Sunday, August 23, 2009

August 23 2009: Promises Unleashed

Harris & Ewing Dance Radio 1938
Dancing class, WRC studio, Washington, D.C.

Ilargi: Money as Debt II: Promises Unleashed is out. And everybody has to see it. Paul Grignon expands on MaD I, also a must-see, if you haven't already watched it, as only he can do. The craziness of our money-system explained in animated form, MaD II takes off where its predecessor temporarily paused, and never looks back. Both masterpieces should be obligatory learning material in every highschool, college and household around the world, they fill in the awkward gaping gap left behind by an educational system that still seems to be predicated on the mad notion that people are better off not understanding where the money comes from that seemingly makes their worlds go round, that they work for every day in order to feed and shelter themselves and their families.

The two films are available on one DVD at, or you can see them via I linked to a playlist below that provides Money as Debt II in an 8-part sequence, 77 minutes. It would be great if everyone orders the DVD, Grignon deserves the return on his investment, but I don’t have to feel bad about posting the youtube link here. A few years ago, he explained to me that he explicitly wants to provide his work through this channel, so he can reach as large an audience as possible. Still, I'd suggest you get a bundle and use them as Christmas presents this year.

Here goes, enjoy.

Money As Debt II: Promises Unleashed
Bailouts, stimulus packages, debt piled upon debt, where will it all end? How did we get into a situation where there has never been more material wealth & productivity and yet everyone is in debt to bankers? And now, all of a sudden, the bankers have no money and we the taxpayers, have to rescue them by going even further into debt! Money as Debt II Explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever growing DEBT...and how we might evolve beyond it into a new era.

Bernanke's Jackson Hole Gets Deeper
by Kevin Depew 

It was a full year ago while speaking at the Kansas City Fed's annual symposium in Jackson Hole, WY, that Fed Chairman Ben Bernanke explicitly outlined The Bernanke Put. But reading news stories previewing Bernanke's upcoming Jackson Hole speech, it seems few really listened to last year's version. "A year after speech, Bernanke may have to eat his words," says USA Today. No he won't. Let's review.

1.  What Did Bernanke Say Last Year?

Speaking at the last year's symposium in Jackson Hole, Bernanke sought to reassure financial markets that The Bernanke Put remains firmly in place and that the Fed stands ready to limit damage to consumer spending and economic growth from a deepening housing recession.  

2.  What Was the Primary Concern Last Year?

Remember all that stuff about subprime mortgage issues being "well contained"?  Well, that was wrong. and Bernanke admitted it. "The financial turbulence we have seen had its immediate origins in the problems in the subprime mortgage market, but the effects have been felt in the broader mortgage market and in financial markets more generally, with potential consequences for the performance of the overall economy," Bernanke said.

What happens when risk aversion grows? The velocity of money slows. In other words, the key engine of our economic growth begins to sputter. "More generally, investors may have become less willing to assume risk," Bernanke noted.  Of course, the role of the Federal Reserve as it is seen from within, is to push risk assumption without letting it get too carried away. "Some increase in the premiums that investors require to take risk is probably a healthy development on the whole, as these premiums have been exceptionally low for some time," Bernanke acknowledged.  "However, in this episode, the shift in risk attitudes has interacted with heightened concerns about credit risks and uncertainty about how to evaluate those risks to create significant market stress."

In other words, risk aversion at this time last year had spilled over into credit markets generally, threatening the whole ball of wax.

3.  The Bernanke Put Clarified

In last year's speech, we learned quite a bit more about The Bernanke Put. Let's take a brief step back, what is the Bernanke Put?  Back in May, 2007, in prepared remarks before a conference on bank structure at the Chicago Fed, my take is Chairman Bernanke essentially absolved the Fed of playing any role whatsoever in the subprime loan debacle, declared the subprime problem "isolated" from "responsible lending" and then waved around a gigantic put option just to let everyone know that, regardless, the Fed will step in and clean up whatever mess is left over. 

But first, for those who are unfamiliar with options, what is a "put"? The purchase of a put option gives one the right, but not the obligation, to sell a specified amount of something at a specified price within a specified time frame. What does that mean? Ask your insurance agent. Seriously. Think about your car for a moment. Most states require you to buy some type of insurance on your car. That insurance requirement?  That's basically a put option. How does it work?  Well, in simplest terms, when you go to an insurance agent and take out a policy on your car, you are buying the right, should something bad happen to your car,  to "put" (sell) it to the insurance company in return for an agreed upon amount over a specified time. 

If you buy the most expensive insurance policy available, then you cover the total cost of replacing your vehicle.  If you buy the most inexpensive insurance policy available, then you may be just covering the cost you would have to pay if your vehicle injures someone else. The Bernanke Put falls somewhere in between a full coverage insurance policy and the most basic liability insurance policy.  How so?  Let's go back to his speech from 2007. "It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions."

This is the statement from last year every news outlet and financial commentator in the world is focusing on. It suggests that the comprehensive policy is out of the question. But they are missing the point, which is: what IS covered by the Fed's insurance policy?  "But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," Bernanke added.

Bear Stearns, Fannie Mae and Freddie Mac certainly qualify as institutions where "developments" can produce "broad economic effects" even if the vast majority of Americans don't even know what any of those institutions really do (or did). Remember the velocity of money issue we discussed? The Bernanke Put means the Fed will essentially do whatever is necessary to try and maintain a certain velocity of money. "The further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally, Bernanke said. Yes, velocity of money, acceleration of credit demand and consumer spending must be maintained.

4.  Coordinated Fiscal and Monetary Response

As I outlined in the the special Five Things on the Credit Crunch , the tools for halting a credit crunch will include monetary stimulus from the Federal Reserve as well as a Fiscal response.

5.  It's A Loose Series of Events, Not A Linear Process

What about financial markets?  Are we really lurching toward a full scale deflationary credit crisis?  Remember, the end of this credit cycle will be a long-term series of events, not a defined process.  What do we mean by that? If we do fall into a full-scale deflationary credit unwind, it will eventually look like this: stocks decline, interest rates move lower, bonds move higher, yet the dollar goes up. Because dollars are used to pay down debt, they become more valuable.

That is why the dollar can go up if deflation is at hand even though the central bank will be trying to fight it by doing everything they can to lower the cost of borrowing money and inject more credit into the system. But by the time deflation becomes front page news, almost by definition, any fiscal and monetary response will be too little and too late. This is a long-term series of events that will take years to unfold, not a domino process, and we are just now entering the second round of policy actions. That makes it difficult to understand why markets may continue to go up for a while. 

Narratives are linear by design. Scenes are set, characters identified and defined, actions unfold over time in steps that lead toward a resolution. Unfortunately, while narrative is convenient in helping us understand things, it is useless in predicting how things unfold.  Why? Because history does not unfold in a linear manner.  Man, in retrospect, it all seems so clear. Have you ever thought that? I have. But why? Why does everything seem so clear in retrospect? Because we are hardwired to recount events in linear narrative fashion... even events that do not unfold in a linear manner!

In other words, our need for linear narrative colors our perception of history. Linear narratives unfold in steps, the output proportionate to the inputl e.g. the Federal Reserve Chairman lowers interest rates, the first a surprise 50 basis point cut, the stock market rallies, credit becomes less expensive, so people borrow and put that money back into the stock market, or in houses. That's the 2000-2005 period, right? It certainly seems that way. However in reality, in non-linear systems, the output is not directly proportional to the input. So it's not the case that, say, if  the Fed does X, a proportional outcome will follow, or if the Fed and politicans implement Y and Z, a series of proportionate outcomes will follow. 

On the one hand, this is why it is so very easy to sit back and laugh at the predictions of economists and market strategists. Hoho, the one prediction that is guaranteed to be correct? That their predictions will most likely be wrong. But this is not about "predicting" deflation. It's about discussing the most probable outcome of central banks continuing policies of attempting to maintain continued credit expansion. As long as credit expansion and demand for credit continues at an accelerating pace, the appearance of prosperity can conrtinue as asset prices increase.

The transition period, where we are now, sees asset prices pressured by slowing credit expansion. If the Fed cannot reverse this slowdown in credit expansion, then the deflationary unwind will kick into full gear. Nevertheless, this credit expansion comes at a price, a cost that must one day be repaid. That day has apparently arrived, and Bernanke's Jackson Hole isn't deep enough to bury it.

Fear over economy lead to more gun permits
Gun owners worried that a bad economy could lead to increased violence and suspicious that new stricter gun laws are on the horizon are rushing in record numbers to get concealed weapons permits. From Washington state to Florida, state officials say more people are deciding to pack heat. In some cases, states are reporting a near doubling in the number of concealed carry permits. The firearms industry has seen a big jump in sales and interest following last fall's elections, driven by a fear that Democrats could dig up old gun control policies. But the economy is also on the mind of many getting new permits to carry a hidden gun. Some worry the recession will get worse, leaving people to resort to theft and violence.

"I do think there are going to be people who have very little, and they are going to decide you have too much and come get it," said Rochelle Haughton of Billings, who described herself as a middle-aged housewife who likes to bring a gun when she travels on the open highway. In Montana, authorities are on pace to issue twice as many concealed weapons permits than last year - and this is in a state that only requires such permits if you go into an incorporated city. They are unnecessary everywhere else.

Gary Marbut, president of the Montana Shooting Sports Association, said students taking his gun training classes report underlying worries on gun control and violence. He said the economy is prompting anxiety over what could happen next - to the point some think social order could start to break down. "People are making decisions based on some anxiety, rather than having thought it totally through entirely," he said. Police in states around the country are unable to keep up with the pace of concealed weapons permits.

The Texas Department of Public Safety says it is hiring temporary workers to help process a surge in applications. Oklahoma also reports a near doubling in concealed carry permit applications. North Dakota officials say concealed weapons permit applications are up a third over last year. The trend stretches from Washington state to Florida, where police expect to process at least 50 percent more applications than a year ago. That state is also turning to temporary workers to help deal with the work.

Florida was one of the first states two decades ago to pass a concealed-carry law. Interest blossomed quickly, and now nearly all states have such a law. Gun advocates call the program wildly successful, pointing to the increased popularity of such permits. Critics say the laws - and interest in packing a hidden gun - are a result of senseless paranoia. Those closest to the big jump in permits this year cite the well-documented interest in buying guns and ammunition ever since the President Barack Obama's election - along with the unsettling nature of the recession.

Others point out that Obama and Democrats have not moved to restrict guns in any way - and in fact they have done the opposite. The president signed a bill in May that permits licensed gun owners to bring firearms into national parks - undoing rules that, ironically, came from the Reagan administration adored by many gun advocates. "The notion that there is some great threat looming on the horizon is horse manure," said Peter Hamm, spokesman for the Brady Campaign to Prevent Gun Violence. Hamm said he is mystified by people getting concealed weapons permits and buying new handguns over economic fears.

"I know in a tight economy, I think of things not to spend money on rather than on things I need to spend money on right away," he said. "If your response to anxiety is to buy a firearm, you should probably take a deep breath." The National Rifle Association fell just short of persuading Congress earlier this summer to force states to recognize the concealed weapons permits from other states. Some states voluntarily accept such "reciprocity," but the proposal would have forced all to do so on a widespread basis.

Edward Avilla, who runs a gun Web site called, lives in Rochester, N.Y., but got a new permit from Utah this year even though he already holds one in his home state. The Utah permits are popular with aficionados because nonresidents can get one through a distance class and because it is accepted in 17 other states. "The fall in the economy does make people feel insecure and want to defend their home," said Avilla. "I do know that it is motivation for a lot of people." Avilla runs a forum popular with assault rifle fans. But he also says he practices with his handguns very frequently - and self defense is on his mind. "I carry concealed basically for preservation of life. I value my life and that of others around me," said Avilla. "I do hope, however, I never have to use it in my entire life."

Longtime holders of permits are not surprised by the big surge in interest. "The reason is simple: People are afraid of what's going to happen," said Bart Bonney, a retiree living in Anaconda who recently renewed his own permit. Leslie Strangford of Baker said he primarily uses his permit so he can bring a gun when he travels with his wife. The rancher said he doesn't feel like he needs a concealed handgun around the small agricultural community where he lives, where guns are a common part of life and often hang in the back of pickup trucks. "I guess it's a sign of the times, every so often you hear about someone that is traveling and gets threatened," he said. "Being as I was traveling all over, I thought it was time to get a permit."

A Great New Bull Market? Unlikely
The strength of the stock market rally seems surprising in light of ongoing weakness in consumer spending and housing.  The strength is not unusual, however.  And it's not an indication that we're in a great new bull market.

In our opinion, the economy's fundamentals and the market's valuation still suggest that we're in the middle of a long bear market.  We still have trouble seeing how the economy is going to go right back to 3%-4% sustainable growth in the face of our massive debt, increased consumer saving, debt reduction, overcapacity, tighter lending standards, high unemployment, and housing weakness.  And we don't see how corporations will quickly generate the record-high profit margins that produced the previous market high without cutting so many more employees that they will kill the economy in the process.

Regardless of which economic outlook you favor, though, don't fall into the trap of thinking that the market's recent rally is confirmation that we're in a new bull market. 

As John Mauldin observes, rallies like this one are par for the course in long-term bear markets. 

Mauldin argues that we're still in a long-term bear that will take the market's valuation much lower than it was at the March low before everything finally turns around.  Based on the market's behavior after previous bull market peaks, this argument is persuasive. 

After the last three major bull markets--1900s, 1920s, and 1960s--the market went through nearly two decades of consolidation before a great new bull market began again.  Valuations also got almost as extreme on the downside as they had on the upside.  (See Robert Shiller's chart below)


Right now, we're ten years into this bear market--about a decade less than the usual long-term bear market.  Valuations dropped from record highs in 2000 to modestly undervalued in March 2009, and they're now back to 10%-15% overvalued again.

Is it possible that we've entered a Great New Bull Market?  Anything's possible.  But the economic fundamentals and valuations make this seem unlikely. 

Check out the charts from Ed Easterling at Crestmont Research in Mauldin's excerpt below.  Note the magnitude of the bear-market rallies in the first chart, and the long-term decline in the market's PE ratio in the second chart (line at the bottom).

Here's Mauldin:

Yesterday my good friend Ed Easterling dropped by... He had a chart that I asked him to get to me for your perusal. The last secular bear market was 1966-82. He charted the ups and down in that market and noted the percentage rises and falls. It was as volatile then as it is now. There were some breathtaking ups and downs. With every rise, pundits declared the end of the bear market, only to have the market fall dramatically again. Take a few moments to gaze at the chart:


What drives the volatility? My contention is that bull and bear cycles should be seen in terms of valuation instead of price. Markets go from high valuations to low valuations and back to high. It is an age-old story. We have done about half the work we need to do to get back to low valuations. These cycles average of 17 years. We are less than ten years into this one.

I believe we are going to lower valuations in terms of price-to-earnings ratios. This can be done by the market going sideways and earnings rising, or the market dropping, or some combination. Look at the graph below, and notice the slow and steady drop in P/E ratios (bottom chart) and the very volatile markets that accompanied that fall. I agree with Ed; we should not be surprised at today's volatile markets. And we should expect more volatility and large price movements. Both up and down. (Some of the best charts anywhere are at


The risk of a double-dip recession is rising
by Nouriel Roubini

The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.

That effort worked and the free-fall of economic activity eased. There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?

On the first question it looks like the global economy will bottom out in the second half of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts of Asia and Latin America) the recovery has already started.

On the second issue the debate is between those – most of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.

There are several arguments for a weak U-shaped recovery. Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

China's ICBC bank lends its way to temporary greatness
Industrial and Commercial Bank of China is lending its way to greatness. The world's biggest bank by market capitalisation, weighing in at $231bn at Thursday's close, achieved an impressive 21pc return on equity in the first half of the year. Loan growth is the explanation. And the real costs of the expansion could be tomorrow's problem. Under orders from Beijing, ICBC has been hosing its customers with cash. The loan book expanded by 18.9pc, or $127bn, from the end of 2008, although lower rates meant net interest income fell 12pc on the same period a year ago. Recent results from Bank of Communications tell a similar story.

It is not just state bidding that is behind this extraordinary growth. ICBC is attracting deposits at a rate of knots. Some $192bn of additional funds lined ICBC's vaults in the first half, needing to be put to work. Chinese banks don't enjoy much fee and commission income from trading and the like, so they need to keep lending to earn their keep. There was only partial reassurance that lending discipline is being maintained. "Discounted bills" - short-term lending given to speculative use - slowed dramatically from the first quarter. Industry data for July show short-term loans are now being re-lent as longer-term, more productive borrowings. Those looking for a reason why Shanghai stocks fell 20pc in a month may find their answer there.

Chinese banks meanwhile proudly claim their bad debts are going down even as lending increases. But that is at odds with economic reality. The fear must be that the tide of liquidity is refinancing risky industrial loans and storing up more problems for later. Some lending may be life-support to unprofitable companies. For now, ICBC's balance sheet is iron-clad. Tangible common equity is a healthy 5pc of total assets. Loans are 58pc of deposits. That means there could be much more lending to come if the state wants it. But the crisis has shown that banks' sky-high returns on equity do not last, and for a reason. Tomorrow's shareholders may pay the price for today's profits.

