Sunday, December 27, 2009

December 27 2009: Eyes wide open and pedal to the metal

G. G. Bain Boxing Week 1910
Boy looking at Xmas toys in a shop window in New York

Ilargi: On Christmas Eve, in No Morals, No Hazard, I talked about Eric Sprott’s report "Is it all just a Ponzi scheme?", which suggests that $704 billion in purchases of US Treasuries cannot be accounted for, since they are on file as purchases by what the Federal Reserve Flow of Funds Report labels the "Household Sector", which, it turns out, doesn't exist. It's merely a name under which all unknown purchasers are grouped, while remaining unknown. The purchaser may be the Fed itself, unwilling to admit to more purchases than are already on file.

Alternatively, as someone suggested, the Treasuries may never have been issued in the first place, and the entire thing may be an empty charade aimed solely at keeping up the appearance of a functioning US sovereign debt market.

This possibility, which Sprott failed to mention, opens up whole new vistas, and would certainly lend a lot more credence to the idea that US finance policy, as designed and engineered by the Treasury Department and the Federal Reserve, is indeed nothing but the giant Ponzi scheme Sprott suspects it may be.

The Tyler Durden collective at ZeroHedge takes Sprott’s suspicions a step or two further, one might say, in a little directive called "Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else".

Durden looks at what the net issuance of US fixed income has been in 2009, after you subtract the part purchased by the Fed (which is after all not a real purchase, but just money going from one's left pocket to the right one, I’ve used the metaphor numerous times in relation to US financial policies).

What Tyler Durden then finds is that net US$ denominated fixed income issuance was only $200 billion this year. For 2010, though, since the Fed is set to leave the scene stage left along with Quantitative Easing sometime early spring, over $2.06 trillion will have to be sold to parties other than the Fed. Durden:
Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion.

The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010.

Now, let's be clear: it's entirely unclear who the buyer of the $2.06 trillion will be. Not only do the usual suspects, China, Japan, have increasing doubts about amassing USD denominated paper including Treasuries, Japan also plans to be as aggressive a seller as the US. And of course there are many other countries who desperately need to sell sovereign bonds in order to pay for get their often already accepted and implemented budgets. And that's just the nation states. Corporations and lower levels of governments, in every nook and cranny of the planet, wants to sell you their debt. Badly.

Obviously, this will drive up interest rates on all this debt. It's impossible to foresee at this point how high the rates my rise, but it looks to be painfully obvious that there will be a lot of pain involved. You can bet that many if not most of the managers and budgeteers involved have done their clever calculations based on low interest rates. And they won't get those. Which will lead to new deficits, new budget cuts, new job losses etc.

But in case you were starting to think that we bring only sorrowful tidings, here's a ray of light for you. For Wall Street, things may not be all that bad. Not at all. The major US banks, as their European counterparts, have access to enormous amounts of funds (yours) at ultralow interest rates. All they need to do is borrow at one of the Fed windows, walk across the street (I know they don’t have to do that, but I'm going for the George Bailey era image here) and buy themselves some Treasuries.

In practical terms, say Bank (of) A borrows $1 billion at 0.25% from the Fed, and buys Treasuries that pay 5.25% (oh yes, we’ll get there, and beyond). All a banker needs to do is sit back, or play golf, and make 5%, or $50 million, on that $1 billion. Since it’s that easy, why not borrow, say, $200 billion, leverage that 10-fold, buy the $2 trillion in Treasuries, and make $100 billion just for sitting still?

Would work like a charm. The debt gets sold, the White House and the media can convince everybody this means that the economy is doing great, and the only sucker in all of it is the taxpayer who’s losing $100 billion a year while the principal of his debt keeps growing, sort of like in a non-amortization loan. Or if the banker doesn’t like the sitting still part, (s)he can use the Treasuries as collateral for more loans (covered by the full faith and credit of the American taxpayer), and go play in the derivatives casino down the street.

Now all we need to do is find a buyer for the trillions in mortgage backed securities the country's choking on.

Reality for the non-banking part of the population is starting to become clearly visible in for instance Japan's falling prices, and in Ireland, where government salaries across the board are cut by 10-20%. It would be wise for most workers and their unions to look very closely at what happens in Eire, since it is their foreland.

Unfortunately, everyone today is firmly stuck clinging to the official global party line that promises a return to prosperity and growth, and no-one sees a need to temper demands. Workers' organizations should be calling for their members to accept voluntary pay-cuts in exchange for watertight employment contracts for the next 10-20 years. But they don't, it's not palatable in the face of what the federal government and the media report on the recovering economy and the risk of inflation.

Boy oh boy, are we ever going to drive into that wall with our eyes wide open and our pedal to the metal! If nothing else, it'll sure be spectacular.

We’ll show 'em yet we know how to do a climax better than anyone.

Ilargi: There is still time to send in your donations for The Automatic Earth. Get yourself a front seat for the main event.

Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else
by Tyler Durden

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was  $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.

And while things are hair-raising in "gross" country (not least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan - the country has plunged into its nth consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

  1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
  2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
  3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Celtic Tiger finished off by debunked ‘miracle’
The worst Christmas in the history of the modern independent Irish State? As the sales season begins today for the first time on St Stephen’s Day, many are wondering if 2010 can be any worse than the outgoing year. For the nation’s public sector workers, pay next month will reflect cuts of between 5 per cent and 20 per cent, levels of reduction not experienced since the 1920s, even when not taking into account previous levies imposed since the Celtic Tiger economic "miracle" began unravelling a year ago.

Ireland, the first eurozone nation to enter recession, is struggling to emerge from beneath a blizzard of frighteningly negative economic statistics after Brian Lenihan, the Finance Minister, delivered a stinging Budget this month with a target of cutting €4 billion (£3.6 billion) in spending. It is an extraordinary reversal of fortunes. As recently as 2007, a Bank of Ireland report smugly described a country that was home to 33,000 millionaires and €800 billion of domestic wealth.

Credit to the Irish private sector nearly doubled between 2002 and 2007, by which time the country’s houses were the most overvalued in the Western world and construction accounted for one fifth of national output. Losing sight of the origins of its recent fortune — a low-cost but highly educated English-speaking workforce — the price of goods soared to 27 per cent higher than the average for the European Union. Gross wages were 40 per cent more generous.

Now output is 7.3 per cent lower than it was a year ago. The inflation rate has fallen as low as minus 3 per cent and the fiscal deficit has exploded to 12 per cent of output. Ingmar Kiang and Darina Roche-Kiang believe that they are a near-perfect case study of Ireland’s helter-skelter ride. "We saw the Eighties as well, when you took the first boat to London or plane to New York after college, but this is far worse," Ms Roche-Kiang said from her magnificent home in the desirable Dublin commuter town of Greystones. "I’m embarrassed to be Irish at this stage."

She and her husband joined the exodus and landed well-paid jobs with Island Records in London, returning to Ireland as the country’s fortunes rose. "Our house is being forcibly put on the market," she said. "We were given six months to sell it because a €98,000 mortgage is being called in." Nothing had prepared them for that news. "We thought we were just being called in for a routine interview," she said. "We have borrowed with Irish Nationwide for 15 years over three houses. They were so anxious to get us to borrow more money, we actually refused to take more 18 months ago."

Michael Fingleton, who retired as chief executive of Irish Nationwide in April after nearly 37 years in charge, has still not paid back a €1 million bonus he promised to return eight months ago. The 2008 bonus was paid in spite of the building society posting a pre-tax loss of €243 million for that year, its first in living memory. It will begin to receive €2 billion of state capital next month as the National Asset Management Agency (Nama) takes €8.3 billion of its loans — the vast majority to property developers — off its books. The Irish taxpayer is funding the clean-up of €77 billion of toxic loans by Ireland’s main financial institutions to the tune of €54 billion.

