further our understanding.

If you don't have the wider vision that informs the economic stance here, you may erroneously think that there is no basis for I&S's strategies for surviving the meltdown.

Long before I&S were blogging I have taken the same steps [when possible] based on the underlying features of the economic POV taken here. The site only confirms me in my strategies.

Today Stoneleigh clearly stated that no strategy is risk free.

Your continual arguing with not only the premises of the site but the purpose is boring. Some disagreement is natural and normal, but promoting constant warfare is troll-like behavior.

If those of us that like the site prove to be wrong-headed then you can come back and rag us.


Farmerod said...

El G and other casino patrons:

I commented about the use of ETFs recently and just came across this which talks about Hang Seng ETFs but applies to all. Ironically, FXI does a remarkably good job of tracking ^HSI particularly in comparison to others like USO which do a remarkably poor job of tracking oil.

thethirdcoast said...


Marla Singer over at Zero Hedge just crushed the gonads of all the whiners who insist that anonymous bloggers are a detriment and lack credibility unless they reveal their true identities.

This is must read stuff:

An Open Letter To The Financial Media


Jim R said...

Stoneleigh, thanks for the primer primer. I have to say, finance and economics always triggered a case of MEGO until I stumbled onto TOD a few years ago, remembered M. K. Hubbert, and realized that I would retire broke, live in abject poverty, and no one would care (they will be enduring their own misery), unless I get a handle on these topics R.F.N.. Thanks for the resource you and Ilargi provide. It's a lot more focused than some other sites prognosticating doom and recommending MREs, ammo, and bullion as hedges (some of them have been pushing bullion for twenty or thirty years I understand).

Gravity, your posts always make my temples throb. Not in a bad way, necessarily.

Greenpa, I don't doubt Mad Max is possible. But it will likely be a localized and temporary phenomenon. It would suck to be nearby when the wilding starts, but they'll stop when they run out of food/fuel/bullets...

El G, I love your sense of humor. "stuffed in the mattresses of TAE readers", and "I know this for a definite fact. I used to watch Rawhide", ROFL.

Ed_Gorey, "A is for Alice who fell down the stairs" -- you're not that Ed Gorey, are you?

I have another idea to throw out, it occurred to me when reading JMG's essay this week, and it's gonna be sort of long. So I'll put it in another post. I like it that TAE is still small enough to casually discuss one's ideas. Sites like DKos or slashdot have such cosmic populations that it's like having a quiet chat in the Port Authority Bus Terminal, and JMG's vetting method really slows down any interaction. Not meant as a criticism of JMG, he's certainly aware of how quickly a public site succumbs to the tragedy of the commons of ideas.

Occasional Summary said...

* Was scepticus actually banned or was he simply asked to take his boring, repetitive crap elsewhere? He was a major addition and should be humbly asked to repost his stuff over and over and over and over at TAE
* New batch of tiny farmers gives hope for future; Market will peak between 1100 and 1200; Don't introduce new products in August; Luck is the largest ingredient in commercial success
* Many thanks for the primer of primers
* Ilargi 1) feels the pain 2) crunches the numbers 3) peels the onion 4) charges the guilty; His challengers are shallow, snarky Christians who argue with atheists
* Collapse may be total, as compared to, say, half a collapse
* Cash is a temporary panacea; Prepare to use your cash to buy food and tools; Some day your cache will be king
* Doomer Expectation Graph
- Miracle |
- Muddle ||||||
- Reality ||||||||||||||||||
- Hunger ||||||||||||
- Diaster |||||
* Previous US prosterity thanks to Ford, Hitler, Oppenheimer, McDonalds and Mozilo; US needs new economic paradigm, preferably from Vulcan; Limitless energy will not solve all our problem like it has so far
* TAE needs code of conduct as required reading for all newbies; TAE is not a democracy and has no constitution and no first or second amendment; Ilargi is free to prohibit your speech, establish a religion and confiscate your gun
* Low carb diet pitched to Ilargi; Meat wars, anyone?

Persephone said...

My chips are on Total Collapse and Hunger.

Persephone said...


#59 to #64

Hombre said...

3rd coast -

"You may recognize "Publius Valerius Publicola," as the precursor later taken by Alexander Hamilton, John Jay and James Madison in the form of "Publius," the pen name over which they wrote the Federalist Papers."

I guess if these folks (and Franklin, etc.) can use pseudonyms effectively maybe some space should be given to I&S here regarding what is, after all, their blog.