The "Real" Mega-Bears
by Doug Short

Here is a chart I like better than my original Mega-Bear Quartet overlay. This "Real" Mega-Bear version shows the current S&P 500 from the top of the Tech Bubble in March 2000 and is thus more consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. When we adjust for inflation, the all-time high for the S&P 500 was in 2000, not 2007.

In previous weeks, this chart also included the NASDAQ from its 2000 peak. But "Rawb" in New York City emailed me with a good question:I'm a curious about the purpose or benefit of showing two bears that "started" approximately 2 weeks apart from each other, specifically the NASDAQ bear (started 3/10/2000) and the current bear which you claim started 3/24/2000, about 14 days later.

I agree. The NASDAQ was simply a carry-over from the original Mega-Bear Quartet chart. I'll keep it in the original, where it represents a nominal secular bear market following an obvious bubble. But it's redundant in the inflation-adjusted Mega-Bear overlay. The broader S&P 500 is the rightful representative of the "real" U.S. bear that started in 2000.

Millions face shrinking Social Security payments
Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975. By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal." Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels. Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.

"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses." About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982. More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors' visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients. There is no such hold-harmless provision for drug premiums. Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula doesn't call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage. But the limit only increases if monthly benefits increase. Critics argue that Social Security recipients shouldn't get an increase when inflation is negative. They note that recipients got a big increase in January — after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. "Congress has to be able to tell people they are not getting everything they want." Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report this year. President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.

Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year. "I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset," said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients. "It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back," he said.

Commercial Real Estate Is an Impending Disaster
Many of us know of people who have lost their homes through foreclosure. We also read about financial institutions bellying-up and big banks being weighed down by subprime home-loans and esoteric derivatives. To a lesser extent we hear about struggling commercial properties vying for a limited pool of tenants. The competition is forcing landlords to accept lower rents and in some cases, the aggregate rents are inadequate to pay their operating expenses.

In addition to distressed commercial real estate, there are also viable, cash-flowing properties that are looking at impending disaster. That is because an estimated $410 billion worth of commercial mortgage-backed securities are scheduled to come due between 2010 and 2013 according to Deutsche Bank Securities. They say that two thirds or more of the underlying properties will not qualify to refinance the existing loan balances. Furthermore, the original loan documents for CMBS-financed properties are inflexible. So loan mitigations, workouts and extending the terms beyond their original due dates are highly unlikely.

REITs, developers, investors and individual landlords will have to come up with a substantial amount of equity to refinance and save their properties from foreclosure. Alternatively, they may have to sell at greatly reduced prices and book huge losses. According to news reports a few months ago, Glimcher Realty Trust sold the Great Mall of the Great Plains in Olathe, Kan. for $20.5 million. That price represented approximately two-thirds of the $30 million mortgage balance secured by the property. The public REIT booked a big loss.

On June 2, 2009, The Equitable Building in Atlanta, Ga., a 35-story tower was put up for auction after defaulting on its loan. It was purchased by an affiliate of Capmark Bank for $29.5 million. Just two years earlier, Capmark made a $52 million purchase money mortgage to Equastone to buy the property. Significantly, there were no other bidders at the auction suggesting that the value was even lower than the amount that the bank paid to salvage part of its investment. Vacancies, increasing capitalization rates and a dearth of buyers played a role in the plunging values of these two properties. Similar scenarios are occurring nationwide.

To make matters worse, CMBS have over-leveraged many properties at 85 percent to 90 percent of value. Shortly after that, the CMBS financing vehicle dried up because Wall Street stopped buying them. The credit crunch, declining values and increasing foreclosures makes it unlikely that CMBS will return in the foreseeable future with such high leveraging. Insurance companies are willing to step in and refinance the best properties at 65 percent to 70 percent of value. That means borrowers who previously financed 90 percent will have to bring a considerable amount of equity to the table just to take out their existing financing.

In some cases, mezzanine lenders and equity partners may join hands with the owners in return for a sizable chunk of equity. But the fear is that battle-scared owners will give up the fight and simply turn the keys over to the CMBS servicers. The Obama Administration is mulling over the possibility of using Term Asset-Backed Securities Loan Facility to buy CMBS held by financial institutions. If that happens, some loan modifications may be possible. Alternatively, TALF might finance private investment groups to buy the securities at deep discounts. Of course there are no assurances that the financial institutions will be willing to book the sale of CMBS at deep discounts. The problem is far from being solved and the next couple of years could spell disaster for commercial real estate.

'Cash is king' in market for foreclosed homes
As an aspiring first-time home buyer, Jay Nielsen hoped to find a cheap, bank-held foreclosure in Vallejo that he could finance with a Federal Housing Administration mortgage. What he didn't expect was having to compete with buyers willing to pay in all cash. "Since January, I've put in 10 bids (on foreclosed homes); some were up to $80,000 over asking price and were still turned down," said Nielsen, 41, a medical assistant. Each time, the banks selected offers from investors with all-cash offers - even when those offers were lower than his, Nielsen said.

"Cash is king right now," said Glen Bell of Keller Williams Realty in Berkeley. For foreclosed homes, "a cash offer that hits the target price will many times trump a higher-priced offer with a loan. The ability to close has become just as important to banks as price. The prospect of a property being tied up longer, still on their books and then falling out is costly." Cash offers close escrow quickly and easily, while offers with a mortgage now often take 45 days or longer to close and can fall through if the financing hits any snags.

The result is that average consumers say they are being shut out because they can't compete against deep-pocketed investors snapping up homes to rent out or flip. The situation could have long-term repercussions as neighborhoods shift toward more heavily rental, and it has frustrated many who hoped that low interest rates and increased affordability would let them gain a toehold in the market.

All-cash sales are most common where prices are low and bank-owned properties account for the lion's share of listings. In foreclosure-ridden Pittsburg, for instance, 42.7 percent of home sales in the first three weeks of July had no record of a purchase loan, according to county data analyzed by MDA DataQuick. The median price for those transactions was $105,000. For the same period in San Pablo, 45.1 percent of sales appeared to be cash transactions; their median price was $110,000. In the Bay Area overall, 22.2 percent of sales in the July period looked like cash transactions; their median was $200,000, DataQuick said.

"Houses are less expensive than they've been in over a decade, and there is a Gold Rush mentality out there," said Andrew LePage, an analyst with San Diego's DataQuick. "If you want to be the one who gets the house, in some cases you just have to have cash." "As properties hit below 100 bucks a square foot and the cash-flow ratios are there, investors are out buying 10 properties at a time in some of the same areas where first-time home buyers are looking," said Kevin Kieffer, an agent with Keller Williams Realty in Danville. "If you buy a $150,000 home in Pittsburg, you can rent it out for $1,500 a month. But if you get a $500,000 home in Walnut Creek, renting it out for $5,000 is not going to happen."

Tim Garton of Coldwell Banker in Vallejo acts as a listing agent for many foreclosures. Another dynamic at work, he said: "Asset-management companies that handle sales for the banks are graded on how fast they can get properties off their books so they can get more properties." But Gary Kishner, a spokesman for JPMorganChase, said that banking giant accepts the highest offer on foreclosed homes, regardless of how offers are financed. The only time an all-cash offer might trounce a higher one with a mortgage, he said, would be if the financed offer were contingent on selling another house, or on rehabbing the foreclosed home to meet Federal Housing Administration requirements.

Cindy Kraeber of Hayward, who is relying on traditional financing, has bid unsuccessfully on nearly 30 homes from Fremont to Brentwood in the past four months. "People are jumping on homes so fast it is like combat house-hunting," said Kraeber, 49, an executive assistant. "You can't go see a house in person (before making an offer); once you see it online, you have to put in a bid as quickly as you can. If you wait, there are already six bids." She visits homes after making an offer to decide if she wants to proceed.

Of her 30 offers, Kraeber had just one accepted. But the deal for a house in Brentwood fell through when an appraiser said the house was worth $21,000 less than her $175,000 offer. Banks will not write mortgages for properties assessed below the sales price because there is not enough collateral. "If you come in with cash, the appraisal is not even an issue; most cash buyers don't ask for one," Kieffer said.

Kieffer offers tactics to help regular buyers compete. "If my client likes a property, I have them bring an inspector the day we look at it and get the inspection report that night, before we write an offer," he said. "Then we know what we're looking at and we can write an offer with no inspection contingency." The fewer contingencies, the better chance that a deal will go through. LePage, the DataQuick analyst, said some owner-occupant buyers may be strategizing to put together cash offers. "My hunch is, in many cases there are loans involved from family, friends, private individuals," he said.

Nielsen, who was looking for a property under $185,000, devised his own creative approach. He decided to sidestep foreclosures and went door to door in neighborhoods he likes, leaving notes explaining what he wanted to buy. His ingenuity paid off. A man called, saying his family wanted to sell their longtime home. They agreed on a price based on comparable local sales and are in escrow. "It was next door to one of my best friends, on a street I really like," Nielsen said. "It's a small house, but something I will be able to manage."

The Existing Home Sales "Bounce" Will Be Brief
The existing home sales number released today showed a slightly better than expected number for the month of July. Given that we are in the heart of home buying season, given all of the money pumped into the system by the Fed AND especially given the $8,000 first time home buyer tax credit, we shouldn't be surprised to see a small, seasonal bounce in home sales right now.

As pointed out by Existing Home Sales would have been negative over June if not for the increase in Northeast Condo sales, Single Family Detached sales were DOWN 5000 units June to July, and in the all-important Western region, existing sales were down 10%.

But let's look at the underlying factors and data to understand what is really going on with the "seasonally adjusted" and polished-up-for-public-presentation number released by the National Association of Realtors. Here are the factors we see that will undermine this brief respite from the ongoing housing Depression:

1) The universe of qualified first-time home buyers gets exhausted; 2) Distressed investors step away as the ever-present "shadow" inventory becomes actual inventory (shadow inventory is bank-owned homes and would-be sellers waiting for "a bounce in the market"); and 3) The massive wave of prime mortgage foreclosures will flood the market, putting pressure on prices in every price-segment AND on buyer demand.

First-time home buyers and foreclosure/short-sale buyers - so-called distressed investors - represented 61% of the estimated sales for July. This metric is not a sign of a healthy, sustainable market for a couple reasons. First-time buyers are most likely "pulling" future sales into the present, as the first-time home buyer tax credit of $8,000 is set to expire in December. Home sales drop off anyway after August, so we would expect to see an even bigger drop in the third and fourth quarters, even if Obama extends taxpayer subsidization of first-time buyers.

As for the distressed investor segment, many of these buyers will look to "flip" their "distressed" purchase fairly quickly or they'll be forced to rent out the property to avoid the negative cash flow hit from holding investment homes. But renting will be made a lot more difficult by the record inventory of rentals units currently on the market, and growing. I would expect to see a lot of "investors" look to try and unload their property if they can't rent it out or become nervous about the market.

And finally, the inventory levels are still at unusually high levels. We know for a fact that banks have been withholding foreclosed homes on their books (REO, real estate owned) from the market in an attempt to reduce supply and hold up prices. We also know, as reported yesterday, that the percentage of properties in foreclosure or delinquency hit a record high of 13.2% of all single-family mortgages. What makes this metric even more severe in terms of housing market economics is the large jump in foreclosures in prime mortgages and FHA-insured mortgages.

Up to this point, the lower priced homes, typically bought by first-timers and distressed investors, have been by far the highest component of existing homes sales. With the impending tsunami of prime mortgage foreclosures will be a flood of much higher priced homes, which will ultimately put a lot of pressure on the lower end of the market. Of course eventually these banks will have to put a lot of their foreclosure inventory on the market, which will exacerbate the problem.

Ultimately this brief "bounce" in home sales will run into the problems discussed above and, because the Fed and the Government tried to put a floor under the market, the ensuing next leg down will be even worse than what we went through over the past 18 months. It will be interesting to see if the Government decides to spend some of the trillions of dollars it's printing to become a home buyer of last resort (I say this only half-facetiously because I bet it's been discussed). Let's not forget that the taxpayer now owns outright or de facto General Motors, Fannie Mae, Freddie Mac, Citibank and AIG. So in a way, via FNM and FRE, the taxpayer is already monetizing the housing market.

Five Reasons Why Negative Equity Could Kill GDP Growth
Negative equity on a residential mortgage means the owner of the residence owes more on the mortgage loan than the property is worth. This has become a big problem in the US and it’s an issue that needs to be taken into account as one forecasts the prospects for a recovery in consumer spending and overall GDP growth in the next few years.

How Big Is the Negative-Equity Problem?

According to data released by First American CoreLogic, as of June 30, about 15 million US residential properties were worth less than the mortgages owed on the properties. This represents about 32% of all mortgaged residential properties. The report also estimated that there are an additional 2.5 million mortgaged properties that were approaching negative equity. This means that negative equity and near negative equity mortgages represent almost 38% of all residential properties with a mortgage in the US.

Three states account for roughly half of all mortgage borrowers in a negative-equity position. Nevada at 66% had the highest percentage, followed by Arizona at 51% and Florida at 49%. Michigan at 48% and California at 42% were fourth and fifth in the rankings. According to the same report, the aggregate property value for loans in a negative-equity position was $3.4 trillion. This figure can be thought of as the value of a subset of properties that are at high risk of default. In California, the aggregate value of homes that are in negative equity was $969 billion, followed by Florida at $432 billion, New Jersey at $146 billion, Illinois at $146 billion, and Arizona at $140 billion.

In a recent report, Deutsche Bank estimated that the number of US mortgage holders facing negative equity would approach 48% within 2 years. Others have offered estimates of around 30%. Approximately two-thirds of owner-occupied housing in the US has a mortgage. This implies that currently, roughly 24% of US households are in a negative equity or near negative-equity position with respect to their home. If Deutsche Bank’s estimates were to prove accurate, this figure could rise to about 33% within 2 years.

The Consequences of the Negative-Equity Problem

1. The financial system faces grave risks.

According to the Mortgage Bankers Association, as of June 30, more than 13% of mortgage owners are either in default or behind in their payments. According to the report, approximately 4% are in foreclosure and 9% have missed at least one payment. The fact that somewhere between 25% and 50% of all residential mortgages will be in or near negative equity in the next couple of years implies that default rates will remain very high for an extended period of time in the US. Indeed, the fact that foreclosures in the US increased by 7% in July relative to June despite an uptick in economic activity is a potentially ominous sign.

Certainly, it must be recognized that not all mortgage holders with negative equity will default. In addition, even if home prices decline another 20% as some analysts are suggesting, a significant portion of the face value of the defaulted loans will be covered by the collateral value of the homes. Still, the phenomenon of negative equity is a problem of monumental proportions for the US financial system.

2. Negative equity could cripple consumer spending.

Being underwater on their mortgage makes people feel poor. This should significantly affect their propensity to consume. The Permanent Income Hypothesis (PIH) developed by Milton Friedman (the most prominent model of consumer behavior within the economics profession) posits that individuals take into account not only their current income, but their total wealth when making consumption decisions. And behavioral research suggests that wealth effects -- particularly large fluctuations in a short period of time -- may impact consumption far beyond what’s predicted by the PIH.

The increase in perceived wealth created by the housing boom fueled accelerated consumption on the part of consumers from the mid 1990s through 2006, well beyond what the standard PIH theory would predict. Keeping this in mind, it seems probable that the enormous damage done to the household balance sheets of vast numbers of Americans as a result of the housing crisis may similarly cause dramatic downward adjustments in household consumption.

The effects of negative equity on a very large segment of US consumers is one among several reasons why private consumption in the US is likely to significantly lag overall GDP growth in coming years -- an almost unprecedented state of affairs in modern US history. Since private consumption represents about 70% of US GDP, this implies that overall GDP growth will necessarily be highly constrained going forward.

3. Negative equity makes people feel trapped in their houses.

Many individuals don’t want to ruin their credit by defaulting on their mortgages. Additionally, many don’t want to “realize” their equity losses. This is due to the well known psychological phenomenon known as the “sunk-cost effect.”

4. Labor mobility is stymied.

People that feel “trapped” in their houses will tend to become immobile. Labor mobility is a critical component for a swift economic recovery. The high mobility of labor in the US has historically been a distinguishing factor versus mobility in Europe, in terms of the US’s ability to recover quickly from recessions. Labor supply must be able to respond rapidly to demand in the most dynamic areas. In this way, the virtuous cycle of employment, income, and consumption growth can be ignited quickly and efficiently. The effects of negative equity in immobilizing the population will greatly hinder this process and it will be reflected in economic variables such as velocity and productivity that are intimately tied to the rate of economic growth.

5. Enormous supply overhang.

Negative equity and the paralysis induced by the sunk-cost effect represents an enormous overhang of pent-up supply for the housing market. Any minor price recoveries in the housing market will be met with eager pent-up inventory by sellers that have been waiting for a bounce that will allow them to alleviate the psychological pressure created by not wanting to sell at a large loss or at a large cost to sunk household equity. This pent-up supply overhang implies that the housing market faces enormous obstacles for price recovery in the next few years.


Negative equity isn’t an issue that’s relevant for market timing. However, it’s an issue I believe many economists aren’t properly accounting for as they forecast economic growth in the next few years.