The trappings of wealth — fine wines, luxury cars and country houses — are all being sold off by liquidators. The number of insolvencies in Ireland has more than doubled to 1,209 this year. House prices have fallen by 26.7 per cent since February 2007 and now stand at October 2003 levels, according to the latest permanent tsb/ESRI House Price Index. Ms Roche-Kiang’s career as a fine artist boomed during the Celtic Tiger years, but she says that her sales have slumped by 98 per cent this year. Her husband, a music producer, is retraining as a picture-framer.

"We are all to blame, really," Ms Roche-Kiang said. "All I saw around me was one hell of a party. People went bonkers. Property was an obsession. It was all people talked about. "But reckless lending played its part. We all knew that houses were too expensive. We are an insanely corrupt country, worse than Greece or Italy. Who would want to live here now?"

Beyond the pale: Ireland in 2009
  • January Government nationalises Anglo-Irish Bank, the Republic’s third-largest lender, amid the collapse of its share price and reports of large-scale deposit withdrawals. The move was prompted by fears that the bank could be declared insolvent, which would trigger a state guarantee and leave the Government responsible for nearly €100 billion of liabilities
  • February Credit default swaps spreads, which measure risk involved in investing in Irish government bonds, peak, hitting 400 basis points
  • April Government forced to resort to emergency Budget with a €3 billion package of tax rises and spending cuts. Ireland reels in the face of soaring unemployment, a housing market crash and a collapse of consumer spending by a fifth
  • September Legislation to create the National Asset Management Agency (Nama) is passed by the Dáil. The State agrees to pay €54 billion for €77 billion of assets — toxic debt in the form of loans to purchase land and property — from the main banks
  • October Mary Harney, the Health Minister, warns that Ireland could be forced to go to the International Monetary Fund for help if the country cannot implement the necessary cuts in the December Budget. Voters approve Lisbon Treaty in reversal of their decision in May last year
  • November Patrick Honohan, a professor, is appointed Central Bank Governor, the first non-civil servant to be given the role, a sign that the Government is serious about cleaning up its banking sector. The European Commission confirms that it will give Dublin a one-year extension to its 2013 target to restore stability to the public finances
  • December Brian Lenihan, the Finance Minister, announces the harshest Budget in the history of the Republic. Stripped of profits made by US companies in Ireland, gross national product declined by 1.4 per cent, leaving the economy 11.3 per cent smaller than a year earlier

Debt-laden Japan shocked by $1 trillion spree to ‘save lives’
Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country’s biggest ever postwar budget: a 92.3 trillion yen (£630 billion, $1 trillion) spending spree aimed at "saving people’s lives". The unprecedented budget, which supposedly shifts Japan’s fiscal spending focus "from concrete to lives", comes amid rising concern about the solidity of sovereign debt in the world’s second-largest economy.

The new budget will require additional debt issuance of Y44.3 trillion — within the Government’s expected band, but still at a level that will raise Japan’s debt-to-GDP ratio to nearly 195 per cent. Of foremost concern, analysts for Nomura said, is that Japanese tax revenues are expected to fall to Y37.40 trillion this year, the lowest that they have been since 1984. It was, analysts said, a watershed moment — the first time that new debt issuance has exceeded tax revenues since the Second World War. Mr Hatoyama said: "We were just able to stay at a level in which we can maintain fiscal discipline."

Mr Hatoyama swept to power in August with grand promises that the era of wasteful public spending would end. Japan’s unnecessary and notoriously expensive "roads to nowhere" public works projects would be curtailed and the money diverted to supporting beleaguered households.

Four months on from that victory and Mr Hatoyama has spent more than any of his predecessors and has yet to make any serious impact on the wider effort of repairing Japan’s shattered economy. Unemployment is falling from its March highs, but not at anything like the pace in other Asian economies. Mr Hatoyama has also been hurt personally by the arrest of a former aide this week amid a money scandal that bore all the hallmarks of the politics of "old Japan" — precisely the sort of venality that Mr Hatoyama and his Democratic Party of Japan (DPJ) were elected to crush. Prosecutors in Tokyo accused Keiji Katsuba, 59, of falsifying funding reports beginning in 2000 and listing dead people as donors.

Political analysts said that the episode would not be crippling to Mr Hatoyama, who has denied knowledge of the matter and does not face charges, but it adds to pressures that already include a weakened domestic economy and strained relations with the United States. Seiji Adachi, senior economist with Deutsche Bank, said: "The scandal in itself is not so serious, but it tarnishes his reputation further and diminishes his power to be an effective prime minister."

The Government hopes that the budget’s inclusion of steps such as allowances for families raising children and free public high school education will boost its popularity before an Upper House election next summer. That election is critical for Mr Hatoyama and the DPJ. Only by winning an outright majority in the Upper House can the new Prime Minister be free of the various coalitions that have hampered his first months in power. "I believe that we have delivered all we can without compromising fiscal discipline," Mr Hatoyama said. "Our country’s economic and employment conditions are very severe. The most important thing for us is to protect the lives of the Japanese citizens."

The budget plan will contain Y53.4 trillion in policy spending; 51 per cent of that will go to social security programmes. This is the first time that social security has received more than half of policy spending, reflecting the new Government’s focus on jump-starting consumption rather than the big public works projects carried out by former administrations. Tax revenues are expected to make up less than half the Government’s 2010-11 budget, falling behind new debt borrowing for the first time since the Second World War after a deep recession that devastated company profits.

Japan's Consumers, Businesses Try to Adapt to Falling Prices
Consumer prices in Japan fell in November for the ninth month in a row, the government said Friday, a worsening trend that is shifting consumer spending and imperiling a nascent recovery in the world's second-largest economy. The effect can be seen in the behavior of consumers like Tokyo housewife Yoshiko Sunabe. Shopping this week at an electronics superstore, Mrs. Sunabe, 64 years old, dithered over which washing machine to buy, bewildered by the numerous special offers. "Ten years ago my washing machine cost over 100,000 yen, now they are so much less.... It's so confusing," said Mrs. Sunabe.

Japan's consumer price index fell 1.7% in November from a year earlier, the government said Friday. The drop suggests Japan faces a lengthening spell of deflation, which began to plague its economy in the latter half of the 1990s and undermined economic growth until around 2006. Deflation -- a decline in the general level of prices for goods and services -- undermines corporate profits, leading to cutbacks and layoffs, and keeps consumers on the fence waiting for new bargains.

Such effects could bring to an end Japan's two consecutive quarters of economic growth, which has been driven largely by demand from other countries for its electronics, cars and other exports. Prices have dropped broadly. Domestic durables prices have dropped 23% over the past three years; children's clothing has fallen 7.1%; fruit has dropped 8% and beverages have dropped 4%. Food overall has risen 2.6% over the past three years but fallen 0.5% in the past year.

Japanese companies are trying to cope by finding profitable ways to sell to increasingly thrifty consumers. In an Isetan department store in Tokyo, Masae Tezuka, a 28-year-old assistant designer, purchased black suede high-heeled court shoes that cost 13,650 yen ($149). They were originally 19,000 yen. "I'm very happy to get exactly what I wanted at the reasonable price. This year prices are definitely lower," she said.

Price competition has been particularly intense in fast food, as low-cost businesses feel pressure. A plain hamburger at a Tokyo Wendy's this week cost 290 yen, compared with 100 yen for a hamburger at the McDonald's across the street. Two decades ago, as Japan's asset bubble was near its peak, that McDonald's burger cost 210 yen.

Citing price competition, Japan's Wendy's franchisee, which acquired the business in 2002, said this month it plans to end its agreement Friday, shutting its 71 outlets, which are mainly in the Tokyo area. Kazuharu Hattori, a 47-year-old taxi driver who once favored lunchtime bento boxes that cost 500 yen, says he now prefers to buy instant noodles in bulk, costing him little more than 100 yen per meal. He also buys 100-yen rice-ball snacks at convenience stores. Seven & I Holdings Co.'s Seven-Eleven Japan, the nation's biggest convenience chain by locations, has thrown more than 10 rice-ball discount campaigns this year. Rival chains have held similar campaigns. "Whenever I see the cheaper 100-yen rice balls left on the shelf at convenience stores, I grab them all," Mr. Hattori said.