I keep coming back to TAE and haven't the slightest interest in knowing their real names. My interest is in their perspectives; and while I don't always agree, I find my own perspective enlarged and somewhat enlightened.

Anonymous said...

The corrupt politicians who are only now calling for a halt and investigation of HFT have known about it since day one.

What could have made them act now, a guilty conscience? hahaha

Karl D is foaming about it to but, here again, it's been around for awhile, why the attention now dude.

It's like being shocked that there's gambling in Casablanca. The concern is a mile wide and an inch deep.

Maybe it was Goldman Sacks America and their stolen 'software that could unfairly manipulate the Market if in the Wrong Hands' that started the cascade on the OMG they're using computers right next door to the Exchange Floor to f*ck the little guy with the death by a thousand cuts scam.

Must be a damn slow news day to get all breathless about something this well known by even the manicurists and lattè dispensers on Wall St.

Thieving a couple of cents off each trade in the Exchange with High Frequency Trading servers hot wired into the Core Matrix of the NYSE actually reminds me more of stealing the pennies from the eyes of the dead.

-Hey, a penny for your thoughts-

Hombre said...

"Ladies and Gentlemen...

Scepticus has left the building!"

Anonymous said...

PATNA, India (Reuters) – Farmers in an eastern Indian state have asked their unmarried daughters to plow parched fields naked in a bid to embarrass the weather gods to bring some badly needed monsoon rain, officials said on Thursday.

Witnesses said the naked girls in Bihar state plowed the fields and chanted ancient hymns after sunset to invoke the gods. They said elderly village women helped the girls drag the plows.


Anonymous said...

Please post the brand new highly anticapated blog address of Septictankicus if you stumble upon it per chance.

I have a deposit to put there. ;>}

Anonymous said...

A foray way off into the weeds. Some dense musings on experience, belief and a few other things authored by a crop circle maker.

Anonymous said...

Is it interesting to watch Scepticus con ilargi or watch Scepticus watch ilargi conning himself?
I don't know the true merit of what I say here but it seems to this idle viewer that whether ilargi bans Scepticus and Scepticus posts no more or ilargi threatens to ban Scepticus and Scepticus goes off to chuckle in glee and post no more, Scepticus wins. If Scepticus is, as I think, a high class troll (my son would call him a fine example of astroturf) breeding confusion and disunity, he wins tails and he wins heads.


Anonymous said...

Is it interesting to watch Scepticus con ilargi or watch Scepticus watch ilargi conning himself?
I don't know the true merit of what I say here but it seems to this idle viewer that whether ilargi bans Scepticus and Scepticus posts no more or ilargi threatens to ban Scepticus and Scepticus goes off to chuckle in glee and post no more, Scepticus wins. If Scepticus is, as I think, a high class troll (my son would call him a fine example of astroturf) breeding confusion and disunity, he wins tails and he wins heads.


Anonymous said...

I always pour draino in my septictankus.

The two were made for each other.

One unplugs the other.

Jim said...

Couple of observations....

Stoneleigh, echo the comments on primer of primers - good stuff.

As a relatively new poster, I (somewhat) hesitate to post this, but what the heck.....Brunswickian, you rather seem to be the troll, with your droll quips and one liners - Toddman tries to invoke some thoughtful analysis and to try to tone down the hostilities, and you try to pin him as Scepticus or a troll! And use the line "well she may be wrong" as your evidence! Bwaaahaaaa! We're talking about the future here. It's common knowledge that anyone and everyone could be wrong - last I checked no one has an accurate crystal ball. Toddman, thanks for your comments.

Speaking of predictions and outcomes, remember it books down to risk mitigation. If a possible outcome is severe, even if it is unlikely in your opinion, it must be factored in and planned for. Think fire insurance or wearing a seat belt. When outcomes can be catastrophic, however unlikely, even small steps can yield tremendous results when taken.

The other issue is detachment, for lack of a better word. If you can get to a point where you are fairly self-reliant (taking into consideration like minded "community") - meaning out of debt, able to provide your own food, water, shelter and other essentials, then it doesn't matter what the "system" or "others" are doing. If the Dow goes to 50,000, they develop cold fusion, etc. -or- the world goes to he'll in a handbasket/mad max/whatever -- none of that matters if you are "detached" and content with your arrangements.

Now I realize "no man is an island" (in fact it has become all too clear over the past year) when factors like climate change, overpopulation and the like can thwart even the best laid plans. At least you can be ahead of the pack and possibly better suited to adapt.