First, the extent and depth of the negative-equity problem implies that default rates may remain higher for longer than many are expecting, with negative repercussions for a financial system which will be constrained in its ability to finance the economic activities of consumers and businesses going forward. Second, I believe that the dramatic wealth effects caused by the housing crisis haven’t been properly accounted for in projections of private-consumption growth in the next few years. Finally, reduced labor mobility should act as a growth inhibitor that will affect the speed and character of the US economic recovery.

The effects of negative equity are just some of the oversights embedded into consensus economic forecasts that are setting financial markets up for significant disappointments going forward related to private consumption and overall GDP growth.

Analyst Bove sees 150-200 more U.S. bank failures
A prominent banking analyst said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, and the industry's payments to keep the Federal Deposit Insurance Corp afloat could eat up 25 percent of pretax income in 2010. Richard Bove of Rochdale Securities said this will likely force the FDIC, which insures deposits, to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.

"The difficulty at the moment is finding enough healthy banks to buy the failing banks," Bove wrote. The FDIC is expected on August 26 to vote on relaxed guidelines for private equity firms to invest in failed banks, after critics said previously proposed rules were too harsh and would actually dissuade firms from making investments. Bove said "perhaps another 150 to 200 banks will fail," on top of 81 so far in 2009, adding stress to the FDIC's deposit insurance fund. Three large failures this year -- BankUnited Financial Corp in May, and Colonial BancGroup Inc, Guaranty Financial Group Inc in August -- collectively cost the fund roughly $10.7 billion. The fund had $13 billion at the end of March.

Regulators closed Guaranty's banking unit on Friday and sold assets of the Texas-based lender to Banco Bilbao Vizcaya Argentaria SA. The FDIC agreed to share in losses with the Spanish bank.
Bove said the FDIC will likely levy special assessments against banks in the fourth quarter of this year and second quarter of 2010. He said these assessments could total $11 billion in 2010, on top of the same amount of regular assessments. "FDIC premiums could be 25 percent of the industry's pretax income," he wrote.

How toxic finance created an unstable world
by Wolfgang Münchau

Two years on, what do we know about the global financial crisis? We still lack a conclusive theory, but we know a lot more than we did in August 2007. We know, for example, that simple monocausal explanations are at best insufficient and most likely paranoid and lazy. If you still blame Alan Greenspan, former chairman of the Federal Reserve, or central bankers in general, you have not got it. Nor can you explain it by “soft” factors such as greed and bonus payments. These played a role but none can serve as an adequate explanation of why the crisis broke out when it did, since they had been present for many years.

My own gut feeling: this has been a crisis of economic policy first and foremost. The financial crisis was necessary for the economic crisis to occur but it was not sufficient on its own. Each depended on the other. The best description I have found of how economics and finance interacted is by Anton Brender and Florence Pisani*. The two French economists describe in great detail how money from European and Asian exporters ended up in US consumer or mortgage debt and how risk was transformed in the process. The main point is that global imbalances would not have become so extreme if global finance had not provided exotic new instruments.

Dollar-rich Chinese, Japanese and German investors did not lend the money directly to the subprime mortgage market but they invested in opaque credit products, such as collateralised debt obligations, which they mistakenly deemed to be as safe as US government bonds. Securitisation dumped the risk on those unsuspecting investors. It also transformed long-term debts, such as mortgages, into marketable short-term securities, which were in demand in countries with current account surpluses, particularly Germany and Japan. It is no surprise that those two countries ended up with large portions of the junk, as they had the greatest need to invest their surplus savings.

Without a global credit market, the pre-crisis level of imbalances would have created an intolerable degree of demand for US triple-A rated securities that could simply not be satisfied by the US government. The story was different in China. Chinese exporters gave the dollars to their central bank in exchange for domestic bonds. The central bank accumulated those dollar holdings, which it invested in securities, Treasury and agency bonds, and other seemingly secure dollar funds, some of which were also ultimately secured by dodgy private-sector loans. In the process, the Chinese central bank prevented a disorderly increase in the renminbi exchange rate, and this in turn helped to make global imbalances more persistent.

If this interpretation is correct, is it good or bad news for us today? On the surface, it is good news. If you add the absolute value of all global current account deficits and surpluses, then divide by two, you get a metric for global imbalances. These, according to the two French authors, were about 1 per cent of world output during most of the 1970s, ‘80s and ‘90s. Since 2000, the imbalances have trebled. Without securitisation, the world cannot sustain such extreme imbalances indefinitely.

There is no way that Wall Street and the City of London will recreate the pre-crisis levels of securitisation, even if we make no changes to financial regulation. Rebalancing is likely to occur eventually. The US will run a large budget deficit for a few years, which partially offsets the sudden increase in US private sector savings, but it cannot do this forever. It is theoretically possible that American households will have repaired their balance sheets in a few years and will return to binge spending by then, but I doubt it.

I am not comforted by this scenario. Both China and Europe are likely to continue with broadly the same policies, trying to rely on exports for future growth while failing to produce sufficient domestic demand. The noises we hear from Germany in particular suggest that politicians and industry are looking forward to returning to the status quo ante. So if all we do is stimulate the economy in the short term through monetary and fiscal policies, and tighten financial regulation, we are not really solving the problem. We can regulate to prevent another subprime crisis, but another subprime crisis is unlikely to occur even we did not regulate at all.

In the absence of another credit boom, which is improbable given the weakness of the global banking sector, imbalances will contract one way or the other. Without an increase in domestic demand from Europe and China, there is nothing to take up the slack created by the saving of the US private sector. Once the US stimulus expires, and the budget deficit starts to narrow, global demand will settle at a new lower level. Under those circumstances, it is difficult to see how the world economy can return to the pre-crisis levels of growth, or even close to them. This is why we should be worrying more about global economics right now than about global finance.

Goldman's Trading Tips Reward Its Biggest Clients
Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show. The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry's research didn't find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.

Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle." But few of the thousands of clients who receive Goldman's written research reports ever hear about the recommendations. At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman's widely circulated research reports. Some Goldman traders who make bets with the firm's own money attend the meetings. Critics complain that Goldman's distribution of the trading ideas only to its own traders and key clients hurts other customers who aren't given the opportunity to trade on the information.

Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research. Former Goldman client George Klopfer of Park City, Utah, who was unaware of the trading tips until recently, says the practice is unfair. "When I joined Goldman as a client, I got all these fancy brochures saying they put the client first," he says. "I just don't want to have to worry about them or big clients trading on stuff like this. I was at the end of the food chain." He says he pulled out most of the $20 million in his account earlier this year after losing money on several Goldman funds. Goldman says individual clients like Mr. Klopfer typically have a long-term investing approach and are not focused on individual stocks.

Since the trading huddles began about two years ago, Goldman has supplied "trading ideas" on hundreds of stocks to the traders and top clients, according to internal documents reviewed by The Wall Street Journal. Goldman spokesman Edward Canaday says the tips are "market color" and "always consistent with the fundamental analysis" in published research reports. "Analysts are expected to discuss events that may have a near-term or short-term impact on a stock's price," he says, even if that is a different direction from an analyst's overall forecast. Goldman's published research reports include a disclosure that "salespeople, traders and other professionals" may take positions that are contrary to the opinions expressed in reports. But the firm doesn't disclose the trading huddles.

Mr. Canaday says analysts are told that any comment at a meeting that could result in a change in a rating, earnings estimate or stock-price target "must be published and disseminated broadly to all clients." He adds, however, that it is rare that tips arising from the meetings reach that threshold. He says ratings changes after the meetings also are rare. The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn't want to overload other clients with information that isn't relevant to them, he says. "We are not in the business of serving thousands of retail customers," he says.

At least one competitor discloses such trading tips much more broadly. Morgan Stanley's research department sends blast emails with short-term views on various stocks to thousands of clients, and posts the information on its Web site. It doesn't call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure, according to people familiar with the matter. "The spirit of the law is twofold," says Eric Dinallo, who in 2003, when serving as a deputy to former New York Attorney General Eliot Spitzer, helped negotiate a $1.4 billion stock-research settlement with 10 major Wall Street firms, including Goldman. "Analysts should give consistent advice to all their customers, be they small investors or big trading clients." Any views that differ from an analyst's published rating but are "worth sharing with certain customers," he says, should be made "available to everyone."

The 2003 case involved allegations that Wall Street firms were issuing overly optimistic stock research in order to win more lucrative investment-banking business. The settlement, in which Goldman and the other firms didn't admit or deny wrongdoing, erected walls between research and investment banking. Securities laws currently require research analysts to personally certify that their reports accurately reflect their views of a stock. Some analysts have gotten into big trouble by contradicting themselves. In 2003, former Merrill Lynch & Co. technology analyst Henry Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails.

These days, analysts must juggle growing demands from trading units at their firms. Such operations have emerged as big moneymakers, fueling the record $3.44 billion in net income at Goldman in the second quarter. A large portion of Goldman's profit came from trades done for mutual funds, pension funds, endowments, hedge funds and other big institutional investors. Proprietary trading, in which Goldman makes bets with its own capital, accounts for about 10% of its profits. Analysts have a financial incentive to give clients useful information. Goldman sets aside roughly 50% of money allotted each year to analyst compensation to distribute based on feedback from trading customers. The balance of analysts' pay is determined by the performance of their stock picks. That pay system is common among major Wall Street firms.

At many firms, traders, salespeople and analysts hold early-morning calls to review ratings changes, recommendations and market events. Throughout the day, analysts talk to key clients to help them interpret research reports and provide more detail on specific events such as earnings. The research business is considered a loss leader at most firms, despite persistent attempts by Goldman and other securities giants to squeeze more revenue from it. Goldman was looking for a leg up on rivals when it started the trading huddles in 2007. That year, Goldman ranked ninth in Institutional Investor magazine's annual list of the best equity analysts, as determined by a survey of big institutional investors. Goldman was rated eighth in last year's competition.

The huddles began in earnest around the time Goldman's research department got a new boss, Mr. Strongin. He came to the firm in 1994 from the Federal Reserve Bank of Chicago, where he had been director of monetary-policy research. At Goldman, he had run the commodities-research operation, then was co-chief operating officer of the whole research unit, before being asked to run it in April 2007. Mr. Strongin, 51 years old, set out to improve Goldman's research operations. The firm asked important clients for suggestions. One idea that took hold was giving certain customers and traders more access to stock tips. The idea was controversial with some Goldman research staffers. "I am not sure we should be giving recommendations that go against our research," said one Goldman employee at a meeting where the trading huddles were discussed, according to one attendee.

Laura Conigliaro, Goldman's co-head of research in the Americas region, replied at the meeting that the firm needed to respond to inevitable differences in the time horizons of investors. Issuing a short-term buy recommendation wasn't necessarily at odds with a lukewarm "neutral" rating for the long run, she added. One recipient of the trading tips, Steve Eisman, a managing director of hedge fund Frontpoint Partners LLC, says that he likes the back-and-forth he now has with Goldman's analysts, and that he pays attention to some of the tips. "A few years ago, Goldman wouldn't make a negative call on anything," he says. "Now they say it like it is."

The huddles can last from 20 minutes to one hour, according to participants. Analysts are encouraged to bring a trading idea. They talk with Goldman traders about the financial markets and events that could trigger movement of specific stocks. Goldman specifies how long each recommendation is in effect, often one week. At a huddle on July 31, for example, the firm's technology analysts and traders discussed more than a dozen stocks, ranging from Garmin Ltd. to Microsoft Corp. None of the analysts said anything that appeared to differ from their stock ratings.

Compliance officers sit in on almost all the meetings, Goldman says. Research analysts say they have been guided on what language to use in the huddles. Words like "buy" and "sell" are to be avoided, while "run up," "give back" and "oversold" are encouraged. Internal documents reviewed by the Journal initially tracked the trading-huddle tips as "buy" or "sell," but now refer to them as "up" or "down." Research-department employees prepare telephone scripts, then call top clients, typically several hours after the meeting has ended. Goldman says its in-house traders are prohibited from trading on the tips until after they've been relayed to clients.

Documents reviewed by the Journal indicate that anywhere from six to 60 clients are contacted, depending on the investment. For example, clients specializing in financial stocks are given recommendations about that sector. Each call typically includes comments about the overall market and the kinds of investors Goldman believes are propelling it, and ends with a stock tip. The meeting where Mr. Irizarry suggested that Janus shares were worth buying, held on April 2, 2008, was attended by Goldman's financial-research analysts and traders who handle customer orders. It also included another class of traders called "franchise risk managers," who sit with and advise the traders handling customer orders -- and make bets with Goldman's money.

Typically, traders who wager firm capital are walled off from those handling customer orders so that they don't take advantage of information about client trading, which securities regulations forbid. Goldman says its franchise risk managers don't trade on client information and must first share trading-huddle tips with clients before acting on the tips themselves. At the April 2 meeting, Goldman says, Mr. Irizarry was expressing a sentiment about Janus similar to one contained in a report Goldman published the previous day. A chart in that report, Goldman says, cited a report from mutual-fund-research firm Morningstar Inc. that was positive on Janus. While internal documents show Mr. Irizarry's rating on Janus stock at the time was "neutral," they note the "price action expected" was "up." Mr. Irizarry declined to comment.

The day after the meeting, Goldman told selected clients that "in particular, we highlight Janus," according to an internal document. At the same April 2 trading huddle, Goldman analyst Thomas Cholnoky said he favored MetLife Inc. over other insurers, according to notes from the meeting. Internal documents indicate he believed the stock would rise over the short run. Hours after the meeting, Mr. Cholnoky released a research report that reiterated his "neutral" rating on MetLife, saying he hadn't changed his estimates. Goldman says his view about the company's favorable short-term prospects is clearly conveyed in a research note issued prior to the huddle, which said the insurer "stands to be the biggest beneficiary from the steepening yield curve."

A week later, Mr. Cholnoky boosted his rating on MetLife to a buy, and Goldman added the stock to its "America's Buy List" of top stock recommendations. Mr. Cholnoky said he expected MetLife's quarterly results, due in a few weeks, to "surprise on the upside." (The quarterly results, when they came out, did slightly.) Mr. Cholnoky, who no longer works at Goldman, didn't respond to messages seeking comment. Goldman says that in both these cases the analysts' views were consistent with the published research, which included a 12-month price target that was above each stock's price at the time.

Morgan Stanley also generates short-term views on various stocks, which it calls "Research Tactical Ideas" and distributes widely via email and the firm's Web site. In May, for example, it told clients that insurer Aflac Inc.'s earnings guidance would be "softer than many investors expect." Its rating on Aflac at the time was "neutral." In its longer-term reports published by analysts, Morgan Stanley discloses that it issues such trading tips, and that the tips on any given stock "may be contrary to the recommendations or views expressed in this or other research on the same stock."

Last year, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible. A Finra spokesman said the agency still is reviewing comment letters filed in response to the proposal. Goldman hasn't commented on the proposed rules.

Consumer Spending Probably Decelerated: U.S. Economy Preview
Consumer spending in the U.S. probably rose in July at half the pace of the previous month, showing the biggest part of the economy is struggling to rebound, economists said before reports this week.
Purchases increased 0.2 percent after a 0.4 percent gain in June, according to the median estimate of 61 economists surveyed by Bloomberg News before a Commerce Department report Aug. 28. Other figures may show orders for long-lasting goods jumped and sales of new homes improved.

The government’s “cash-for-clunkers” plan revived auto sales last month just as Americans cut back on items such as furniture and electronics. Depressed home values and the biggest employment slump since the 1930s will prompt households to save more, meaning an economic recovery will be slow to gain speed even as housing and manufacturing stabilize. “It’s hard to see consumer spending driving the economy forward given the losses of wealth that have occurred,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “The consumer isn’t going to play a leading role in this recovery,” he said, in part because “employment is going to keep falling.”

Auto industry data showed sales of cars and light trucks rose to an 11.2 million unit annual pace in July, the most since September, after the government offered credits of up to $4,500 to trade in gas-guzzlers for more fuel-efficient vehicles under the cash-for-clunkers program. The government said last week that it will stop accepting dealer applications for the incentive at 8 p.m. New York time tomorrow. The $3 billion program has recorded more than 489,000 dealer transactions worth $2.04 billion in rebates, according to Transportation Department data released Aug. 21.

Sales at U.S. retailers in July unexpectedly fell 0.1 percent, the first drop in three months, government figures showed on Aug. 13. Purchases excluding automobiles dropped 0.6 percent, also more than anticipated, as Americans cut back on everything from groceries to sporting goods and furniture. Lowe’s Cos., the second-largest U.S. home-improvement retailer, said last week that sales in the three months ended July 31 fell 4.6 percent to $13.8 billion, below analysts’ estimates. “Consumers are still under tremendous pressure, given the continued decline in housing prices and that we’re still losing jobs,” Robert Niblock, chairman and chief executive officer of the Mooresville, North Carolina-based company, said in an Aug. 17 telephone interview.

Larger rival Home Depot Inc. reported second-quarter results on Aug. 18 that topped analysts’ estimates as the Atlanta-based company cut expenses to partially offset a 9.1 percent drop in sales. A weak labor market continues to sap consumers’ ability to spend. Payrolls fell by 247,000 last month, bringing total job losses to 6.7 million since the recession began in December 2007, the most of any contraction since the Great Depression. The job cuts, coupled with rising stock prices, are causing measures of consumers’ outlooks to diverge this month. The Conference Board’s confidence index, due Aug. 25, is forecast to rise, while the Reuters/University of Michigan gauge on Aug. 28 is projected to fall. The Standard & Poor’s 500 Index has climbed 52 percent since March 9, when it fell to a 12-year low.