In the Yurakucho area of Tokyo, restaurant owner Daisuke Chiba has cut lunchtime serving staff to two from three, and is offering a free bowl of rice with meals. His diner, part of a chain called Pepper Lunch, charges 980 yen for a fried steak with bean sprouts. A year ago, he was charging 1,100 yen. For the first time on Wednesday, Mr. Chiba was offering a rib meal for 740 yen. Businessman Yasuyuki Someya, 32, said: "For the price the meal is very tasty, if it cost 1,000 or 2,000 yen I'd be reluctant to pay."

Wataru Takano, a salaryman in his 30s who moved to Tokyo from Osaka earlier this year, snagged a free cafe au lait from a McDonald's in the Musashi Kosugi neighborhood but says he would otherwise rarely visit. Gyudon-style restaurants, which serve beef strips on rice, offer a better deal, he believes. "I found out about the recent price cuts [at gyudon chains] on TV. It's surely another reason to visit them more often," he said.

According to data compiled by the Organization for Economic Cooperation and Development, Japan's poverty rate, or the percentage of those living on less than half of the median income, rose from 12% in the mid-1980s to 14.9% in the mid-2000s, the fourth highest among OECD countries after Mexico, Turkey and the U.S. In 2007, 15.6% of Japanese households surveyed said they hadn't always been able to afford food in the past year, according to recently released study by the National Institute of Population and Social Security Research, a government-affiliated think tank.

U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy
The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday. The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each. Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said.

Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s. "The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note." Treasury officials couldn't be reached for comment Friday.

So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring. In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.

The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.

Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies. The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.

The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies. The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.

Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority. The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.

For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million. When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator. At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.

Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer. At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.

The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie. He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable." The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.

Here's The Secret Reason We Eliminated The Bailout Caps On Fannie And Freddie
On Christmas Eve, when the news was assured of getting no coverage whatsoever, The White House announced that it had eliminated the maximum bailout cap for Fannie Mae and Freddie. As some observers have pointed out, all the move really did was formalize what everyone has figured for decades, that the two zombie GSEs were truly organs of the federal government, and that their debts would be backed up ad infinitum. So, why the move, and why then? Credit analyst Edwart Pinto shares his theories.

What the Treasury’s lifting of the bailout caps on Fannie and Freddie might portend for 2010

Might Treasury be taking these steps in anticipation of the following?

1.    Revisions to the flagging Homeowner Affordable Housing Program (HAMP).  Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.

2.    Fannie and Freddie taking on a greater role in the near term to support their own mortgage backed securities (MBS).  Now that the Treasury’s and the Federal Reserve’s own support programs are in the process of winding down, the administration’s actions  may be preparing  Fannie and Freddie as the vehicles for continuing this support.  The Treasury’s December 24, 2009 announcement raises the portfolio limits to $900 billion each, thereby providing Fannie and Freddie with the ability on a combined basis to increase their portfolios by a total of $275 billion.  At the current rate of the Fed’s MBS purchases, this new capacity would last about 4-5 months. 

3.    Fannie and Freddie growing their portfolios on a long term basis to provide continued support to the MBS market.  Given the recent uptick in mortgage rates due to increasing Treasury rates, the lifting of the bailout caps may be designed to reassure investors in an effort to keep MBS spreads from widening relative to Treasury rates.  By providing a more open ended capital commitment, along with the greater portfolio capacity now, Fannie and Freddie are in a position to grow their portfolios early in 2010.  If the market accepts their purchases without wider spreads, then even higher portfolio dollar limits can be created with the stroke of a pen; 

4.    The administration’s announcement in February regarding the future role of Fannie and Freddie.  In a separate press release also issued on December 24, 2009 it was revealed that the executive pay packages at Fannie and Freddie do not include a common stock component.  This fact, along with the lifting of the bailout caps and the expanded portfolio capacity, may well indicate an intention to formalize Fannie and Freddie’s continued status as government agencies.  If this were to happen, Fannie and Freddie’s outstanding common stock likely becomes worthless, making it of no use as an employee incentive. .  This action would be justified by stating that Fannie and Freddie are just too important to the economic recovery to re-privatize.

5.    Increasing the demand for Fannie and Freddie’s MBS by reducing the multiplier for bank risk based capital requirements from 20% to 10%.  This action would help serve to keep spreads to treasuries narrow.  Banks would only need 0.8% risk based capital to support their holdings of Fannie Freddie MBS versus the 1.6% needed today.  The earlier noted lifting of Treasury’s capital support caps could provide the justification for this reduction in capital requirements, since it signals an increase in the government’s commitment to Fannie and Freddie.. 

The above actions would preserve and strengthen the government’s involvement and control over the country’s housing finance system and make it harder to reintroduce substantial private sector involvement later on.  They would also continue distortions in the marketplace leading to who knows what unintended consequences. Finally these steps would do nothing to deleverage the housing finance system, a key step in returning it to any degree of normality.

Chinese Premier Wen Calls for Action on Property Speculation as Prices Soar
China’s Premier Wen Jiabao called for policies to curb property speculation, an indication the government is ready to tighten policies to prevent the economy from overheating. Wen, speaking in an interview with the official Xinhua News Agency, said property prices have risen too quickly in some areas and that tax and interest rates are among tools that could be used to control speculation. His remarks were broadcast online today.

China’s property prices climbed last month at the quickest pace since July 2008, adding to concern that record lending may create asset bubbles in the world’s fastest- growing major economy. Wen isn’t the only one concerned about overheating: central bank adviser Fan Gang said Nov. 18 that "double-digit" growth wouldn’t be good in 2010 amid the rising risk of bubbles in stock, real estate and commodity prices.

Wen said in the interview that China isn’t experiencing inflation and that consumer price increases will be kept in a "reasonable range." "China will keep its loose stance at least in the first half of next year as inflation is expected to stay within tolerable levels," said Shen Minggao, chief economist for Greater China at Citigroup Inc. "There won’t be significant changes to maintain policy stability, but some industries with excess capacity have seen credit tightened."

China’s growth may surge to as much as 12 percent next year, increasing the risk from inflation unless the government raises interest rates, Zhu Jianfang, chief economist at Citic Securities Co., said Dec. 23. Residential and commercial real-estate prices in 70 major cities rose 5.7 percent from a year earlier, compared with a 3.9 percent increase in October, the National Bureau of Statistics said on Dec. 10. The nation is poised to overtake Japan to become the world’s second-biggest economy next year, according to International Monetary Fund projections. The government’s $586 billion stimulus spending, record bank lending and subsidies for consumer purchases helped the economy expand 8.9 percent last quarter, the fastest pace in a year, amid the global recession.

China raised its 2008 growth estimate to 9.6 percent from 9 percent and said this year’s quarterly figures will increase, narrowing the gap with Japan, the statistics bureau said Dec. 25. A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year drove a recovery in the economy and increased the risk of bubbles in property and stocks. The economy may be boosted by a rebound in exports and domestic spending next year, said Zhu at Citic, who expects the benchmark lending rate to increase by between 27 basis points and 54 basis points from 5.31 percent. A basis point is 0.01 percentage point.

China’s central bank reaffirmed Dec. 23 plans to keep a "moderately loose" stance for 2010 and to restrict credit for industries with excess capacity. The Chinese economy grew 8.9 percent from a year earlier in the third quarter, 7.9 percent in the second and 6.1 percent in the first as the global economy recovered from the worst slump since World War II. Economic growth in the fourth quarter will exceed the 8.9 percent of the three preceding months, Xu Xianchun, deputy head of the National Bureau of Statistics, said Dec. 23.

China won't be pressured over yuan peg - Wen
Chinese Premier Wen Jiabao on Sunday struck a defiant note about the country's controversial exchange rate policy, saying the government would not give into foreign demands to let the yuan rise. Wen said the currency was facing growing pressure to appreciate, but insisted that China was committed to keeping it stable, having virtually pegged it to the dollar since the global financial crisis worsened in the middle of last year.