The rebound in demand for automobiles likely contributed to an increase in bookings at factories. Orders for durable goods, those meant to last several years, probably jumped 3 percent in July, reversing the previous month’s 2.5 percent decline, economists projected an Aug. 26 report from the Commerce Department will show. Excluding demand for transportation equipment, which tends to be volatile, orders probably increased 0.9 percent. The worst housing slump in more than 70 years is showing signs of abating. The Commerce Department on Aug. 26 may report that purchases of new houses rose 1.6 percent in July to 390,000, the highest level since November, according to the Bloomberg survey.

A measure of home prices is projected to fall at a slower pace. The S&P/Case-Shiller index of property values in 20 U.S. metropolitan areas was probably down 16.5 percent in June from a year earlier, the smallest decline in almost a year, the survey showed. The report is due on Aug. 25. Last week the National Association of Realtors said purchases of existing homes jumped 7.2 percent in July to an annual pace of 5.24 million, the highest level in almost two years.

The government’s revised figures for second-quarter gross domestic product, due on Aug. 27, may show the economy contracted at a 1.4 percent annual rate, compared with the 1 percent estimated last month, according to the survey median. The revision will stem from even bigger declines in inventories than initially anticipated, economists said, which set the stage for a boost in production when sales stabilize.

Car Buyers Make 'Mad Dash' to Dealers as Clunkers Program Ends
Bernie Saric has watched the U.S. government’s “cash for clunkers” program burn through more than $2 billion in car-purchase assistance. As the program enters its last weekend, she said she decided to grab her share. Saric, who works for an auto-parts maker, plans to trade in her 1996 Ford Explorer this morning for a 2010 Ford Edge, two days before the program expires Aug. 24. “I definitely felt the pressure to make a decision and say, ‘If I felt good about a car I test-drive, I have to go for it,’ ” said Saric, of Howell, Michigan, who declined to give her age. “It’s like a mad dash to get a deal done now.”

The clunkers plan, which offers auto buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles, has recorded more than 489,000 dealer transactions valued at $2.04 billion in rebates, according to Transportation Department data released yesterday. Last-minute shoppers looking to capitalize on the trade-in program may have few cars or dealerships to choose from. AutoNation Inc. and Group 1 Automotive Inc., two of the country’s largest car dealership groups, said yesterday they will opt out of “cash for clunkers.” Some independent dealers have done so, too, citing cumbersome bureaucracy.

Bryan Mason, 40, of San Francisco, founder of an Internet start-up company, said he had planned to buy a new car to replace his red 2000 Jeep Cherokee with 133,000 miles during the next couple of weeks.
Filling Out Paperwork “When I heard the program was ending on the news last night, I was here this morning when the doors opened,” Mason said yesterday, while filling out paperwork to buy a 2009 Honda Fit from a dealership in Oakland, California. He said it was the only place that had the car in the color he wanted. “I’ve had my eye on it,” he said. “I am here today because I wanted to make sure all my paperwork is processed in time.”

The program, formally known as the Car Allowance Rebate System, or CARS, may help the industry’s new-vehicle retail sales in the U.S. top 1 million in August for the first time in 12 months, J.D. Power & Associates forecast. “Given that the funding could run out at any time, the government is erring on the side of caution so neither consumers nor dealers are left holding the bag,” said Jeremy Anwyl, chief executive officer of research firm in Santa Monica, California. “We expect there will be a flurry of activity over the weekend as the program comes to a close.” That’s what happened with Philip and Caroline Rehill of San Francisco. The 28-year-olds came out to shop yesterday after learning on the Internet that the discounts would be gone soon.

“I was looking to get something by Labor Day weekend, but I’m out here now trying to make a deal,” Philip Rehill, said at Bay Bridge Auto Group, which sells Cadillac, Pontiac, GMC and Buick vehicles, in Oakland. The couple said they wanted to trade-in their 1997 gold Nissan Pathfinder, which had racked up 142,000 miles, including two-cross country trips. “Honestly, without this program, we wouldn’t be in the market,” Philip Rehill said.

The law that took effect July 1 offered consumers a $4,500 credit if the new car they are buying gets 10 miles-per-gallon better gas mileage than the model they are trading in. Light trucks must get 5 mpg better than the older model. For a $3,500 credit, the improvement for cars must be 4 mpg or better, and for light trucks, 2 mpg. The trade-in vehicle must be no older than a 1984 model and get 18 mpg or less in combined city/highway fuel economy. New passenger cars purchased with the discount must get at least 22 mpg in city/highway fuel economy, and light trucks must get at least 18 mpg.

Ryan Gangadeen, a 28-year-old engineer, was able to get a deal, though he wasn’t able to get exactly the diesel-powered Volkswagen Jetta of his dreams when he traded in his ‘94 Acura. He wanted a black one, but had to settle for white. It didn’t have the fog lamps or body molding he desired. “I didn’t have much of a choice. I had to take what I could get,” he said. And picking it up meant driving an hour from his home in Brooklyn, New York. “I had to go to New Jersey,” he said.

UBS chairman says clients "not harmless victims"
Clients of UBS facing disclosure of their accounts to U.S. tax authorities were not harmless victims and legal cases against former UBS bankers did not affect the bank, its chairman told Swiss Sunday newspapers. "The clients are not just harmless victims. They knew what they wanted to evade," Kaspar Villiger, chairman of the world's second-largest wealth manager, said in an interview with SonntagsBlick. "But they trusted the bank that it would work. Now we have to correct that," said Villiger, adding it was still not the responsibility of UBS to make sure clients paid their taxes.

Switzerland last week agreed to reveal the names of thousands of UBS's rich U.S. clients to Washington, settling a tax-avoidance dispute that had battered the bank's reputation and damaged Switzerland's prized bank secrecy. Villiger did not believe systematic tax evasion had been a problem in countries other than the United States, he said in a separate interview with NZZ am Sonntag, adding that legal action against former U.S. bankers did not affect the bank.

"The personnel consequences have been solved in so far as those responsible no longer work for UBS. We have not discovered any misdeeds relevant to Swiss criminal law," Villiger said. "That means we have no reason to take action against individual employees." Under Swiss law, tax fraud is a criminal offence, while tax evasion is punishable only with a fine. Villiger did not expect the introduction of an automatic exchange of client data between countries in future. "If Europe took unilateral action to introduce an information exchange and also forced this on Switzerland, money would flow to Asia in a big way," he said.

Switzerland sold its 9 percent stake in UBS, making a solid profit on last year's rescue of its largest bank, the day after the historic agreement with Washington. The buyers were international investors, showing confidence in the bank, Villiger told SonntagsBlick. Serious, systematic tax evasion should not be protected by bank secrecy, said Villiger, but Swiss banks would face increased competition in future as a result of the agreement.

"Swiss banks hid behind bank secrecy for years," said Villiger. "The competition has got bigger with the disappearance of the difference between tax fraud and tax evasion." Switzerland's Foreign Minister, Micheline Calmy-Rey, told SonntagsZeitung that the Swiss state could hand over the data of other clients to U.S. authorities if requested given cases of "tax fraud and the like" as set out in the agreement over UBS. "Accounts would only have to be disclosed in cases that are absolutely of the same kind. That can not be ruled out," she said in the interview.

UBS should pay for the costs of the Swiss government to reach the agreement with the U.S., though the legal basis for doing this still had to be cleared up, she added. "If the Federal Government wants to have the costs reimbursed, then we will do that," Villiger told SonntagsBlick. Villiger was pleased with the progress UBS had made in recent months on key issues like the U.S. tax case and improving its capital base, but said the bank, which booked the biggest loss in Swiss corporate history in 2008, still had a way to go. "The majority of the work is still in front. We have to return to profitability," he said.

Joseph Stiglitz Says Asia's Economies in 'Remarkable' Recovery
Nobel Prize-winning economist Joseph Stiglitz says Asia's economies are on the way to recovery after the most severe downturn in a decade. But he sees the need for greater regulation and monitoring of global financial markets. Joseph Stiglitz says Asia's economies are in a good position to reduce their dependence on exporting goods to the United States and Europe.
Speaking at a conference in Bangkok Friday, Stiglitz said he was upbeat over the economic outlook for the region. After slumping along with most other economies, Asian markets are rallying and some economies are expanding again, aided by government stimulus efforts. He said they should look more to the regional and domestic markets to boost growth.
"Asia's recovery has been remarkable. People are talking about a 'V' shaped recovery," he said. "The big issue that it raises is can Asia decouple from the West - the U.S. and Europe? You have a robust large economy here in Asia and so you have the basis of developing a regional economy."
Stiglitz, who won the Nobel Prize for economics in 2001, said that to protect economies, there needs to be global cooperation in regulating markets. He criticized the management of the U.S. financial system and the deregulation of markets, which he said "brought instability and risk without return." "The crisis is a failure of capitalism, American style. And it shows that the presumptions on which that kind of capitalism was based have not worked," he said. "In my mind it highlights the need for a balanced role of the state - a balance between the market, the state, and NGOs [non-government organizations] and other actors in society."
He also criticized the U.S. government's multibillion dollar rescue of the leading banks. Stiglitz says the rescue packages benefited companies and stock holders, but did little to help average Americans. Stiglitz advocated shifting away from using the dollar as the dominant global reserve currency. He says the dollar is "not a good store of value" given the high public debt and uncertain economic outlook in the U.S.

Thai Prime Minister Abhisit Vejjajiva also addressed the conference, calling for the creation of an international institution to regulate global financial markets. He said that emerging economies should have a greater voice in multilateral financial institutions such as the World Bank. The Thai economy is facing a contraction of three to four percent this year. But Mr. Abhisit says the outlook will improve later in the year.

Stiglitz Receives Hero’s Welcome in Bangkok
Joseph Stiglitz may just be the most popular Western economics professor in Thailand. On Friday, Stiglitz, a Nobel-prize winning economist who teaches at Columbia University, addressed an enthusiastic crowd of businesspeople at a conference in Bangkok about the failures of American-style capitalism. “The misallocation of capital over the last 10 years by the private sector is greater than anything done by any government,” the 66-year-old Stiglitz said. And the Obama administration’s policies to cope with the financial crisis are only making things worse, he said: “I call it socializing losses and privatizing gains.”

In comments that spilled well over his scheduled time slot, Stiglitz burnished his reputation for being undiplomatic with a few shots at former Fed chairman Alan Greenspan, who called the banking and housing crisis a “once-in-a-century credit tsunami.” “This crisis was man-made,” Stiglitz said. “It didn’t just happen.” He also dismissed Greenspan’s past assertions that there’s nothing he could have done to prevent a bubble in the housing market as “nonsense.”

Stiglitz’s fandom here love him largely for the way he wielded his sharp tongue eleven years ago in the midst of the Asian financial crisis, which began when Thailand effectively devalued the baht on July 2, 1997. Stiglitz was a member of the Washington establishment who challenged that establishment’s own remedies for coping with the Asian crisis. As chief economist at the World Bank, he openly criticized its sister organization the International Monetary Fund and the U.S. Treasury Department for worsening Asia’s problems by opposing government stimulus spending (how times have changed) and advocating high interest rates to restore confidence in Asia’s battered currencies. He was dismissed in early 2000, a year before winning the Nobel prize.

On Friday, Stiglitz took another contrarian stance by supporting suggestions earlier this year from China’s top cental banker, Zhou Xiaochuan, that the global reserve system needs an overhaul to avoid overdependence on the dollar. The Obama admistration, eager to avoid exacerbating speculation about the dollar’s stability, has given the Chinese comments a cool reception. “It is odd for the global financial system to be so depedent on the vagaries of one economy,” Stiglitz said, adding he was hopeful that “with the support of China,” an orderly approach to revising that system over the long term was possible.

Blow to UK Chancellor Alistair Darling as tax take falls 20%
The tax take has collapsed by 20% on last year — three times as much as Alistair Darling, the chancellor, forecast in this year’s budget. Official figures show that revenue raised from businesses has fallen dramatically, with last month’s corporation tax receipts sinking to £6.1 billion — 38% down on the same time last year. Meanwhile, the Treasury’s Vat take during July plunged 34%, from £10.5 billion last year to £6.9 billion, a collapse only partly explained by the government’s decision to cut the sales tax by 2.5% last year.

The collapsing revenues come amid conflicting signals on the health of the global economy. Home sales in America jumped at the fastest rate in 10 years in July, according to figures released last Friday by the National Association of Realtors. The news spurred rallies in share prices worldwide. The FTSE 100 index, which has soared almost 40% since its low point in March, closed at a 10-month high of 4,850 last week. Some fund managers believe that it could break through the psychologically important 5,000 level this week. The Dow Jones Industrial Average ended the week up 184.56 points, or 1.67%, at 9,505 — its highest point this year and a rise of 45% from March.

The housing news came as central bankers meeting at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, expressed cautiously optimistic views on the global economy. Ben Bernanke, the Fed’s chairman, told the meeting: “After contracting sharply over the past year, economic activity appears to be levelling out, both in the US and abroad, and the prospects for a return to growth in the next year appear good.” Forthcoming UK figures may show that the economy performed slightly better than initially expected in the second quarter. Some economists believe revised figures due on Friday will show it shrinking by 0.7%, rather than the 0.8% that was originally estimated.

Gerard Lyons, chief economist at Standard Chartered, said: “Even with a small upward revision, the data will confirm the economy was hit very hard in the first half of the year, justifying fully the policy stimulus that has taken place.” With unemployment widely expected to rise into next year, revenue from income tax and National Insurance is forecast to fall this year. Income-tax receipts fell to £15 billion last month, down from £17.6 billion in July 2008.

Ross Walker, chief economist at Royal Bank of Scotland, described the state of the public finances as “horrible”. In all, the total core tax take was £39.5 billion in July — down from £49.4 billion last year. The collapse in receipts will strengthen calls for urgent cuts to public spending and rises in taxes. The Institute for Fiscal Studies said that forecasts published alongside the budget showed that the Treasury expected its tax take to fall by 7.5% in 2009-10.

Native Americans to join London climate camp protest over tar sands
Native Americans are to join the Climate Camp protests in the City of London this week in an attempt to draw attention to corporate Britain's "criminal" involvement in the tar sands of Canada.
Five representatives from the Cree First Nations are coming to co-ordinate their campaign against key players in the carbon-heavy energy sector with British environmentalists. Eriel Tchekwie Deranger, from Fort Chipewyan, a centre of Alberta's tar sands schemes, said: "British companies such as BP and Royal Bank of Scotland in partnership with dozens of other companies are driving this project, which is having such devastating effects on our environment and communities.

"It is destroying the ancient boreal forest, spreading open-pit mining across our territories, contaminating our food and water with toxins, disrupting local wildlife and threatening our way of life," she said. It showed British companies were complicit in "the biggest environmental crime on the planet" and yet very few people in Britain even knew it was happening, said Deranger. She was speaking ahead of an annual Climate Camp that will be held for one week somewhere in Greater London from this Thursday. The exact site of the camp has not been revealed as green organisers are worried that the police might move to thwart their plans if they are notified in advance.

BP and Shell are two of the major oil companies extracting oil from the tar sands. The thick and sticky oil can only be removed from the sands by using a lot of water and power as well as producing far heavier CO2 emissions. RBS, now partly owned by the British government after its financial rescue, is also a target of environmentalists and aboriginals because it is seen as a major funder of such schemes.

The Climate Camp concept started with a protest outside the Drax coal-fired power station in North Yorkshire and was followed up by similar protests at Heathrow – against the proposed third runway – and Kingsnorth in Kent, where E.ON wants to construct a new coal-fired power station. There was also a Climate Camp in April at Bishopsgate inside the City of London, which became linked with bad policing after a bystander died following a clash with a constable.

The tar sands are seen by many as a particularly dangerous project providing enough carbon to be released in total to tip the world into unstoppable climate change. Shell was the first major European oil company to invest in the Canadian-based operations but BP followed under its chief executive, Tony Hayward. The oil companies both dispute the amount of pollution caused by tar sands and insist they must be exploited if the world is not going to run out of oil.

But George Poitras, a former chief of the Mikisew Cree First Nation, said the so-called heavy oil schemes were violating treaty rights and putting the lives of locals at risk. He said: "We are seeing a terrifyingly high rate of cancer in Fort Chipewyan, where I live. We are convinced these cancers are linked to the tar sands development on our doorstep."

Fury at plan to power EU homes from Congo dam
Plans to link Europe to what would be the world's biggest hydroelectric dam project in the volatile Democratic Republic of Congo have sparked fierce controversy. The Grand Inga dam, which has received initial support from the World Bank, would cost $80bn (£48bn). At 40,000MW, it has more than twice the generation capacity of the giant Three Gorges dam in China and would be equivalent to the entire generation capacity of South Africa.

Grand Inga will involve transmission cables linking South Africa and countries in west Africa including Nigeria. A cable would also run through the Sahara to Egypt. But controversially, it is understood that part of the feasibility study for the Grand Inga project would see the scheme extended to supply power to southern Europe, at a time when less than 30% of Africans have access to electricity - a figure that can fall to less than 10% in many countries.

Extending the scheme to Europe is part of a recent trend that includes the ambitious €400bn (£345bn) Desertec plan to take solar power from the Sahara to southern Europe. And last month Nigeria, Niger and Algeria, with the backing of the European Union, signed a $12bn agreement to transport Nigerian gas through a pipeline to Europe. "Under the guise of bringing power to poor Africans, development banks are looking to put tens of billions of public money into a flight of fantasy that would only benefit huge Western multinationals and quite possibly feed African energy into European households," said Anders Lustgarten of the Bretton Woods Project, which scrutinises the World Bank and IMF.

The scheme on the Congo river won support from World Bank president Robert Zoellick on a tour of the facility two weeks ago. Its progress is being keenly watched by a host of international power companies and infrastructure banks. World Bank officials concede there is concern that a project that has the potential to bring electricity to 500 million African homes might have some of its power diverted to Europe. But the Grand Inga project may hinge on the capacity to export energy to richer markets to ensure it receives financing from banks. "We need creditworthy anchor customers to subscribe so investment can go ahead," said Vijay Iyer, sector manager of the Africa energy group at the World Bank.

Grand Inga would be the final part of a three-phase project, the first of which is under way. That involves refurbishing a hydroelectric plant dating to 1972 that has fallen into disrepair due to the instability caused by Congo's civil war. The first phase will involve restoring power supply to South Africa and a host of neighbouring countries. The second 4,300MW phase is to power the Katanga mining region of the DRC, with a substantial amount of electricity distributed via cable to other African nations. FTSE 100 mining giant BHP Billiton is in negotiations about funding a feasibility study with the DRC government.

The more ambitious Grand Inga phase requires a new dam and a reservoir. The African Development Bank and the World Bank are working up plans for the scheme along with the World Energy Council. Plans will take five years to finalise, with construction taking another 10 years at least after that.


Erin Winthrope said...

Re: The doors to early withdrawal from your IRA/401K are closing.

Today, the NYTimes published an editorial recommending alterations to laws regulating tax-defered retirement investment vehicles like the 401K, 403b, IRA, etc.

Long ago, Stoneleigh warned readers to take the 10% penalty and cash-out any IRA or orphaned 401K. She argued that as we slid deeper into deflation, and a major collapse in financial markets drew closer, routes to escape from the financial mayhem would be closed to small investors.

The moment Stoneleigh warned about is obviously drawing closer, and we can now clearly see that regulatory authorities are planning to erect the barricades.

Please pay attention to this key quote from the editorial:

"Pre-retirement payouts from 401(k)’s and universal I.R.A.’s should be discouraged"

You read that correctly folks. The early withdrawal option will soon be nixed. When a statement like the one above appears in the NYTimes editorial page, you can rest assured that lobbyists have already written the legislation to enact it. All that remains is the appropriate timing for politicians to enact the change.
About Your 401(k)

Why is the government doing this? As I wrote a few days ago, the FEDs know that the equity market will soon decline substantially (at anytime in the next 6 months). The FEDs are hoping for a controlled decline, not a cascade. A cascade will have ugly political implications. Blocking the exits to small investors is one of the tools at their disposal to attempt to slow the fall. I wouldn't bet on success.

el gallinazo said...

Thanks for the heads up, Ed. Passed it on to all my contacts.

el gallinazo said...


It's not just the 10% under 60.5 penalty. I have friends over that age who don't want to take the lump sum tax hit. Wonder how they intend to limit the 60.5+ crowd.

el gallinazo said...


OTOH, I advise friends with equity and ETF positions in IRA's. They are just as free and liquid to sell these equities as if they weren't in an IRA. So how would a withdrawal prohibition halt a stampede from equities? AFAIK, the only thing you can't do inside an IRA is put cash in your checking account or mattress.

Of course, unorphaned 401-k's are another story.

John Hemingway said...

Great video, Ilargi. "Money as Debt II" really is something that everyone should see.

Anonymous said...

I have been reading this site since last September due to a tip off and this is my first post. The video has compelled me to comment.

I mostly learned this material the long, hard way through the likes of Professor Fekete's writings, particularly his early lectures on money and banking. These videos put it all in one easy to understand format. I have been telling everyone that will listen for about three years the difference between physical notes and electronic credits and that typical bank depositors are actually creditors! It even touches on the foolish notion of perpetual growth and its importance to our current monetary system that I have only picked up on in the last year or so.

I am not a conspiracy prone "bug", just someone that wants to live a simple sustainable life. Many years ago I learned that if one has materialistic tendancies, they are merely enriching their employer by working harder, the bank through borrowing and the government through taxation. You have to get past all three just to get something yourself. The more you desire, the harder you must work at the expense of your quality of life.

Love the material presented at this site. It is not reason for doom and gloom, rather trying to understand and confront reality and adapt the best we can. Most people cannot accept the change that is coming and refuse to consider the notion.

Keep up the good work.

Lone Ranger

PS. All the Poms might have something to brag about if they could actually win a series down here. Back in the 80's the West Indies used to come down here and belt us consistently...

Jim R said...

Of course, unorphaned 401-k's are another story.

Yeah, that's what I have. It's a tough decision for a multidecade cubicle rat to just up-and-quit, but I'm wondering if I shouldn't do just that to claim ownership of it.

Anonymous said...

I am a retirement plan attorney and there are a lot of things to worry about other than not being able to take premature 401(k) plan distributions. There is no discussion of this idea on anyone's radar that deals with these issues professionally.

Right now, so many people are using these distributions as a lifeline that the IRS is happily collecting that 10% + the income tax on the distribution. Closing that window would do no good to anyone, including TPTB.

Worry about something else. Really. There are so many other things to be legitimately concerned about.

The people who write these retirement plan articles usually know about as much about retirement plans as a few days of research can tell them (which is not much).

rapier said...

The NY Times editorial on tax advantaged retirement accounts represents the vast differences in world views that is simply impossible to bridge.

From the perspective of those who are skeptics of the current order IRA's and 401's and the like are seen as primarily a subsidy to the stock market. The article reliably calls them "savings" accounts and so infers stocks are 'savings'. Stocks are a speculative investment of course but that's just my reality. There is no possible way to bring most people to accept that view. Despite the fact that balances in such accounts are down 25%. (said balances being down are certainly mostly lower because of falling prices, but not entirely. Withdrawls played a part.)

Since the stock indexes are essentially where they were a decade ago and stocks pay precious few dividends I think it's a fair deduction to say money under a mattress was every bit as good a tax advantaged 'savings' account for most. This assertion is sure to make the heads of the NY Times editors and virtually every person within two degrees of separation of our elites explode. A library full of books making my case would not change a single mind.

So where do you put your money? Well to play the skeptic again the MaD story suggests for the most part there is no such thing as your money.

Unlike many skeptics I am not a gold bug or one who holds that money is somehow sacred or can possibly made immutable. Money is complex abstraction, which has just gotten ever more complex over the centuries. Especially the last one. It's a game we all agree to partake in.

There is an irony in the fact that the real winners, the very wealthy, who the NY Times editors are or represent, are aware at a deeper level than most about the game aspect of money, prices and so called values. Yet they are the ones who most strongly defend the existential necessity of maintaining the money illusions.

I don't have any proposal to 'fix' the system. Just saying.

Jim R said...


It's a medium of exchange1!!! No, it's a store of value! By the time we are talking trillions, it's an almost meaningless abstract concept. But of course, so is the idea that shiny things have intrinsic value because of their shininess.

It can leap tall buildings -- stack a trillion or so and we can have a space elevator ;-)

But thanks again, I&S for the clear eyed exploration of the mythology of money.

Anonymous said...

I purchased 10 copies of Paul's DVD's and am going to give them as gifts to "important" folks in my town---the town in which I serve on the Finance committee.

IMO, it is critical that we help the naysayers and serial cognitive-dissonance types to in the very least understand that these are very heady times, and that simply putting ones head in the sand will no longer do.

Unknown said...

Garth Turner's post from this Sunday follows some American bloggers predicting that the Bank of Montreal might take a big on Tuesday's quarterly earnings report, possibly starting a bank run. He suggests that the earnings hit will probably happen (has to eventually, and that I agree with) but that it probably won't be severe enough, in the current heady Canadian atmosphere, to cause a run. I'm not sure what to think myself, since *unexpected* hits and fast crashes are pretty much what we can count on these days. I guess we'll see tomorrow...

I have some money in BMO myself, although most of my savings has been spread around elsewhere. Most of what's in BMO is stuff that was locked in to GICs or Canada bonds farther back in the past, incl. my RRSPs. Not sure whether to pull out my remaining bit of free cash before tomorrow. Probably should.

Stoneleigh said...

Ed Gorey,

The FEDs are hoping for a controlled decline, not a cascade. A cascade will have ugly political implications. Blocking the exits to small investors is one of the tools at their disposal to attempt to slow the fall. I wouldn't bet on success.

Agreed again. The little guy will find more and more doors closed. At first it will be lost opportunities to profit from knowledge or foresight. Later it will be worse - fewer and fewer opportunities available even to make a living or keep one's head above water.

When an institutional framework fails, as ours is going to, societies are reduced to the politics of the personal. That amounts to a naked power grab where connections are everything. There will be the tightly connected, the loosely connected, the unconnected and the unfree.

The unfree will be those whose forced labour will compensate for the loss of our ubiquitous energy slaves. Current debt slavery is one likely route to the ranks of the unfree.

If you are unconnected you will have to make your own way in the world, against a significant headwind if you are within reach of central power. Initially we should see a chaotic phase, but once that is over, and we move towards stronger and much more repressive central control, the elites will be trying to compensate for the loss of the fruits of globalization by squeezing domestic populations harder. Your role will then be to try to keep body and soul together while also trying to produce a surplus for the elite to cream off. Such tithes are not optional, so any shortfall comes from the individuals own share. This happened in Rome, where peasants abandoned their land as they could not meet the increasing demands of the centre.

If you are tightly connected you may find yourself in an inner circle where no one actually trusts each other, where loyalties are often for show and almost everyone is vying for power or influence. You would never know whom to trust, and so probably could trust no one, even your own family. (For an example of what this could be like, see the BBC dramatization I, Claudius about just such machinations in Roman imperial times. I imagine Saddam Hussein's court might have been similar.)

Being loosely connected might be the best bet if you can manage it. There would be some benefits, but not enough power to make you a target.

Ilargi said...


This, from Daily Reckoning is the source. The text I bolded makes it pretty obvious.

The Biggest Banking Lie of the Past 64 Years - Uncovered

"Don't forget: on this coming Monday, August 24, at High Noon, Strategic Short Report's Dan Amoss is going to uncover the next major bank stock set to crash. If you'll recall, Dan also called Lehman's bankruptcy five months before it occurred (and led readers to as much as $200,000 in gains.)

Now he's pinpointed another major bank, with a 192 year-old history and 37,000 employees, whose crash is going to hit shareholders like an A- bomb.

This bank made risky loans to people who, unfortunately, are losing their jobs quickly...without jobs, these people won't be able to pay the bank back. The bank management is using accounting tricks to hide these losses from their shareholders, while some of the same executives even appear to be quietly dumping their own shares at peak prices...

They can't hide it forever...and for investors with their ear to the ground, this means an opportunity to triple your money, as a whole new wave of downside profit opportunities emerges."

Obviously, if true, this would stir a few bottles. You have 2 hours left to prepare.

Shib said...

yes thanks for the heads up. I was under the impression that we had a couple of years (or at least one) before this would happen. I suppose that if this is published in the NYT it is a warning that the laws could be changed in the not too distant future.

Stoneleigh said...


So where do you put your money? Well to play the skeptic again the MaD story suggests for the most part there is no such thing as your money.

Very true. Most people just don't realize that yet.

Money is complex abstraction, which has just gotten ever more complex over the centuries. Especially the last one. It's a game we all agree to partake in.

My favourite book on this (not one which explains it, but one which makes people think about what constitutes money and value) is Boggs: A Comedy of Values by Lawrence Weschler.

JSG Boggs is an artist who makes his living by drawing bank notes and quite openly using them to purchase things. He doesn't make them exact copies - after all, they are art, not money - and the people who accept them as payment know perfectly well that they are not actually money. They only have value because the people who accept them as money believe that they do. Generally they are right, as these works of art have usually ended up being worth much more than their face value.

Boggs later offers to buy back the notes for real money, so that he can create a larger work of art with the note and what he bought for it. These are worth much more than the notes. People don't always want to sell the notes back though.

I have two favourite stories from the book. The first was the time that Boggs paid for his dinner in a restaurant with one of his hand-drawn bills - the waiter accepted it and offered Boggs a drawing of his change, which Boggs happily accepted. The second relates to the court case against Boggs for counterfitting. Boggs intended to pay his legal bills by drawing eight $100,000 bills, which his lawyer would accept as payment ;)

scandia said...

A language the realm of finance what does " secular " describe?
I am familar only with the secular as opposed to religious usage.

Anonymous said...

@Lone Ranger:
"Closing that window would do no good to anyone, including TPTB"

I have to disagree. TPTB are eyeing that money, to force it into buying Treasures. I think that has a lot of value to them.

All they have to do is to put in a 100% early withdrawl penalty, and limit where you can put that money.

@Ed_Gorey: It's a 40% penalty, when you add in the taxes. If it was only a 10% penalty, I'd take my money out now.

Also, regarding doors closing, here's another little snippet. One of the very few banks in our area which is rated 4-starts has stopped taking deposits! Not only are they not taking new accounts, but they are also preventing people from adding to existing accounts.

Prechter and Stoneleigh called this one quite right.

Anonymous said...

Speaking of videos, has anyone seen this parody using a clip with Hitler as the real estate investor? Good for a laugh.

VK said...

@ Canadians

Now he's pinpointed another major bank, with a 192 year-old history and 37,000 employees, whose crash is going to hit shareholders like an A- bomb.

Isn't that the Bank of Montreal? Also known as BMO Financial Group.

bluebird said...

Anonymous said @ 10:59 "It's a 40% penalty, when you add in the taxes. If it was only a 10% penalty, I'd take my money out now."

But isn't getting 60% better than 0 if you wait.

Ilargi said...


That is the idea. You didn't read rumor at 9:47.

VK said...

Hello Ilargi,

You didn't read rumor at 9:47

Flew right past!

It's funny that a Canadian Bank can fail. I wonder what a certain Central Bank Economist would make of this? 11% growth coming soon to a town near you! :p

VK said...

Less Vegas! Joel Stein is out to take revenge on Las Vegas.,8599,1915962,00.html

After two decades as one of the fastest-growing metropolises in the U.S., Las Vegas has seen its population growth flatten. It's got the highest foreclosure rate of any major metro area, and the unemployment rate jumped from 3.8% to 12.3% in just three years


But I'm here because Las Vegas is on sale. The hotels, led by Wynn Resorts boss Steve Wynn, slashed room prices to increase occupancy rates to 82% from a low of 72%. On the right day in July, you could book the type of 750-sq.-ft. room that was $500 a year ago at the Wynn for $109 and get a $50 gift certificate. The high-end restaurants at the MGM have gotten rid of most of their $400 bottles of wine and replaced them with $100 ones. This is either a model for the rest of the country or, if the reset fails, the beginning of a long, long slide.

Vegas was in the midst of building a real urban center, trying to turn what was just a break from sanity — fake Eiffel Tower! giant dancing fountain! a dance in every lap! — into a permanent installation of insanity. If we decide that we don't need a resort town that's roughly the same size as Washington, D.C. (which Las Vegas is) — that we can't continue to devote as many resources to gambling, tasting menus, spas, strip joints and nightclubs as we do to our national government — then we finally revert from being a nation of optimistic materialism to one of Puritan thrift. The one that not even Cotton Mather could get Americans to buy.

Ilargi said...

Anon 10:59

What the state intends to do with the funds is, in my view, less interesting. Fact is that they are in dire need of money, and 401k's and other pension-related provisions are among the rare sources of actual capital left in the country.

Ironically, one of the others isn't even in the country: capital invested abroad by US citizens. The hunt for UBS accounts speaks volumes in that regard. Expect much more of the same.

There are people who claim that this means a default is much less likely, and that bond sales will get a boost. Me, I'm not so sure, the entire chase smacks a little too much of desperation.

Once these sources are burned, you're really pretty much staring at the bottom of an empty barrel. And that is something people might clue in on at high speed.

Obviously, down the line it'll all go the way of Social Security and, as explained in Money as Debt, ordinary bank deposits. There'll be nothing left anywhere but promises to pay, and nothing to make good on those promises.

Erin Winthrope said...

@ Anonymous 10:59 AM

"@Ed_Gorey: It's a 40% penalty, when you add in the taxes. If it was only a 10% penalty, I'd take my money out now."

My reply: It's not a 40% penalty. You pay the taxes regardless of whether you take the money out now or when you're 60 something. The only penalty is for early withdrawal.

Here's something else to think about. Even if you assumed that the world-as-we-know-it could somehow hold itself together until your retirement (a virtual impossibility), I can guarantee you that tax rates would be much more burdensome than they are now. So the longer you wait, the more you lose.

Anonymous said...

So, if I pull my money out of my IRA, where on Earth am I supposed to park it?

Anonymous said...

Initially we should see a chaotic phase, but once that is over, and we move towards stronger and much more repressive central control, the elites will be trying to compensate for the loss of the fruits of globalization by squeezing domestic populations harder.