"We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures," he said. "The true purpose (of these calls) is to contain China's development," he added in an interview with the official Xinhua news agency. The yuan has fallen against the currencies of most of its trading partners this year because it has been fixed to a weakening dollar, while China's economy has bounced back strongly. U.S. senators have asked for an investigation into whether current yuan policy represents a form of subsidy that would justify tariffs on Chinese imports.

Wen also repeated an oft-made declaration that the stable yuan had contributed to the global economic recovery. A series of foreign policymakers, including U.S. President Barack Obama, European Commission President Jose Manuel Barroso and International Monetary Fund chief Dominique Strauss-Kahn, have visited China in recent months to press for an appreciation of the yuan. But many analysts believe that Chinese leaders will want to see several consecutive months of increasing exports before letting the yuan resume the path of gradual appreciation it followed from 2005 to mid-2008. The market expects a roughly 2.7 percent appreciation of the yuan over the next 12 months, according to offshore forwards pricing.

Wen gave a cautious outlook for the domestic economy in 2010, saying it was too early to wind down the government's stimulus policies but that officials needed to be attentive to surging property prices and incipient inflation. Although China would continue to encourage citizens to buy homes for their own use, differentiated interest rates would be used as a tool to fight property market speculation, Wen said.

He was apparently referring to a policy proposal that China could keep preferential mortgages -- a discount of up to 30 percent on benchmark lending rates -- for people buying their first homes but eliminate them for additional home purchases. More broadly, Wen warned on imbalances rising from too much bank lending while defending China's use of a 4 trillion yuan stimulus package to fend off the global economic crisis. "Parts of the economy are not balanced, not coordinated, and not sustainable," Wen said, repeating previous statements. It would be better if lending by Chinese banks was not on such a large scale, Wen added.

China's overall lending situation had improved in the second half of the year, when banks dramatically slowed their pace of credit issuance after a record surge in the first half, Wen said. Chinese bank are on course to lend an unprecedented 9.5 trillion yuan ($1.4 trillion) this year, double last year's total. The market expects new loans to fall to about 7.5 trillion yuan next year. This time last year, central planners facing a sharp downturn in external demand for Chinese exports worried the country would be unable to reach the 8 percent growth deemed necessary to maintain employment and avert social instability.

With the country on track for about 9 percent growth this year and an even faster expansion next year, concerns have instead shifted to whether pockets of the economy are overheating and whether inflation could flare up. Wen warned that although there is no sign of inflation at present, this year's exceptional money supply growth could stoke inflationary expectations and that inflation could appear. But he said the government was committed to seeing through its massive two-year stimulus package, launched in late 2008. "If we have a too-early exit of the stimulus policies, we may lose all that we have already achieved," he said.

Pounding for Gordon Brown over UK debt crisis
A group of leading economists has attacked the government for its "irresponsible" failure to set out "even the rudiments" of a convincing plan to reduce Britain’s £178 billion budget deficit and warns of "alarming complacency" in the face of the country’s fiscal challenges. In a letter to The Sunday Times, the economists, including Tim Congdon, Patrick Minford and Gordon Pepper, warn of "heightened risk" of a downgrade of Britain’s sovereign debt rating.

The signatories, several of whom are on the "shadow" monetary policy committee, say that the integrity of UK fiscal and monetary policy is at stake because of the huge budget deficit. They warn that international investors could see the Bank of England’s £200 billion quantitative easing programme, mainly the purchase of UK government bonds (gilts) as "driven by a politically-motivated desire to ease the government’s funding difficulties".

Some of the economists, who also include Peter Warburton — who this year topped The Sunday Times table for forecasting accuracy — Peter Spencer and David Smith, favour immediate action to cut the deficit, while others say the need is for a medium-term plan. "While there is room for debate about the pace of reducing the budget deficit in the initial phases of recovery, there should be no debate about the need for a clearly set out fiscal consolidation programme for the medium term based on spending discipline rather than higher taxes," they write.

"We were particularly concerned that the pre-budget report announced additional public spending for later years, as well as higher taxes, at a time when the priority should be to reduce public spending to levels compatible with the UK’s tax base." The Conservative party should set out its intentions before the election, they say. "This would give voters and markets a clear choice between a governing party prepared to indulge in risky procrastination about the scale of Britain’s fiscal problems and an opposition prepared to take the necessary action," they conclude.

In another report, the Centre for Economics and Business Research (CEBR) will warn that uncertainty over Britain’s public finances could push sterling below parity against the euro between now and the election. "If opinion polls show the Tory lead dropping well into single figures, the markets will have kittens and probably start a sterling sell-off," writes Doug McWilliams, chief executive of the CEBR. "Rating agencies are looking for an excuse to downgrade the UK government from its AAA rating, following countries such as Greece".

"Whether markets react to Britain’s fragile public finances before they react to the divergence of performance in the euro zone will determine whether sterling drops below parity. If I had to bet, I would bet on the side of parity being broken." Treasury officials maintain that a credible plan is in place for reducing the deficit and that they have been cautious about their revenue assumptions for the future. They say that the pre-budget report contained a more aggressive deficit-reduction plan than those adopted by other countries.

As Slump Hits Home, Cities Downsize Their Ambitions
Mesa, Ariz. -- The police department in this city of 470,000 has lost about 50 officers, and is hiring lower-paid civilians to do investigative work. The Little League has to pay the city $15 an hour to turn on ball-field lights. The library now closes its main location on Sundays, and city offices are open only four days a week. This holiday season, the city didn't put up festive lights along the downtown streets. Mesa's tax receipts, depressed by the recession, will likely come back one of these days. But Mayor Scott Smith doesn't believe city services will return to prerecession levels for a long time, if ever. "We are redefining what cities are going to be," says Mr. Smith, a Republican who ran a homebuilding company before his election last year.

The redefinition isn't sitting well with residents like Sandra West, 67 years old, who has lived in Mesa for more than four decades. She's noticed the city's parks looking a bit ragged, is unhappy the library has cut back hours and misses the Christmas lights. "It was really beautiful," she says. Months after many economists declared the recession over, cities are only now beginning to feel the full brunt of it. Recessions often take longer to trickle down to local government, in part because it takes time for the sales and property-tax revenues on which municipalities depend to catch up with a depressed economy.

But the sting this time around is expected to be far more acute and long-lasting then in previous recessions. Projected deficits are especially deep in some places and tax revenues could be pinched for years as consumers turn thrifty and real-estate prices remain diminished. That means the relatively painless measures such as borrowing, deferred payments to pension plans and scattered layoffs that have been used during past episodes of fiscal strain are unlikely to be effective in some cities.

In the decade through 2008, municipal tax revenues grew at a rate of 6.5% a year, faster than the overall economy's 5.1%, unadjusted for inflation. Those revenues have started to slip. A national tally isn't yet available, but state tax collections fell 11% across 44 states in the third quarter of 2009, from the same period a year ago, according to a report by the Nelson A. Rockefeller Institute of Government at the State University of New York. In a recent survey by the National League of Cities, 88% of city budget officers said they were less able to meet their financial needs than they were a year ago.

The specter of lean budgets for years ahead has some of the nation's 89,000 local governments rethinking what services to provide and how to pay for them. From Mesa to Philadelphia, this means some combination of higher taxes and fewer services. In some places, it means more and higher fees for permits and recreation programs. Museums, pools and the like are relying more on income from fees charged to users and from nonprofit organizations, and less on taxpayers.

These cuts matter greatly to the economy at large. Local government spending accounts for 8.8% of the nation's total output, including everything from employee salaries to snowplows. The sector employs one in nine workers -- 14.5 million in all, or about 8 million in education and 6.5 million elsewhere. More Americans work for cities, counties and school boards than in all of manufacturing.

More likely to be union members, government workers tend to be better paid and have greater job security than many of the taxpayers who pay their salaries. Benefits are often better, too. Virtually all full-time state and local workers have access to retirement benefits; in the private sector, about 76% of full-time employees had retirement benefits. Employment in local government peaked in August 2008 and has fallen by 117,000 since then, or less than 1%, compared with a 6.3% fall in private employment from its December 2007 peak.