"We" as in the collective whole? I think not. Your assumption that central power will retain its ability to effectively control anything after the "institutional framework fails" is flawed. If your prophetic scenario is predicated on an extended elitist retention of power, I think you may surprised by future developments.

Ilargi said...


"If we decide that we don't need a resort town that's roughly the same size as Washington, D.C. (which Las Vegas is) ......."

That's a great line that got me thinking beyond what the author meant. Something like: we already have a resort town that size. Fake Eiffel Tower or real Pentagon? Which is more worthy of a visit? Come stay in Cheney's basement this fall, half price for the whole family. See Bernanke gamble away a $100 billion a day, guaranteed. No reservations required.

Ilargi said...

" Your assumption that central power will retain its ability to effectively control anything after the "institutional framework fails" is flawed."

Your statement means little when presented this way, without explaining why you think it is flawed. And if you think that a scenario [..] predicated on an extended elitist retention of power is unlikely, try one based on a greatly increased elitist retention of power.

scandia said...

@ Ilargi, Your title, " Promises Unleashed " brought to mind another American phrase, " Promise Keepers". The Promise Keepers must be conflicted by the Obama administration?
@ rumour, I responded to the rumours about BMO by making a few calls. The response from all was that I really should stop reading bloggers.
I can see my viseral panic response arises from lack of transparency. As nobody knows anything goes.

Anonymous said...

Ed Gorey, thank you for mentioning the NYT editorial. Yes, I recall Stoneleigh mentioning several times during the past year to cash-out of any IRA.

Erin Winthrope said...

@ Anon 11:53 AM

"So, if I pull my money out of my IRA, where on Earth am I supposed to park it?"

My Reply: Read the primer entry "How to Build a Lifeboat." It has everything you need to know.

How to Build a Lifeboat

Anonymous said...

Ed Gorey said:
"You pay the taxes regardless of whether you take the money out now or when you're 60 something."

Yes, but the point is that (with the current structure) my taxes are/were going to be very small when I took it out.

For me it's a 40% hit. For many others too. As for the future, it's impossible to say precisely. But the odds are that the changes will mean little for myself.

For others, it may be significant. I'll believe it when Congress starts taking action, and move before they do.


Yes, preserving 60% is better than not having anything to preserve. Show me the money though. While I take this talk seriously, I'll believe it when Congress gets to changing the tax code.

That assumes that this can't be done by Presidential of Treasury fiat. I think they need to bring in Congress to take some of the political heat.

Stoneleigh said...

Anon @11:54,

Your assumption that central power will retain its ability to effectively control anything after the "institutional framework fails" is flawed. If your prophetic scenario is predicated on an extended elitist retention of power, I think you may surprised by future developments.

The beggaring of the masses will free up resources that the elite will use to engage in repression IMO. The same thing happened during the fall of Rome under Diocletian - a move towards increasingly onerous taxation and repression bought the empire quite a bit of time, at the expense of its subjects (ie the centre redoubled its efforts to suck wealth out of the periphery, and it worked for a while, until the burden became so onerous as to drive the peasants off their land entirely, so that there were no surpluses to purloin). Tainter explains this very well in The Collapse of Complex Societies.

Anonymous said...

Your statement means little when presented this way, without explaining why you think it is flawed.

There's more going on here than just a global collapse of fractional reserve banking. We've all been living as slaves in the Dark Ages, and the days of cabals and the power elite are coming to an and. Despite TPTB's initial attempts to quell an uprising, a new Renaissance of thought will soon emerge, and reach critical mass. The battle isn't against the elite themselves, it's against their way of thinking.

bluebird said...

Anonymous @ 12:16. While I have no idea what your IRA/401(k) is invested in, what if there is a market crash and the value of your investments turn much lower? What if the brokerage firm that handles your IRA/401(k) goes bankrupt? What if the FDIC is unable to insure everyone's accounts including IRA certificate of deposit?

FWIW, spouse and I have same concerns. We're withdrawing half this year, and half early next year.

Stoneleigh said...

Anon @12:36,

Despite TPTB's initial attempts to quell an uprising, a new Renaissance of thought will soon emerge, and reach critical mass.

I don't doubt that there eventually be revolutions, but I don't think that will happen soon. People are going to be subjected to the Shock Doctrine, and many will be far too traumatized to take up pitchforks. Citizens in the developed world have so far to fall. They'll be too busy worrying about where their next meal is coming from to take up pitchforks. The next generation - raised on hardship, risk and opportunism, used to violence and with nothing to lose - will be much more inclined to do so than their soft parents IMO.

The last time a large bubble burst (the South Sea Bubble in the UK and the Banque Nationale in France in the 1720s), the upheaval lasted for decades and culminated in a spate of revolutions in the late 1700s. This time it could happen more quickly, as the fall will be much greater, but I still don't think it's an imminent threat to TPTB.

I certainly don't see a new Renaissance on the way - more like a new Dark Ages. The Renaissance was a product of rising social mood over a long period of time. We are now about to experience a sharp move in the other direction, and we are not going to like it. The dark side of human nature, which emerges during periods of negative social mood, is something most of us in developed countries have little experience with.

John Hemingway said...

@ Stoneleigh,
You know, I'd say that the "dark side" is already here. People keep asking when this is going to happen and I say, it's already happening. It started a long time ago (the end of the 70's?, after WWII?). Democracy is dead in the USA and in most other industrialized countries. All we have now is the façade of democracy and maybe the big change now is that TPTB will finally throw away the mask.

Ilargi said...

TPTB is a meaningless term unless you define precisely who you think of when using it. That definition, when not provided, will remain so different and opaque for everyone that it is rendered obsolete. I simply never use it.

Anonymous said...


Thanks for your concern. I pulled my money out of the stock market before the crash, after I discovered TAE.

So, technically a 40% loss is a wash after a crash.

I'm not concerned about myself. But rather for the less knowledgeable readers here. I can just see one pulling out their money, and getting surprised by a big tax bill. They'd end up blaming TAE, even though I&S had nothing to do with it.

It's incumbent upon all of us here to report accurate information, so that people will continue to take TAE seriously.

John Hemingway said...

TPTB = the financial oligarchy that runs the USA, along with the Military/industrial/intelligence complex, and I'll throw in the Free-masons for good measure;-)

Stoneleigh said...

John Hemingway,

Democracy is dead in the USA and in most other industrialized countries. All we have now is the façade of democracy and maybe the big change now is that TPTB will finally throw away the mask.

Indeed. Our political structures have been bought. While time were good, no one much cared. Now as we move into hard times, the fait accompli capture of our governing institutions will be much more obvious, as will the consequences.

Government power is no panacea. In good times people think of it in terms of public service, but in bad times centralized powers are always abused for the benefit of the elite. Powers grabbed by the centre, which may be willingly granted to them by a frightened populace desperate for security or a hungry one clamouring for rationing, are never relinquished voluntarily. Even if they are not abused by those who obtained them (which is doubtful), they will be by their successors.

John Hemingway said...

@ Stoneleigh,
You're right, of course. Just look at Obama. None of the powers that W usurped for the Imperial Presidency have been returned to the people by our new knight in shining white armor.

Perhaps I should take your cue and get a guard dog. We're in for troubled times. I've got a collie and he barks enough, but how could anyone ever be afraid of Lassie?;-)

Ilargi said...

Mr. Hemingway:

"TPTB = the financial oligarchy that runs the USA, along with the Military/industrial/intelligence complex, and I'll throw in the Free-masons for good measure;-)"

That's just what I mean: how ill-defined would you like it? Is Obama among them? W43? If you say yes, that means you think they have actual power?

Your definition potentially includes tens of thousands of people. And that doesn't fly with me.

My definition says true power doesn't rhyme with visibility.

But that wasn't my issue: it's the opaqueness of the term, which allows everyone to throw in their own personal favorite evil-doers. Meaningless follows soon thereafter.

Stoneleigh said...

John Hemingway,

Perhaps I should take your cue and get a guard dog. We're in for troubled times. I've got a collie and he barks enough, but how could anyone ever be afraid of Lassie?;-)

We have a pack of huskies (for transportation, not guard duties) and a kuvasz. I'd like to add one or two more kuvaszok to protect us and our livestock. My kitchen furniture will suffer some more (it's been comprehensively teethed on by our puppy), but I think it'll be worth it.

Although dogs have their vulnerabilities and are no guarantee of security, I still think having them around is a good starting point. At eight months, Else is already a formidable animal.

Concerned said...


What do you think will happen in the major cities of the USA (NYC, DC, SF)? Especially those with mass transit, and excluding those that are more spread out and suburbian (Miami, LA, Atlanta, etc.). Do you see a decline in infrastructure in those places? What about civil unrest? How will people fare in these cities in comparison to other locales in the United States?

Erin Winthrope said...

@ Anonymous 1:23 PM

Anonymous said:
"I can just see one pulling out their money, and getting surprised by a big tax bill......It's incumbent upon all of us here to report accurate information"

My reply: Nothing inaccurate has been reported. How could anyone be surprised by getting a tax bill? Does anyone think they're getting that 401K money scot-free? If so, they deserve the surprise for being so clueless. I would hope that most folks have already gotten accustomed to mentally reducing their "retirement savings" by 30-40% relative the the number reported in monthly statements. After all, that is the true amount one could hope to collect after taxes.

John Hemingway said...

Mr. Ilargi,

Then perhaps we should call TPTB, il potere. or el poder, or "the mysterious ones who are never seen and yet who seem to impact on everything we do", TMOWANSAYWSTIOEWD?

thethirdcoast said...

So I'm 31, it took me a few years to wake up, and as a result I now have about $50k parked in the money market/stable bond options offered by my 401k plan.

My question is, how difficult will it be for me to retrieve a portion of this money?

Do I just call the 401k firm and ask them to send me a check, or can I expect to spend hours on the phone getting told "the market always comes back!" by some sales droid before hanging up in frustration?

Prime said...

Stoneleigh I have a hypothetical for you. Suppose the government were to somehow begin to respect the rule of law and allow all of the bad debt to default. We go into a depression for sure, but do you think we can avoid some of the darker outcomes you are predicting?

Erin Winthrope said...

@ thethirdcoast

Most of the time, your 401K money is locked-up for as long as you remain employed by the firm providing the 401K plan. If you lose your job or change employers, then your 401K plan becomes orphaned. At the present time, you can leave the orphaned 401K plan alone, you can roll it over into the 401K plan provided by your new employer, or you can cash-out. Obviously, the government prefers that you don't cash-out (thus the 10% early withdrawal penalty).

Anonymous said...

Ed Gorey said:

"If so, they deserve the surprise for being so clueless."

I prefer to help the clueless by trying to provide as much information as possible. You might consider it worthwhile to do the same.

Anonymous said...

Youze guys are so far down your deep dark holes of impending doom you've forgotten to smell the flowers (or even what they look like).

Diocletan...? A dictator almost two millenia ago and he is a model for the "coming dark age"? I guess Ramses and Moses are relevant as well? How about the Shoganate of Japan or Hannibal and his elephants even?

Do you guys realize just how far out there you've traveled? I mean we're talking gone folks! Utterly departed down paths of mental constructs whose relevance and correctness with future reality is a turkey shoot lottery with odds in the trillions.

Earth people. We live here on earth. Dirt. Feet. Ground. Time for our two Major Toms to head back home...

Erin Winthrope said...
This comment has been removed by the author.
Unknown said...

I really think Anon @2:23's substanceless cries need to be taken into account. Nothing that happened far enough in the past has any relevance to today. We entered a new paradigm in the 80s, people. History is clearly not useful anymore.

(Sorry, I couldn't resist. Every once in a while, I need to snark a bit.)

Erin Winthrope said...

@ 2:23 PM

"I prefer to help the clueless by trying to provide as much information as possible. You might consider it worthwhile to do the same."

My comment: You're right, the more details the better. Sorry for being short-tempered. Not enough sleep.

Anonymous said...

"TPTB = the financial oligarchy that runs the USA, along with the Military/industrial/intelligence complex, and I'll throw in the Free-masons for good measure;-)"

How is this power organized and wielded? Is it like the "blue-room" X-files "cabals" with explicit plotting?

It would seem to me more likely that upper income levels of society, in aggregate, have a different set of priorities and tools to exert influence, and, in aggregate, exert pressure through lobbying, advertising, controlling what news stories their news outlets emphasise, what academic-fashion and social science research groups are funded, etc. ("intellectual fashion" has always annoyed me. It seems to be be the best way to keep the chattering class in line, but I have sometimes wondered if the fashionable buzzwords have just evolved naturally or been planted, like "the new global economic reality", etc of recent decades)

Maybe it is a combination of aggregate actions on the large scale, with some "cabal" activity in specific political/military ventures?

el gallinazo said...


TPTB is simply a shorthand for the political, police, and military power of the financial elites and their executive meat puppets. Black holes are also invisible, but they can be evaluated by their gravitational and X-ray effects. So can the sum vectors of TPTB by their political effects.

Case in point. Letters to Congress ran 100 to 1 against the bank bailout TARP, yet it passed. Wonder were the "hidden" gravity was?


Secular- Economics (of a fluctuation or trend) occurring or persisting over an indefinitely long period : there is evidence that the slump is not cyclical but secular.

To anyone, particularly Stoneleigh:

Would someone explain to me why it would be beneficial to the financial elites to prohibit or curtail the withdrawal of tax deferred funds? I really don't get it. Please be specific both in the kind of regulations you might see coming and how they would benefit the elites.

Anonymous said...

I posted the earlier comment about the government having no interest in restricting early 401(k) plan withdrawals.

Don't misunderstand me, I'm as big a doomer as many of you (I'm a moderator on one of the finest doomer sites on the, but there is currently simply no discussion whatsoever about restricting 401(k) withdrawals in Congress or the administration. Nothing. Zero. Please remember that before you take a 40% haircut on many years of savings attempting to elude something that isn't there.

Hard times to come, no doubt. Put your 401(k) money into the stable value fund within the plan (which is actually pretty secure), but think long and hard before taking an early distribution because you think the sky is about to fall.

There are MANY options to explore, including an IRA that holds physical gold with a custodian (Google it).

I'm speaking from experience when I say that I have seen MANY well meaning doomers do unwise things in the heat of fear that they later regret.

Think it through, explore all of your options, educate yourself, and THEN act. Most of what people are saying here about retirement plan issues is dangerous noise from novices who are not providing advice from a deep level of expertise in this topic (no offense to the novices).

I have many legitimate concerns about the U.S. retirement system at all levels, but early 401(k) withdrawals doesn't happen to be one of them.

Good luck.

RC said...

After I left my last real job in 1975 I never paid into SS again so I'm getting zip and thus have no 401K concerns, SS concerns, or pension concerns. Starvation may well eventually loom, but that isn't very complicated.
In answer to thethirdcoast, what has happened to my friends, acquaintances and clients when attempting to cash out of various instruments and equities is definitely the sales droid thing.
Certain items like REITs took months to be sold off and the cash returned: or really, a dismally damaged percentage of the cash if we wish to dwell upon the Doomery.
And as the sale failed to occur, the cash value plummeted. I was not really aware of all the catastrophes possible in these deals until I began to get the anecdotals.

I would suggest you check with El G as he seems to be aware of the relative refund resistances of the various investments and their brokers.
The 401K torture actually seems not too bad {no first person report, sorry} but the penalties are apt to interrupt your breathing.

Anonymous said...

Good luck.

Yeah your going to need it just look at Argentina as an example of what happen when a government can no longer fund itself and steals the retirement savings of the masses to pay their bills.

Anonymous said...

TPTB is a meaningless term unless you define precisely who you think of when using it.

That's ludicrous -- even if you consider the acronym relative. We all know who GOD is, no matter how precisely you define who or what a supreme power is when you think of it. Why all these people rush to clarify themselves is beyond me.

Erin Winthrope said...

@ anonymous 2:46 PM

anonymous said:
"I have many legitimate concerns about the U.S. retirement system at all levels, but early 401(k) withdrawals doesn't happen to be one of them."

My reply: I'm very curious to hear you describe your concerns about the US retirement system, as well as how you imagine it's going to sustained without haircuts approaching 100%.

I'm trying not to be a smart alec. I'd really like to read your rationale.

el gallinazo said...

A 2:50

The government of Argentina stole a government affiliated pension fund. IRA's are as diverse as any investment imaginable. As I said before, the only thing you can't "invest" in in an IRA is money in your checking account and in the mattress. It's gonna be a lot harder and more complex for the government to steal IRA's than a giant pension fund.

My 65 year old friend has 100% of her IRA (which is most of her liquid assets) in 13 week T-Bills through an account with TD Ameritrade. Other than the broker going belly up, what would be the risk factors. (Personally, I liquidated my small IRA the month I turned 60.5).

Re the Treasury yield curve - my comment a couple of days ago with no response:

!3 week Treasuries just a year ago were paying about 1,8 %. Today they are paying exactly 10% of that rate. Da Boyz must be investing in adult sized pampers and applying them to themselves for that kind of yield curve. Shows a certain lack of confidence.

RC said...