About one third of the federal $787 billion fiscal stimulus was aimed at state and local government. The money has helped some local governments keep police and school teachers on the job, and has gone toward building new firehouses and police stations. Another stimulus program subsidizes municipal borrowing by paying 35% of local government's interest cost on borrowing for infrastructure. But some cities have complained that too much of the stimulus was absorbed at the state level. President Barack Obama is promising to do more, calling in a recent speech for more "relief to states and localities to prevent layoffs."

Just as the recession has spurred businesses towards more efficiency, it has forced some cities to do the same. In upstate New York, for instance, the Village of Lake George and the neighboring town of Lake George are debating a consolidation plan that would create one government from two sets of lawmakers, two planning boards and two zoning commissions.

The move would save about $350,000 a year, or about 10% of the combined town and village budgets, according to Fairweather Consulting, which was hired to study the proposal. But some locals say the two places might sound alike on paper, but in reality are very different: Residents of the quaint village, which thrives on tourism, worry services could decline, while residents of the town, whose primary commercial center is a highway-adjacent strip with a Howard Johnson, worry that taxes will rise. "It's the unforeseen," says Robert Blais, mayor of the Village of Lake George. "They know what they've got and they're happy with it."

In Philadelphia, where sales and corporate taxes have taken a hit, budget cuts are limited by the large fixed costs of city workers' pension and benefits plans. About one fifth of the city's $3.7 billion budget goes for health-care and pension costs for current and retired workers. The city's overall tax revenue has fallen 6% over the past two years, while pension costs have risen 6% and health-care costs 11%. Philadelphia Mayor Michael Nutter, a Democrat, is pushing union employees to pay more of their health costs and is looking to move new employees to a less generous pension plan.

The city has cut about 800 positions in the past year, mostly through attrition, and suspended some services citizens used to take for granted. It has stopped providing snow removal on some smaller, one-way streets, except in emergencies, and it suspended mechanical leaf pick-up in some spots. This fall and early winter, older, tree-lined neighborhoods like Mt. Airy and Chestnut Hill were littered with rotting leaves. "Intellectually, I understand budget cuts need to be made but I do not think this was thought through," says Liz Macoretta, who lives in the West Mt. Airy neighborhood. "You're going to have half the street full of leaves and then you're going to have one-way traffic. I feel let down."

Anyone who wants to have a parade in Philadelphia now has to pick up the tab. The city's Mummers Parade, where 10,000 or so string bands and other performers don bright costumes and march up Broad Street on New Year's Day, won't receive the $336,000 in prize money that used to go to the best string band and other parade participants. The last time that happened was during the Great Depression. "You used to get ten grand and a trophy, now you just get a trophy," says George Badey, chairman of Fund, a nonprofit that helps fund the parade. The Mummers also had to pay $8,800 for security, clean up and other services, all of which the city used to provide free.

Mesa was founded in the 19th century by Mormon pioneers who built a grid of wide streets to accommodate settlers' wagons. It's been growing ever since, from a quiet Phoenix suburb to the nation's 38th most populous city. More people might have heard of Minneapolis or Miami, but Mesa has more people than either. The stretch marks of growth are everywhere, from new freeway lanes under construction to miles of red-roofed subdivisions with curvy streets.

The city's revenues come largely from state aid and sales taxes, both of which have been hit hard by the recession. As a result, Mesa has spent the past year slashing services it spent decades adding, stripping 13% out of its general fund budget and cutting 340 positions through layoffs and attrition. Mesa's voters also approved a property tax this year, something that the city's generally conservative citizens had long resisted. Mesa's police force now has 801 sworn officers, down from 858 last year. To keep the force just as visible on the streets, some detectives have been reassigned to patrol duty, leaving bigger case loads for the rest of the detectives.

The cuts have spawned new ideas. A nine-person investigative unit, based out of a Mesa substation on the eastern edge of town, consists of civilians, not sworn officers. Investigators make about $37,000 per year, versus $49,000 for officers, and carry out basic investigations for minor nonviolent crimes. They travel in unmarked white cars, don't carry guns and wear "business attire" -- usually a pressed shirt and pants -- instead of the blue uniforms sworn officers wear.

The team goes through 18 weeks of training, 20 weeks less than police officers do. Many of the classes are the same, but the course leaves out things like aggressive driving and time at the firing range. They come from a variety of backgrounds: One had been a police officer, a few had civilian desk jobs for the Mesa police department, while several others worked in retail stores including Costco and Barnes & Noble. Sgt. Stephanie Derivan, who oversees the program, says hiring civilians reduces costs while improving services. It gives police officers more time to patrol the streets, she says, and the specialized investigators never have to hurry through a crime scene to get to a break-in in progress or chase down robbers. "My folks have the time to spend with people," says Sgt. Derivan.

On a recent afternoon, civilian investigator Rachell Tucker was sent to check out a burglary at a Mesa trailer park. Ms. Tucker was an officer in the Los Angeles School Police Department eight years ago, where she patrolled public school buildings, before taking time off to have kids. At the trailer park, she dusted a window screen for fingerprints and asked neighbors if they'd seen anything suspicious. Becky Cumberland says she didn't notice that Ms. Tucker wasn't a police officer. "As long as she does what a police officer can do, that works for me," said Mrs. Cumberland as she sat on her back porch, sipping a Coke while writing down everything that had been stolen from her trailer, including an Xbox video game console and her son's birthday money.

Cuts in the parks department are easier to see. Michael Holste, Mesa's assistant director of recreation operations, pointed to the department's new brochure, which lists an after-school recreation program with kickball and other games with the word "cancelled" overlaid in bold letters. In one Mesa park, a green-and-yellow jungle gym is surrounded by dirt because the city couldn't afford sprinklers. At Powell Junior High School, which itself might be closed due to tight budgets, swimming classes are cancelled; the pool has been closed all year, and isn't likely to reopen.

It's far from certain the city will resume funding parks at the same level, even when tax revenues return. Cuts in the recreation department eliminated a city-funded programmer who organized disabled sports programs such as wheelchair basketball and flag football games for people with disabilities including autism and Down syndrome. Mesa Association of Sports for the Disabled, a local nonprofit, has hired its own coordinator at a lower salary and fewer benefits. Lane Jeppesen, the group's executive director, says the new arrangement may be permanent. "I don't think the city will come back with another full-time position for a very long time because we've picked up the slack," she says.

All the cutting has put Mesa in a financial position stronger than that of many cities. Expenses are now in line with revenues. Standard & Poor's rates the city's debt AA and calls Mesa's financial management "strong, well embedded and likely sustainable." And despite tight budgets, the remaining city workers are striving to add at least some services for the city's still-growing population. At a city council study session on a recent morning, library director Heather Wolf presented her idea for a new "express" library to open in 2010. "There is a need out there for library service and this is one way to fill the gap," says Ms. Wolf.

It wouldn't look much like Mesa's main branch, though, which sits downtown and is adorned with a plaque commemorating the library's 1980 dedication. Because of the shoestring budget, the new library would be housed in a mostly vacant strip mall, with two employees and open just three days a week. On days when the library is closed, the collection of mostly popular titles such as self-help books and airport fiction would be dispensed via vending machines similar to the DVD rental kiosks that sit in front of convenience stores in Mesa and many other U.S. cities.

Home sweet rental
No longer buying into the American Dream

Home ownership has often been considered a critical part of the American Dream -- an unwritten privilege of living in America bestowed on its financially secure citizens. Owning a home was the ticket to financial security and, for several years earlier this decade with home values soaring, seemingly the best investment Americans would ever lay their hands on. But in the wake of the housing crisis -- with home values down 35 percent or more and with little robust growth seen on the horizon -- it may be time to ask whether buying a home is still so vital to financial happiness.