Erm, I'm rather hazy about God and the TPTB, and thus, I find myself in the agnostic column about both. Like Ilargi, I never ever use the term TPTB and other than this paragraph can't recall writing the letters.
Therefore, it may be possible a great many persons find the concept too squishy to pass the Orwell Board.
The TPTB idea, meme or miasma, whatever it might be, I find very irritating and yet another indication of the widespread lack of critical thinking. OK, thanks Ilargi, I got that one off my chest. You can all go back to ignoring me now.

Ilargi said...


Sorry, no ignoring here, no can do. It's still funny, though, to read that it's ludicrous to ask for a definition of the term from someone who likens it to God.

I simply think a discussion that involves terminology that has a potential different meaning for everyone involved has little meaning.

But I apparently and inadvertently (why not define?) stumbled upon a too convenient notion to let go or question. Like sweeping the dirt under the carpet.

I still think it's too out there to use in any serious debate. If you would add up who various parties would gather under the term, you'd not only end up with a list the length of a phone book, many of those listed would be likely to be the first to be thanked for their services with a neckshot.

RC said...

Thank You again, Ilargi. Much of what I read and hear, not just the TPTB thing, makes me want to scream.
As a result I spend a great deal of time with my plants or operating very loud heavy machinery. I can't take drugs of any kind, recreational or non, and can't drink, all because of medical conditions. Thus, I expose myself to the stress of the foggy human stumbling as little as possible. I do want to be plain and state that this site offers a very elevated set of posts and comments, although not a perfect one. Humans are involved, so how would that ever lead to perfection? But I find this location to be wonderful as it does not induce the desire to locate some exotic mind numbing
experience. Most of the time.

Ventriloquist said...

rumor said...

I really think Anon @2:23's substanceless cries need to be taken into account. Nothing that happened far enough in the past has any relevance to today. We entered a new paradigm in the 80s, people. History is clearly not useful anymore.

How true.

Similar to the historical role of gold/silver coinage, which has held its value through multitudinous financial depressions, thieving dictators, natural disasters, and fiat money collapses . . . . but "now it's different", and the "shiny things" will have no relevance as a viable medium of exchange in the coming implosion.

Yeah . . . . . riiiiight.

Funny thing is that most people espousing this position naturally possess none themselves.

Correlation, anyone?

Shibbly said...

@Bluebird, Ed,
Why will you wait until early next year to cash the remaining half of your IRA? I am just wondering if you think the window to cash out will be available next year and do you not think that income tax rates will be way up next year?

Anonymous said...

anonymous said:
"I have many legitimate concerns about the U.S. retirement system at all levels, but early 401(k) withdrawals doesn't happen to be one of them."

My reply: I'm very curious to hear you describe your concerns about the US retirement system, as well as how you imagine it's going to sustained without haircuts approaching 100%.

I'm trying not to be a smart alec. I'd really like to read your rationale.

I could talk about this topic for hours, but on the DB plan side, the actuarial assumptions used by U.S. pension plans are simply unrelistic, and on the DC plan side the whole concept of participant-directed investments is a dumb idea.

I'm not saying the system can be sustained long term, I'm just saying that nobody is currently talking about preventing early withdrawals from 401(k) plans for people who are otherwise eligible.

It's VERY easy to invest in long term treasuries in an IRA. If the deflation premise is correct, buy now and you should be able to make a killing and THEN take a distribution.

For anyone who wants to get their money out now, by all means do so if you are eligible. Just make sure you look at the choice from every angle. I see no harm in thinking the decision through fully, and that's really all I am suggesting.

VK said...

As the conversation evolved and took various twists and turns, he eventually proposed that a business helping the ultra rich establish “lifeboats” would be both lucrative and timely, and that I might be especially qualified. Imagine the family of an investment banker being plucked from their rooftop helipad in upper Manhattan to a prepared enclave in the country, while watching burning tires and broken glass 40 stories below. They could end up in upstate New York, or in a more exotic place like their personal island in the South Pacific.

He then named about a dozen families on the Forbes list of billionaires who have already prepared for doomsday on a spectacular scale, including multiple geographic options. These were the early adopters, I was assured, and now a second and much larger wave will be in need of professional advice and on-the-ground know how.


I must admit, this experience took me a bit by surprise. I was unaware (a) that these sort of ‘high level’ retreats were being built, and (b) of the utter disregard, almost contempt for the common man and woman I witnessed. Even so, I found myself wondering if my new friend was correct about the direction of the future, and whether it might be smart of me to acquiesce, and position myself for the “inside” rather than the “outside” of the walls being built.

VK said...

Oops forgot to link the above article!!

el gallinazo said...

A 4:11

Long term bonds will do very well for the next few months to maybe a year. When the treasury dislocation takes place, if you can't get out fast enough you will lose your shirt.

As to a break down of TPTB aka the shadow government:

I'll go with that radical anarchist, Paul Craig Roberts, formerly know as Mr. Reaganomics and Asst Secretary of the Treasury under Reagan.
In terms of influence: the financial oligarchs, the MIC, big pharma, AIPAC. Of course there is much overlap. And of course they are not monolithic and there are competing interests in these groups and between these groups, but one thing is clear, they all want to eat you for lunch.

Ventriloquist said...

From today's blog posting by Kunstler:

Paul Krugman says that we'll soon realize that Gross Domestic Product (GDP) is growing. He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul, you fatuous wanker.

. . .

Did we win some cosmic lottery that hasn't been announced yet? What's growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair? In short, are you out of your mind, Paul Krugman?

C'mon Jim, quit shilly-shallying and say what you REALLY mean!

bluebird said...

Anonymous @ 2:46 said "
Hard times to come, no doubt. Put your 401(k) money into the stable value fund within the plan (which is actually pretty secure),"

Perhaps stable funds are more secure now, but they had issues earlier this year:

Now millions of workers who invest through their 401(k) plans are finding that one of the last pillars of safety – so-called stable value funds – may be riskier than they assumed. These funds, which are typically only available through retirement plans, are essentially bond portfolios wrapped in insurance contracts that promise to smooth returns over time.

Stable value funds are only as good as the guarantees behind them. And now that a fund in the Lehman Brothers retirement plan has suffered an unprecedented drop, investors and their employers are forced to wonder just how stable their fund really is.

State Street Corp., Boston, voluntarily contributed $160 million in January 2008 and an additional $450 million in the fourth quarter to stable value accounts to bring the accounts back to market level, according to an 8-K filed by the bank on Jan. 16.

The accounts are managed by subsidiary State Street Global Advisors.

Further, fixed-income liquidity and pricing issues in 2008 so negatively affected the market value of SSgA’s stable value accounts that “third-party guarantors considered terminating their financial guarantees,” leading SSgA to purchase about $2.5 billion of risky securities from the accounts, according to the 8-K.

Anonymous said...

God, people, the system where capital is king is one big, interrelated, TPTB. The cult of productionism, which pits everyone against everyone and everything, at every level one can conceive of, is at the core of what ails us, such as the dis-empowering nature of division of labor along with the hierarchical/authoritarianism that are its chief offshoots.

Society has evolved into one big exploitation factory, whether of the earth or each other. TBTB meme is an example of wasting time on a symptom not the disease itself, and even the symptom is being grossly misapplied as I've stated above.

Anonymous said...

@Ed Gorey: No hay problema. I thought there was some compassion to be found. Glad to see that I was right. :)

And yeah, I know what it's like to be without sleep. This stuff keeps me up at night sometimes. It's not productive, but what can you do?

el gallinazo said...

A 4:59

"And yeah, I know what it's like to be without sleep. This stuff keeps me up at night sometimes. It's not productive, but what can you do?"

Watch "Final Collapse Coming"

You'll learn that it's a good renewal collapse, replete with beautiful women dressed in medieval garb. Like a lullaby.

bluebird said...

Anonymous @ 2:46 said "the government having no interest in restricting early 401(k) plan withdrawals."

Maybe the government has no interest, but somebody is restricting early withdrawals:

Some investors in 401(k) retirement funds who are moving to grab their money are finding they can't.

Even with recent gains in stocks such as Monday's, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can't withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.

Frank said...


Funny thing is that most people espousing this position naturally possess none themselves.

That's pretty much a "well, duh." If you don't think gold and silver are good investments, you won't have any. You could have more money than Bill Gates and you still wouldn't have any. Correlation close to 100%.

el gallinazo said...


Thanks for the WSJ link. If I had a 401k, I'd be headed for the bathroom at a trot right now. It ain't the government regulations right now, it's the bezzle. God, I wouldn't want my employer controlling my investments (and I was self-employed :-)


Thanks for the head up on the release of MaD II. I don't think that it is so much of a sequel as a rework, and very successful, though v. 1.0 was great.

Reminded me of a line from Woody Allen, I think it was in "Manhattan." "Love is like a shark. It's gotta keep moving forward or it dies." Just like our financial system.

Gravity said...

You are here because you have failed in humility, in self-discipline. You would not make the act of submission which is the price of sanity.
You preferred to be a lunatic,
a minority of one.

Only the disciplined mind can see reality, it requires an effort of the will, an act of self-destruction.

Reality exists in the human mind.
Not in the individual mind, which makes mistakes, and soon perishes, but in the mind of the Party, which is collective, and immortal.

You are imagining that there is something called human nature which will be outraged by
what we do and will turn against us. But we create human nature.
Men are infinitely malleable.

Or perhaps you have returned to your old ideas of the proletariat revolting? Put it out of your mind, Winston, they are helpless animals. Humanity is the Party.

If you are a man, Winston, you are the last man. Your kind is extinct;
we are the inheritors.

bluebird said...

VK @ 4:25 - interesting article about the billionaires. Somebody, a few months ago, described something similar occurring somewhere in secluded remote areas.

Ruben said...

@ El G.

Thanks for posting that link--that is 3:48 I will never get back. Do not, under any circumstances, go to the blog linked from the YouTube page. I did, and I am visibly more stupid.

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


You mean it won't help you sleep better? Jeez, you're a tough customer :-)

Gravity said...

I switched all the windows sounds on my computer with speech samples from HAL9000 to give it a friendlier personality.

When it turns on, it plays:
"Good evening Dave, everythings running smoothly, and you?"
(My name isn't Dave,
but that doesn't matter.)

When it turns off:
"I know that you and Frank were planning to disconnect me, and I'm affraid that's something I cannot allow to happen"

It was either that one or
"My mind is going, I can feel it."

"I'm sorry Dave, I'm afraid I can't do that" is less annoying than the standard windows sound.

"My God, it's full of stars!"
is Bowman's comment on removeable storage media.

I cannot fathom how anyone could find HAL to be scary, I consider him a loveable character, even when slightly sociopathic.

scandia said...

I have been mulling over the anon comments that the behaviour of past empires is irrelevant now, that now is different. Also that TAE is a doomer site, that there is a recovery that I & S are blind to...So thinking aloud, I have a couple of sincere questions for those Anons.
I have considered it an imperative to deleverage from current debt levels and foresee hardship of some unknown degree in that process. Do you see deleveraging from debt either unnecessary or painless?
About past empires I agree the context now is different, much, much more complex. Yet the quest for power, for more than one's share ,is as old as the Golden Fleece.In this sense of human behaviour the historical record has relevance to-day.I would like to know why you think history fails to inform in this discussion of a finacial system collapse?

Erin Winthrope said...

Re: Changes to 401K policy

From the NYTimes, March 2009:

Money Quote:
"we need to consider a new tier of retirement income that would allow 401(k)s to return to their original role as a supplementary savings plan. The goal of this additional tier would be to replace about 20 percent of pre-retirement income. To accomplish the goal, participation should be mandatory, participants should have no access to money before retirement, and benefits should be paid as annuities. The system should be funded and reside as much as possible in the private sector."
So Much for the 401(k). Now What?

The quote is from:
Alicia H. Munnell is the Peter F. Drucker professor of management sciences at Boston College’s Carroll School of Management and director of the college’s Center for Retirement Research.


Let's also hear from Teresa Ghilarducci, the University of Notre Dame academic who testified before Congress in October 2008 about deficiencies in the 401K system.

Money Quote:
"as she sat at the witness table on Oct. 7 at a hearing of the House Committee on Education and Labor, running through the litany of what's wrong with the 401(k) and other defined-contribution retirement plans — they have high fees, for one — Ghilarducci didn't think she was courting controversy. "I was saying things that seemed completely milquetoast," she recalls. Ghilarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market's collapse for monthly payouts from the government."
Should the 401k Be Killed?

My comment: Ghilarducci has argued that those government payouts should come from investing private 401K funds in special new government bonds that guarantee a certain rate of return.

Change is afoot my friends. It's all a matter of the timing.

Anonymous said...


History rhymes but it rarely, if ever, repeats. When seeking the common thread to match today's muse with one who rhymed before it begs the question: which history, which muse? Using history from two millenia ago to forecast our future is beyond synthesis. It's out there in the same realm as Asimov's science fiction tales where future "history" could be codified and predicted using discrete social and economic variables from the present. The same blind postulate was put forth in physics before the age of Heisenberg and quantum mechanics. In the age of Newtonian physics it was supposed that if all velocities, mass, and direction of all particles could be known then the entire future of the universe could be predicted in advance.

GunHillTrain said...


I agree about the relevancy of history, no matter how far back.

"Not to know what has been transacted in former times is to be always a child. If no use is made of the labors of past ages, the world must remain always in the infancy of knowledge."

That was Cicero in the First Century B.C. He still speaks to us, I think.

VK said...

@ Scandia

It's simple really. For society as a whole,

Marginal benefits are declining.
Marginal costs are rising.

When costs exceed benefits the whole system begins to collapse.

By collapse I mean a rapid decline in complexity.

A lack of credit = decline in complexity.

As hundreds of thousands of firms worldwide go bankrupt and people become unemployed. What you get is lower standards of living and shortages.

Unknown said...

Stoneleigh has explained at length the pertinent parallels between the present western economic empire and empires of the past, particularly the Western Roman Empire. Certain anons should read the primers before discounting her comparisons out of hand. She's made the arguments about relevance - anons haven't made the counterarguments.

The age of history isn't a factor to discount it - people are still the same people and therefore we still have much to learn from our past.

Bigelow said...


"I switched all the windows sounds on my computer with speech samples from HAL9000 to give it a friendlier personality."

Switched most of mine to quotes from Rocky & Bullwinkle!

thethirdcoast said...

"Stable Value Fund" picks in 401k plans are generally just a euphemism for a stock fund that invests in large blue chips that are expected to hold a steady price.

These days you're much better off with 401k choices that invest in money markets or short-term bonds. I've managed to hold my capital steady by pursuing this strategy the past several months.

If I contributed up to the company match I could theoretically achieve 15% growth year-over-year, but I refuse to place additional funds under my 401k firm's control.

Phlogiston Água de Beber said...

@Anon 6:26

Are we to understand that because old Werner determined that we cannot know both the position and velocity of a particle that we should therefore ignore the efforts of Stoneleigh and Ilargi to tell us what the future is going to smell like? You must be a real hero to all the kids that think history is not worth studying.

Not knowing everything is not the same as not knowing anything. Sure the next Dark Age will not be exactly the same as the last one, but it will still be dark and most likely long. If you don't agree, how about leaving Heisenberg and Newton on the shelf and trot out some arguments that might actually apply. Please note that we're not overly concerned right now about the fate of the universe.

We Nobodies don't know much, but years of scraping it off our boots has made us very familiar with the smell of BS.

VK said...

Good ol' Ambrose P Evans

A draft report by China’s Ministry of Industry and Information Technology has called for a total ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium. Other metals such as neodymium, europium, cerium, and lanthanum will be restricted to a combined export quota of 35,000 tonnes a year, far below global needs.
China mines over 95pc of the world’s rare earth minerals, mostly in Inner Mongolia.

The move to horde reserves is the clearest sign to date that the global struggle for diminishing resources is shifting into a new phase. Countries may find it hard to obtain key materials at any price.

VK said...

@ Ilargi!!

SIX million people in Britain are living on unemployment benefits, shocking new figures revealed last night.

They mean that almost one in six of the working-age population is now on handouts instead of working for a living.
The crippling cost of the benefits culture is now £193billion a year – up from £93billion in 1997 in payments like Incapacity Benefit and Income Support. That’s nearly double NHS spending.

Details of the milestone figure emerged in a report by think-tank Policy Exchange. Its dramatic findings blow apart the Government’s own official figures for unemployment rates, leading to possible accusations that Labour is massaging the numbers to keep them as low as possible in the run-up to a General Election.

With the political fall-out from rising joblessness potentially devastating, the Government earlier this month claimed the number of people out of work was 2,435,000 – the highest for 15 years.

But the Policy Exchange figures lay bare the real cost of Labour’s mismanagement of the economy which has caused rapidly-lengthening queues at the dole office.
It found the total number on benefits like Jobseeker’s Allowance, Income Support, carers’ allowances and incapacity benefits stood at over 5.96 million in July.

The article goes on to state that 6.8 Million people could be really unemployed by the end of the year and this figure does not count people who are excluded, went back to Eastern Europe and freelancers!

Anonymous said...

In Roubini's article, he said:
"Most of the shadow banking system has disappeared,"

Excuse me, but does anyone know where he possibly got this? Last time I checked, the derivatives market was over 1 Quadrillion, and the banks still had tons of assets on their Tier 3 books, including derivatives. How in the world does he come up with this?

Ilargi said...


Daily Express piece looks like propaganda to me.

VK said...

@ Ilargi


Well here's 3 different newspapers take on it.

The Sun -
BRITAIN'S "real" unemployment figure is set to top SIX MILLION, a shock report reveals today.
The alarming total includes EVERYONE claiming out-of-work benefits, including income support and sickness payments.

The Telegraph -
'Six million British adults on benefits'

The Independent -
Neil O'Brien, Director of Policy Exchange, said: "The narrow unemployment figures we are used to seeing tell you less and less about the real number of people who are trapped on benefits."

I'm sure the UK stats are as massaged as the American ones?!?

sensato said...

@ VK: Not to worry. The Business section of the Guardian is reporting ...

The ICAEW survey showed that UK businesses expected a rise in all but one of 14 key financial performance indicators in the coming year, in contrast to earlier in the year when most were expected to contract.

The research found 41% of senior business professionals were more confident about the economic prospects facing their business in the next year. But only 6% were much more confident, indicating a continued level of caution over the timing and speed of the recovery.

IT was the most optimistic sector, followed by banking, finance and insurance firms. The survey found "a remarkable upturn" in confidence in the banking sector. Signs of stabilisation in the housing market also helped boost optimism for property firms.

Ilargi said...

"I'm sure the UK stats are as massaged as the American ones?!?"

Little reason to doubt that, but just check the brawl Policy Exchange had with the BBC over a "report" on Islam in Britain.

Anonymous said...

One of the accounts I read of top level nazis and their civilian industrialist backers in the 'beginning of the end' stages of WWII had to do with building the German/nazi equivalent of what people are referring to today as doomer 'lifeboats'.

These weasel bezzles of the Third Reich, both civilian and military, knew they were totally f*cked when the Russians broke the sieges at Stalingrad and Leningrad. Many went into high gear at that point, preparing to bug out to their 'spiderholes' carved into the mountains of Bavaria. Paranoia doesn't begin to describe their efforts to make impregnable fortresses in the Byzantine cave complexes of the southern German/Austria Alps.

Well, it turns out, as a historical detail, these 'powers that be' of Nazi leadership managed to divert so much labor and resource away from the German war effort, on both fronts, that it registered itself as a litany of bitter complaints from German military planning staffs, and even reach the Führer's desk. So much cement was diverted from the beachhead fortifications at Normandy to the Doomsteads of Bavaria, many military historians familiar with the incident thought it was a contributing factor to the weak German performance to hold northern France.

Parasitic Sociopathic Crypto Humanoids (PSCH) are always produced when the blob of unchecked mindless herd humans overshoots their eco-niche and these PSCH, while they hold power, always look like TPTB to 'the little people'.

In Nazi Germany, a term like 'TPTB', would not need to be defined (a la Ilargi) or even discussed. Everyone with an IQ over 80 knew what a term like that practically meant. Those denying the term and the reality of it simply vanished.

Problem solved.

Even Sociopaths have to be culled as a group.

Even Sociopaths are trapped in their own 'herd' instincts of alpha domination wet-dreams.

This is going to happen in this latest disgusting passion play of humanity in the 21st century. TPTB will be like scorpions trapped in the bottom of a tequila bottle, fighting for the worm.

As soon as the bloom leaves the poisonous rose of mutually advantageous thievery, they will turned upon each other like an I Claudiuspalooza.

There are no safe havens, even for the Masters of the Universe.

They are intoxicated with power and the lust of Infinite Wealth.

They are going to pull the pillars of the temple down on us and themselves as well, because they are Sociopaths, not because they are diabolically clever and can think 20 chess moves ahead.

If you think 'they' have a fool proof plan of world domination, read a little history.

They are insane and will do all in their irrational herding power to remain top dogs until mortally wounded in Perverted Pyrrhic victory.

VK said...

I found this from Statistics UK.

The inactivity rate for people of working age was 21.0 per cent for the three months to June 2009, up 0.3 over the previous quarter and up 0.1 over the year. The number of economically inactive people of working age rose by 127,000 over the quarter and by 83,000 over the year to reach 7.95 million.

So that's about 8 Million people of working age who are not employed and must be supported by benefits or spouse/ guardian.

Surprising to note that the UK's labor force participation rate is 72.7% while that of the US is around 66.2%.

VK said...

I thought this data series provided by the EU was a pretty good indicator of employment (NOT Unemployment) in the EU i.e. The Labour Force participation rate between 15-64. This provides a good indication of real unemployment or the amount of Government help needed or support by spouse/ guardian for those not working.

Then in the little notes section they had this statistical stunner.

Short Description: The employment rate is calculated by dividing the number of persons aged 15 to 64 in employment by the total population of the same age group. The indicator is based on the EU Labour Force Survey. The survey covers the entire population living in private households and excludes those in collective households such as boarding houses, halls of residence and hospitals.

Employed population consists of those persons who during the reference week did any work for pay or profit for at least one hour, or were not working but had jobs from which they were temporarily absent.

WOW, what's the point of the data series when the bar is set so low? One measly hour and you're counted as employed?! Gee, that's wonderful isn't it?! You're really going to survive on 12 euros an hour aren't you...

sensato said...

Speaking of precendents, more from the Guardian - a comment from Bigwigandfiver ...

From the Laud Chronicle:

'In this year (1124 AD) before Christmas king Henry sent from Normandy to England and gave instructions that all the moneyers who were in England should be deprived of their members, namely the right hand of each and the testicles below: the reason for this was that anyone who had a pound found it would not buy a penn'orth in a market. Bishop Roger of Salisbury sent over all England, and commanded them all to assemble at Winchester by Christmas. When they came thither they were then taken one by one, and each deprived of the right hand and the testicles below. All this was done in the twelve days between Christmas and Epiphany, and was entirely justified because they had ruined the whole country by the magnitude of their fraud which they paid for to the full'

NZSanctuary said...

From Anon @ 3:06
"TPTB is a meaningless term unless you define precisely who you think of when using it.

That's ludicrous -- even if you consider the acronym relative. We all know who GOD is, no matter how precisely you define who or what a supreme power is when you think of it. Why all these people rush to clarify themselves is beyond me."

Which is why I like El G's take on it. TPTB, at this point in time, may best be defined by their effect – their gravity well, if you will.

Ventriloquist said...

Anon @ 8:49PM said:

In Nazi Germany, a term like 'TPTB', would not need to be defined (a la Ilargi) or even discussed. Everyone with an IQ over 80 knew what a term like that practically meant. Those denying the term and the reality of it simply vanished.

Ummm . . . I'm pretty sure that Ilargi has an IQ probably double of that which you refer to. Exactly what is it you are trying to say here?

ric2 said...


Here is Charles Hugh Smithʻs well-explained working definition of TPTB, from his Survival Plus e-book:

"We must be alert to the irony that the Elite's first task is to convince the underclasses that there is no Elite, no Powers That Be and no Plutocracy. While there is no "membership" card in the Plutocracy, the simple facts of concentrated ownership, influence and income roughly define that class. Conflicts between various segments of the Elite does not mean there is no Plutocracy--it only means that greed and over-reach naturally set up some shuffling and pushing to head the line.
. . .

Why bring this up now? Only to note that The Plutocracy is not a conspiracy in the formal sense of a membership which gathers like the Bohemian Club or even an informal assemblage such as the Bilderberg Group. "Membership" is granted solely by great wealth and control of productive assets; political influence flows from that.

People who control, say, $100 million or more (via family ownership or managerial position), tend to meet one another socially or to do business, and while they jockey for advantage within a group like the rest of us, they form a small class of citizens possessing virtually unimpaired political influence.

Thus in describing a Plutocracy I am not positing a semi-formal conspiracy but simply a financial elite which controls some 2/3 of the productive wealth of the U.S. This is simply a statement of fact. Their collective self-interest is in maintaining the conceptual, legal and financial systems which enable their continued dominance of wealth and influence.

It is important to note this bias for independent agencies is founded both in our minds and in the real world; people with similar self-interests naturally band together in self-organizing networks and groups to protect those interests, and since information is power then the inner workings of self-organizing groups are confidential as part of that self-protection.

Thus when I speak of The Plutocracy I refer not to a formal conspiracy with meetings and officers but to a self-organized Elite based on protecting their ownership of 2/3 of the productive wealth of the nation. As each acts to protect his/her wealth at the highest reaches of influence (tax shelters, tax breaks, legislative exclusions, legal rulings, etc.) then they are also acting to defend their class."

Anonymous said...

"..In Nazi Germany, a term like 'TPTB', would not need to be defined (a la Ilargi) or even discussed. Everyone with an IQ over 80 knew what a term like that practically meant. Those denying the term and the reality of it simply vanished..."

Maintaining TPTB isn't 'properly' defined doesn't make it magically not exist just cause you don't want to believe it. I can't see the magnetic field from my old kickass rock n roll speakers, but the giant magnets from them still fucked up the USB jump drive I accidentally set down on them (erased the data)

What you don't know or believe in can most definitely hurt you. Your 'acknowledgment', or lack of it, of TPTB has diddly squat to do with whether they will crush you like a cockroach.

(hint: yes they will)

Click your magic Ruby Slippers of denial together, maybe it will make you as invisible to them as they are to you.

Sweet Dreams

Anonymous said...

History rhymes but it rarely, if ever, repeats. When seeking the common thread to match today's muse with one who rhymed before it begs the question: which history, which muse? Using history from two millenia ago to forecast our future is beyond synthesis. It's out there in the same realm as Asimov's science fiction tales where future "history" could be codified and predicted using discrete social and economic variables from the present. The same blind postulate was put forth in physics before the age of Heisenberg and quantum mechanics. In the age of Newtonian physics it was supposed that if all velocities, mass, and direction of all particles could be known then the entire future of the universe could be predicted in advance

Well said...and Zing, right over Rumor's head. As elegant and astute as SL's knowledge of history is, it's simply not applicable.

Ventriloquist said...


so Ilargi doesn't like the acronym TPTB,

yet there are others who make valid statements about a nomenclature that has resonance with most who recognize what "it" means.

Let's face it, language IS an evolving organism.

So, can we come up with a term/acronym that we can all subscribe to, or do we just devolve into a series of shitfits on definintions, syntax, and semantics?

scandia said...

@Anon 6:29...Thank-you for the response.
I think the astute person notices the rhyming...a head's up to examine a pattern mankind recognises as a familiar tune, an opportunity to learn from the past pattern.
My science education is extremely limited leaving me unable repond to your references.
I am finding it a useful endeavour to combine history with systems theory.

Anonymous said...

How about
the top .05%:

Anonymous said...

Or would that be the top .01%?

Anonymous said...

so Ilargi doesn't like the acronym TPTB...

A rose by any other name...

It matters not WHO holds the power, only that power is held -- power is the issue. The battle is not against the elite, it's against elitist thinking, for which we are all guilty.

Leona said...

Do you folks even listen to Bloomberg news on satellite radio? I mean you don't even have to hear their words to know that they are giddy- but with maybe a slight edge.

I heard one commentator stumbling on about how steel company stock prices rising shows that the economy is back on track- revved for recovery.

I listened on my way to the bank to take out more "walking around" money as Kunstler also suggested last week.

And then drove my little kids 70 miles round trip to the nearest outdoor municiple pool. We were there when it opened and the last to leave. How can you even imagine an end to days with such a day as that?

Infrastructure? let me tell you about infrastructure. This is a great small town pool- four different swimming areas, slides, wading areas, and full of kids. Staffed by teachers on summer break and high school kids. It's like a flashback to my own childhood. How could this ever go away.

The world will be short one giant joy when we can't enjoy our fleeting summer on the high prairie with a day at the municiple pool. But living with the thought that this could all go away makes one savor it all the more.

Anonymous said...


Let's not forget that the poor of the world most likely see the average American as part of TPTB. We have been enjoying the spoils of the US empire for many years.

Anonymous said...

So humans are inevitability 'guilty' of being shortsighted, egotistical, unchecked hubris spewing, herd driven, spineless delusional self indulging mouth-breathing, knuckle dragging killer apes.

As Hunter Thompson would say,"and there's a downside too."

Herding behavior sounds remarkably like the notion of 'original sin'. We're all guiltyguiltyguilty of being zombie automatons, pre-programmed to act like, well, animals and never really wake up to reason until a charismatic alpha male sees the light and plays nice and shares.

Sounds like a 'B' movie script.

Make's me not too pumped up to see 'humanity' muddle through this coming mass extinction event, just so it can crawl back out of the post oil gutter in filth and suffering over the next couple thousand years. Another millennium or two of warlords and futile-ism and mindless murder just so the 'herd' can learn exactly nothing from history, again.

Boy, that's an exciting prospect look forward to sacrificing for. More herding behavior as far as the mind's eye can see.

Sorry kids, homo sapiens (Latin: "wise man" or "knowing man" - what a joke) really are defective on a physiological, psychological and cosmic spiritual level.

It's not 'original sin', it's an evolutionary dead end.

Like the expression, wiping egg off your face, when a large mistake is made, I think the Planet wants to start over by wiping the Killer Ape off it's face.

EconomicDisconnect said...

Back from vacation, and had to say best picture ever Ilargi!
Hope all is well.

Anonymous said...

"..I think the Planet wants to start over by wiping the Killer Ape off it's face.."

Homo Sociopathicus

Ventriloquist said...

Anon @ 10:55 said:

So humans are inevitability 'guilty' of being shortsighted, egotistical, unchecked hubris spewing, herd driven, spineless delusional self indulging mouth-breathing, knuckle dragging killer apes.

Yep, that pretty well sums it up alright.

I work in an environment where I have a large amount of contact with upper-income Americans, with plenty of disposable income. And the elitist, entitled, "It's all about me, me, me" attitude spews forth like an aura of toxic sludge from every pore in their collective bodies.

Where is the Committee of Public Safety when we need them so much now?

Anonymous said...

ric2 said...


Thanks for providing the charles hugh smith on TPTB. I was thinking something similar, and you see different levels of TPTB at all levels from the national, to the local. A crudely-put illustration, put to song, would be frank zappa's "society pages". You can see that in any moderate sized town if you pay attention to local news over the years:

You're the ol' lady from the society pages
From a small town somewhere I used to be
You owned the paper and a bunch of other stuff
That didn't appeal to me


The hospital plans (yer brother drew 'em all)
You ran the paper 'n Charity Ball
Every day on the third or fourth page
There you was. . .you was quite the rage
Somehow, you was all kinda cheap 'n wrong
Just like in a lotta small towns
Where folks like you
Hang around too long
And pass out jobs to yer relatives 'n such
So you all keeps a lot, 'n nobody else
Ever gets too much.. .to speak of. . .
So what? What can you say?
So long as the trash gets picked up
So long as the trash gets locked up
Just so the trash don't stack up

While that probably is the mode of action of TPTB, that doesn't mean that some cabals don't exist as well.

I struggle to reconcile what Stoneleigh predicts (center squeezing the periphery to make up for loss of global access), which I agree with "in my head", with what I feel in my gut, which is "no way! off with their heads!" If the elite class manage to stave off a revolution, they will have to keep a large fraction of the population warm and fed. If the system crashes to the extent predicted here, most will not be on farms as in Roman peasant days or producing anything to "squeeze"? So in order for there to be anything to squeeze surely the elite classes must mantain some functioning system of production. A slow crash would be in the interest of the elite classes would it not, because that would allow more to be squeezed? If that is the case, then certainly there are limits to the power and organization of TPTB because what is coming probably does not benefit the class as a whole.

PS, apologies for any misinterpretation of I&S theses.

Anonymous said...

Anon @ August 24, 2009 8:49 PM

Re nazi doomsteads

That sounds interesting. Can you point to any easily accessable references to this?

Anonymous said...

The 'elite' sociopaths (that's all they are 'elite' at by the way) are not really human in any normally understood meaning of the word.

They represent a highly refined form of sadism incarnate. And they're insane, did I mention that? As in not responding to logic or reason or empathy or even 'common sense', like junkies whacked on smack, power smack, the best kind.

But then again, by the way 99+44/100% of the 'human' population defer and suckup to them, you'd think they were God's Gift to the World.

Sadists live for subservience and in the Land of the Brave, they get it in Spades. Pop culture is a form of sadism. It thrives on subservience of it's audience. The worshiping of pop stars is like self flagellation, your self esteem being beaten bloody with bicycle chains.

I'm nothing compared to you, oh great Pop God, step on me with your Big Black Leather Boots.

America wears it's sickness on it's sleeve, like it's late Demi-God Freak Michael Jackson.

Look no further for a window into Duhmerica heartless soul than the Peter Pan who hit finally Hit the Fan.

Go Mickie, show your countrymen the Way with what unbridled self indulgence looks like as it finally get super Ripe.

Hmm, nice, feel the Burn.

Anonymous said...

Re nazi doomsteads

That sounds interesting. Can you point to any easily accessable references to this?

Read Albert Speer's

"Inside the Third Reich"

Nazi Minister of Armaments from 1942 to 1945

He knew where all the bodies were buried.

He was there, right behind the Eight Ball.

Anonymous said...

Also there is a section or two in the book "The Hunt for Zero Point" by Nick Cook. The book's theme revolves around propulsion research by the Nazis in WWII but has several interesting off topic references to the crazybatshit antics of the Nazis as the wheels came off their Volkwagons and the Thousand Year Reich.

Ilargi said...

New post up.