The current economic environment is making a strong case that renting a home and smartly investing your savings can be just as rewarding. When making the decision to buy vs. rent, people usually consider several factors -- the rent vs. mortgage payment being the primary question. But there are other financial factors to consider, including:
  • Your insurance premium.
  • Property taxes (which are usually higher than any tax deduction you get from your mortgage interest).
  • Maintenance (pipes break, electricity problems, etc.).
  • Utilities (utilities and maintenance for renters is often reflected in the rental price, but it's not reflected in a mortgage when you own).
  • Yard work, pest control, remodeling, etc. (again, rents usually have this built into the price, but mortgages don't).

And let's not forget those initial costs that always seem to add up to more than you expect:
  • A down payment of at least 15 percent, which is $90,000 on a $600,000 home.
  • Closing costs, usually 5 percent of loan amount, or another $25,000.
  • Initial remodeling costs.

Remember that you are completely out of that cash down payment you made because even if you sell, homeowners usually roll over that initial down payment into a new house for tax purposes. Cash is king and many prefer having cash in the bank. Okay, so when you buy you definitely spend more per month and your initial costs mean that the house has to appreciate 10 percent-to-20 percent on Day 1 in order for you to break even. But that's supposed to be okay because you have the house as an investment, right?

Well, except for earlier this decade, it's been a so-so investment. Between 1890 and 2004 (when housing prices began being tracked up until the peak of the housing boom, so I am giving zero credit to the decline in housing prices that have made these numbers a lot worse), housing went up a dismal 0.4 percent annually vs. 8 percent for the stock market, according to the Social Security Advisory Board.

Critics of renting point to real estate being an asset as opposed to throwing money away renting. But they forget about the massive amounts of money that it takes to get into the home ownership game. Rather than spend $100,000-to-$200,000 on a home's initial cost -- and that has become completely illiquid as long as you own the house -- you can put that money in a portfolio of diversified real estate investment trusts, including residential investment trusts, if you truly believe in the housing market.

Renting in today's market and investing your savings will allow you:
  • To diversify your savings, something buying a home prevents you from doing.
  • To keep your assets liquid, a real security blanket, particularly in times of stress.
  • To keep from becoming way too leveraged in housing for a significant chunk of your portfolio.

So while the banking industry, the White House and your Uncle Bob are all telling you to buy a house already, your portfolio may be better set if you rent a place to live. And maybe you can get your landlord to shovel the snow.

How Overhauling Derivatives Died
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.

The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.

But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges. A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an "educational" process by dealers and customers that resulted in "a grudging recognition" that many uses of derivatives didn't fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital Hill.

For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school. Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin.

Dealers persuaded lawmakers to make exemptions to the clearing rules for some customers, including those covering foreign-exchange contracts, hedging by "end users" such as energy firms and airlines, and activities to offset "balance sheet risk," said Adam White, derivatives analyst at White Knight Research & Trading in Atlanta. Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements. Ohio Democrat Dennis Kucinich said in a statement he voted against the bill because it "contains a number of loopholes that sophisticated industry insiders will exploit with ease."

In an interview, House Financial Services Committee Chairman Barney Frank, who led efforts to craft the bill, defended the legislation, saying it is tougher than critics say. He said its clearing and trading provisions would require greater disclosure of trades and resulting risks, and give regulators more power to monitor and manage such risks. The Massachusetts Democrat disputed Mr. Kucinich's implication that Wall Street dealers will be able to exploit the bill's exceptions, but said House Republicans had blocked some of his own efforts to make the bill tougher.

Wall Street executives say requiring end users to post additional margin could boost costs. An executive from Chicago utility Exelon Corp. told the Senate in September that requiring it to execute its electricity hedges on exchanges could require billions in additional cash outlays for margin that could boost prices to consumers. 3M Co. and Boeing Co. also warned of costs. The Obama regulatory reform plan unveiled in June envisioned imposing higher capital requirements on dealers for customized, nonstandard derivatives that aren't cleared—to encourage dealers to send more to clearinghouses. But the House bill said only that capital and margin standards for off-exchange trades should be appropriate "for the risk associated with the noncleared swap," leaving specifics to regulators.

Some credit-default swaps clearing has already begun this year at the IntercontinentalExchange Inc., known as ICE, and CME Group Inc. The biggest derivative clearing operation, LCH Clearnet Group Inc. in London, already clears about one-third of roughly $200 trillion in interdealer interest-rate swaps. A report Dec. 17 by Morgan Stanley analysts estimated that the volume of derivatives cleared could increase from a current 20% of the total to as much as 60% by 2012—a backdoor confirmation of critics' charge that 40% of the universe won't be covered.

Do we need a new reserve currency?
A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis", says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money." Indeed, Wolf said he's in complete agreement with China's Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly".

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession, the dollar is not adequately supported." The US currently has a national debt in excess of $12 trillion (Dh44trn) or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108bn. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf. "There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable". "This is simply the American way of shifting the recession from them(selves) to their trading partners," said Wolf. "What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable." "Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

"The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. "We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess and that's where we are, I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years, I'm sure of it. We're going to get there. The only question we have to decide is, how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07trn from a year ago. However, according to The Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010. China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.

Ilargi: Robert Shiller wants government to issue stocks (equity) instead of only Treasury bonds (debt), in order to give investors a share in future GDP growth. Nice idea, you might say, at first glance, but if you do, please note that Shiller does not once address either the possibility that there may be no growth, or the consequences this would have for investors.

A Way to Share in a Nation’s Growth
by Robert J. Shiller

Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national "profit," as measured by gross domestic product.

Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century. Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now? Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession.

In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call "trills," short for trillionths. Let me explain: Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

If substantial markets could be established for them, trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices.

If trills were issued by Canada, for example, they would pay about 1.50 Canadian dollars in dividends this year, one trillionth of the annual cash flow. The value of the security is derived from the dividend, and might be priced very highly in the market — perhaps at around 150 Canadian dollars — given that country’s strong prospects for growth. Trills issued by the United States Treasury would pay about $14 in dividends this year and might fetch $1,400 a trill or more.

The Standard & Poor’s 500-stock index now has a dividend yield of 2.3 percent. The dividend yield on trills might be much lower, reflecting the substantially higher long-term growth rate of G.D.P. relative to S.& P. dividends — in real terms, 3.1 percent versus 1.1 percent a year, respectively, since 1957. The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.

There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields, which may have to be raised to attract more investment. Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.

The United States government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government’s dividend burden would automatically decline in tough times, when G.D.P. declined. The final statement of the Group of 20 economic meeting in Pittsburgh in September pledged to "establish a pattern of growth across countries that is more sustainable and balanced, and reduce development imbalances." These imbalances — exemplified by the massive Chinese holdings of United States government debt — might not be so worrisome if the investments were financed better.

In fact, issuing shares in G.D.P. might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its G.D.P., creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances.

We already have international equity markets that allow international investments in private firms within countries. But these do not represent the entire economy. Corporate stocks represent implicit claims on after-tax corporate profits, which typically amount to no more than 10 percent of G.D.P. Moreover, after-tax corporate profits are a much more slippery concept than G.D.P., affected as they are by many domestic policies, including taxes, government involvement in labor disputes and even government bailouts — as we now know very well.

Someday, China might issue shares in its G.D.P., too, and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China’s standard of living.

Proposals for securities like trills have been aired many times over the years. I argued for them in "Macro Markets," my 1993 book. The Nobel laureate Robert Merton has had similar proposals. Other ideas for G.D.P.-linked securities have been advanced by John Williamson at the Peterson Institute, by a group at the United Nations Development Program, by Kristin Forbes of the Council of Economic Advisers under George W. Bush, and by Eduardo Borensztein of the Inter-American Development Bank and Paulo Mauro of the International Monetary Fund. So far, these proposals have gone unheeded. But the current environment may be more suitable for them.

Ilargi: John Williams gets it all increasingly right, but he still overlooks the deflationary phase, even as we’re in it.

We're Screwed! founder John Williams explains the risk of hyperinflation.

Do you believe everything the government tells you? Economist and statistician John Williams sure doesn't. Williams, who has consulted for individuals and Fortune 500 companies, now uncovers the truth behind the U.S. government's economic numbers on his Web site at Williams says, over the last several decades, the feds have been infusing their data with optimistic biases to make the economy seem far rosier than it really is. His site reruns the numbers using the original methodology. What he found was not good.

Maymin: So we are technically bankrupt?

Williams: Yes, and when countries are in that state, what they usually do is rev up the printing presses and print the money they need to meet their obligations. And that creates inflation, hyperinflation, and makes the currency worthless.

Obama says America will go bankrupt if Congress doesn't pass the health care bill.

Well, it's going to go bankrupt if they do pass the health care bill, too, but at least he's thinking about it. He talks about it publicly, which is one thing prior administrations refused to do. Give him credit for that. But what he's setting up with this health care system will just accelerate the process.

Where are we right now?

In terms of the GDP, we are about halfway to depression level. If you look at retail sales, industrial production, we are already well into depressionary. If you look at things such as the housing industry, the new orders for durable goods we are in Great Depression territory. If we have hyperinflation, which I see coming not too far down the road, that would be so disruptive to our system that it would result in the cessation of many levels of normal economic commerce, and that would throw us into a great depression, and one worse than was seen in the 1930s.

What kind of hyperinflation are we talking about?

I am talking something like you saw with the Weimar Republic of the 1930s. There the currency became worthless enough that people used it actually as toilet paper or wallpaper. You could go to a fine restaurant and have an expensive dinner and order an expensive bottle of wine. The next morning that empty bottle of wine is worth more as scrap glass than it had been the night before filled with expensive wine.

We just saw an extreme example in Zimbabwe. ... Probably the most extreme hyperinflation that anyone has ever seen. At the same time, you still had a functioning, albeit troubled, Zimbabwe economy. How could that be? They had a workable backup system of a black market in U.S. dollars. We don't have a backup system of anything. Our system, with its heavy dependence on electronic currency, in a hyperinflation would not do well. It would probably cease to function very quickly. You could have disruptions in supply chains to food stores. The economy would devolve into something like a barter system until they came up with a replacement global currency.

What can we do to avoid hyperinflation? What if we just shut down the Fed or something like that?

We can't. The actions have already been taken to put us in it. It's beyond control. The government does put out financial statements usually in December using generally accepted accounting principles, where unfunded liabilities like Medicare and Social Security are included in the same way as corporations account for their employee pension liabilities. And in 2008, for example, the one-year deficit was $5.1 trillion dollars. And that's instead of the $450 billion, plus or minus, that was officially reported.


These numbers are beyond containment. Even the 2008 numbers, you can take 100 percent of people's income and corporate profit and you'd still be in deficit. There's no way you can raise enough money in taxes.

What about spending?

If you eliminated all federal expenditures except for Medicare and Social Security, you'd still be in deficit. You have to slash Social Security and Medicare. But I don't see any political will to rein in the costs the way they have to be reined in. There's just no way it can be contained. The total federal debt and net present value of the unfunded liabilities right now totals about $75 trillion. That's five times the level of GDP.

What can we, the people, do to stop the government from, you know, taking all our money?

We should have acted 20 years ago. There's not much you can do at this point to prevent the eventual debasement of the dollar. This involves both sides of the political spectrum. It's not limited to the Republicans or the Democrats. They've both been very active in setting this up.

What can individuals do?

The only thing individuals can do now is look to protect themselves. I wish I could see a way, but shy of severe slashing of the social programs that is so politically reprehensible and would create such problems and social unrest, I don't see that as a practical solution.

If you're a young 20- or 25-year-old guy or gal, would you move to another country? What would you do?

We still have a great country. We're going through a period of economic pain. It's happened before. This is the kind of thing that's taken us decades to get into and it will take us decades to get out. Although the hyperinflation is going to be limited largely to the U.S., the economic downturn will affect things globally. I can't tell you how things will go with a hyperinflationary Great Depression, which is where I see things going.

It's the type of thing that will tend to lead to significant political change. People tend to vote their pocketbooks. You could have the rise of a third party. You could even have rioting in the streets. I'm not formally predicting that — anyone can run these different scenarios. For the individual, what you need to do, from an investment standpoint, look to preserve your wealth and assets. Don't worry about the day-to-day fluctuations in the markets. What I'm talking about here is over the long haul...

[Gold is] going to be highly volatile, as will the dollar, over the near term, but longer term, physical gold I would look at as a primary hedge for preserving the purchasing power of your wealth and assets. Maybe some physical silver. Get some assets outside the U.S. dollar. I might even look to move some assets physically outside the United States. The key here is to look at a longer range survival package, battening down the hatches, and preserving your wealth and assets during a very difficult time. Once you're through that, you'll have some extraordinary investment opportunities, and I can't tell you what it's going to be like on the other side of this crisis.

Dr. Phil Maymin is an Assistant Professor of Finance and Risk Engineering at NYU-Polytechnic Institute. The views represented are his own.

The Long Decline of the American Economy
by John Kozy

The official position on the cause of the current financial downturn is that it was caused by the reckless practices of financial institutions and the failure of regulatory bodies, and it is likely that these were the proximate causes, but they were not the ultimate cause. Americans, unfortunately, are rarely willing to search for ultimate causes or do anything about them when they are found.

In the 1980s, I was living in a suburb of Washington, DC. One evening, a friend and I were walking the streets of Georgetown when we met a group of Japanese taking pictures of a building they had just purchased. They asked us to take some photographs of them in front of it, which we did. A few blocks further along, we observed a group of teenagers drumming on plastic household buckets. The kids were very good drummers, but I pointed out to my friend that after WW2, the youths of the Caribbean altered abandoned oil drums into musical instruments of various ranges and created a new and unique musical genre—steel drums. Later over dinner, my friend and I discussed what appeared to be a serious decline in America's economic fortunes and culture.

We were not alone in noting this decline. There was much talk and writing at the time about how the Japanese seemed to be on the verge of buying America and how the quality of products and services delivered by American companies had been outstripped by foreign competitors, especially the Japanese. TQM (Total Quality Management) programs, made up of approaches to management that originated in Japanese industry in the 1950s, were highly touted. Having observed Japan’s success employing quality control techniques, western companies started to take their own quality initiatives. TQM, developed as a catchall phrase for the broad spectrum of quality-focused strategies and programs. The most well-known proponents of TQM are Deming, Juran, Ishikawa, Feigenbaum, and the ISO (International Standards Organization).

The success of these programs has been slim. Numerous studies have shown that implementing a quality standard rarely improves a company's performance, and my own personal experience validates that. I was involved in ISO standard implementations in three companies. It was obvious to me that none would work, and the first company went bust within three years of acquiring certification, the second company also no longer exists, having had its assets sold off in a bankruptcy proceeding, and the third is currently in the process of being sold. During this last implementation, I asked to be relieved of my work on it because the project was so shoddy, I didn't want to be associated with it.

Today TQM talk has almost entirely disappeared from popular literature. It has disappeared along with factories and jobs. TQM citations in the business literature began a continuous long-term decline in 1992. There has also been a marked decline in TQM consulting firms. "Commitment to TQM appears to have been only skin deep." Various reasons are cited for this failure, because anyone familiar with the standards recognizes that the best practices advocated themselves are not faulty.

The reasons cited mainly have to do with American managerial attitudes. The implementations were 'top-down,' imposed from above rather than 'bottom-up' so rank and file employees never had a stake in them, managements created no follow-up programs to measure effectiveness, etc. And all of these reasons are also proximate causes for their failure.

But quality in TQM is often defined as the totality of features and characteristics of a product or service that bear on its ability to satisfy the expectations of consumers. In other words, quality is "giving the customer what he wants." In pre-implementation training, consultants often used McDonalds as an example. Every McDonalds' hamburger, no matter where made or bought is identical. When this example was presented to rank and file employees, they scoffed.

They often asked, "What do we need all these new policies and procedures for? We're already producing junk." It was not that the policy was being imposed 'top-down' that alienated the rank and file employees, it was the program's goal. The employees recognized that merely producing junk more consistent would not stem the economy's decline, since junk never competes well with quality. What really caused the economy's decline was the business model adopted by American companies, touted by America's orthodox economists, and aided and abetted by the government.

Recently, TechRepublic summarized a piece published by Forrester:
Most . . . managers are stumped when it comes to capturing the right . . . metrics and then effectively conveying their relevance to management. Decision makers tend to focus on the one metric they understand: The cost . . . and how to reduce it. This Forrester White Paper reveals the five essential metrics for effective . . . managing. . . .
  1.   investment alignment to business strategy,
  2.       business value of . . . investments,
  3.       . . . budget balance,
  4.     service level excellence,
  5.       and operational excellence.

These five metrics should form the core of a . . . performance scorecard.

But this advice is pie in the sky. Decision makers focus on the only metric they care about—the cost and how to reduce it, not the only one they understand. Ideally, companies exist to provide products and services to people. If the products and services are good, the companies prosper; if they aren't, the companies fail. That's risky, so American companies inverted this model. They fed the public the notion, which has rarely been questioned, that a company's responsibility is solely the financial welfare of its stockholders. Products and services are no longer the goal of business; they are merely means to profit. That reducing quality leads to greater profits quickly became evident.

One fewer olive in each jar, one flimsy part in a complex device, one inefficient procedure in a manufacturing process, built-in obsolescence, built-in short product life-cycles, engineered high failure rates. The American quality standard became, "Junk"!

To ensure that American consumers would buy this junk, a number of other policies were advanced—declining employee wages so that consumers could not afford to buy more expensive imported produces, unenforcement of immigration laws and the introduction of special visas such as H1B1s so that the workforce would expand putting even further downward pressure on wages, restrictions on the ability of American workers to organize, and finally the offshoring of production. None of these policies could have succeeded without the complicit cooperation of America's orthodox economists and government.

But logically, this business model could not be sustained. As the incomes of workers drop, so does their consuming ability. To mask this result, easy consumer credit at high interest was introduced, but that would eventually bring about consumer defaults. So even the bankruptcy law was changed to make it more difficult for debtors to be relieved of their debts. GNP was calculated so that all of this consumer debt was counted as productive spending which masked the economy's decline. Sooner or later, the current economic collapse was inevitable. The nation's negative balance of payments became huge as did its deficit. Foreign nations have far more American dollars to spend than does the vast portion of Americans themselves. This business model has bankrupted the nation.

So now American companies are hoping to sell their foreign-manufactured junk in foreign countries. But this hope involves two problematical scenarios. It can only succeed if foreign countries also adopt this junky model, and only so long as the countries where the junk is being made don't realize that they can manufacture and market the junk without the help of American companies. The likelihood of either of these is slim.

First, most of the developed nations in Europe have strong labor movements which not only can and often have shut down all economic activity in their nations. So many of the policies described above which have enabled the American model to succeed domestically are not likely to be adopted elsewhere. Second, China, at least, has already discovered that it can market its products in developing countries itself.

So when the American power elite speak of a rebounding economy, they are whistling Dixie in the Yukon. There is no economy left to rebound. It has been dismantled and exported. The ultimate cause of America's collapse is the entrenched, rigid, faulty ideologies that our nation's leaders have adopted. These ideologies placed America on the road to ruin. Foreign policies, especially wars paid for by borrowing, have increased the speed of travel on this road. And as incomes decrease, so do our freedoms. Future historians will someday ask, who lost America? The answer will be the American business community, its economists, and its politicians who have adopted rigid ideologies. That answer will serve as America's epitaph.


jal said...

Ilargi said ...
“Obviously, this will drive up interest rates on all this debt.
... For Wall Street, things may not be all that bad...
... borrows $1 billion at 0.25% from the Fed, and buys Treasuries that pay 5.25% ...
... Would work like a charm.”

hehehe! beautiful! Don’t forget to add commissions and bonus for the traders!

Why take a chance lending to businesses that could go bankrupt when you got a scheme like that?

Anonymous said...

Those Treasuries were purchased by those who sold their MBS's to the Fed through that portion, the largest, of QEI. Think PIMCO and investment funds and insurance companies and trust funds and so on and so on. No, we do not know the names. Yes the number $770+ billion is huge but that's exactly how much of the MBS purchases have been settled.

A great dis service is being done by going off into conspiracy lala land on this. The MBS purchases are not normal Open Market operations through the Primary Dealers but run out of the back room by private managers and evidently there is no lack of sellers. Again, we don't know who they are. We can infer it is mostly fiduciaries dumping their MBS and buying Treasuries. Which was the plan all along.

It is so unseemly buying your own sovereign debt directly, so much more opaque if you buy MBS and the seller turns around and buys the Treasuries. It is all pretty straight forward if you just look, instead of taking that Household thing and running off into the weeds. By running off into the weeds the very serious implications of the game get lost.

In the mid 90s a reporter for the Mecury News, Gary Webb, ran a sensational series on the CIA complicity with cocaine traders who were ostensibly with the Contras. This was absolutely true. Even their hand in ordering the DEA off their guys was proven true. The CIA issued a report detailing their working with 53 individuals who they knew at the time were likely coke runners.

That was all forgotten because the author focused on the CIA plan to enslave the ghetto with crack. This was a silly story. The crack cocaine explosion went viral all on its own and the CIA wouldn't have been smart enough to plan it even if they were evil enough to want to. Crack started in Detroit not on the West Coast and gang culture in full flower then took the ball and ran with it.

So the underlying truth and sick scandal of the CIA helping the coke underword was forgotten and worse. For the term Contra Coke became synonymous with CIA/Crack and since the latter was in my opionion silly and in any case unprovable the entire story got deep sixed.

The MSM went out of it's way to demand the Mercury news denounce the story and the author Webb. Tim Russert regulary poopooed the entire thing. Webb lost his job and essentially was blacklisted. He lost his livelihood and his marriage collapsed. He committed suicide a few years ago.

So put down the crack story, that Ben and Tim are doing bogus transactions or who knows what, in a deep conspiracy. Such stories in fact should be viewed suspiciously as disinformation. I think the CIA/Crack story was disinformation fed to Webb with the intention of thowing the focus off the real crime and it worked to perfection. If planned disinformation or not keep your eye on the ball. The Fed monetized, indirectly, a much larger portion of the Treasuries borrowings over the last year. That's enough.

Ilargi said...

A comment was lost "in moderation". Blogger says "3 comments were published", but only 2 are. Whoever got scratched, it wasn't me.

Greenpa said...

This is pretty nice, and straightforward, and a little more extreme than I expected:

Dow 10K 1999 bought 5,400 bushels of corn
Dow 10K 2009 buys about 2,750 bushels of corn

Dow 10K 1999 bought 4,000 bushels of wheat
Dow 10K 2009 buys about 1,900 bushels of wheat

Dow 10K 1999 bought 36 to 40 ounces of gold
Dow 10K 2009 buys about 9.4 ounces of gold

more nice details in the whole story.

Anonymous said...

To 6p00e54ff189008833:

Interesting theory. PIMCO did hold a boatload of MBS earlier this year and has apparently dumped the vast majority in the meanwhile. Additionally, they've gone heavily into US treasuries in the second half of 2009. So it fits and, as you say, provides nice cover for whatever games Ben and Timmy are playing.

EconomicDisconnect said...

Nice write up. At this point I think all this stuff (stock markets, debt sales, economic numbers) are pure fabrications but it is easier to pretend than to do anything about it. How much debt can the US float (what I call the Debt Chandrasekhar Limit)? It may well be limitless beacuse the bagholders are in no position to demand anything.

If I donate before years end, can I get a T-shirt or something? It could read:
"TAE: Fighting Ignorance Since, Well, Forever"

bernie said...

Is is possible that an influx of unemployed workers will be taking money out of their RRSP's in 2010 as UI checks start to dry up, thus putting even more strain on the markets?

Greenpa said...

oh, goody. The United Arab Emirates have awarded a $25 Bil contract to: South Korea. To install 4 nuclear power plants, to be operating by 2020.

The mind boggles. Pick any aspect of it. Yike.

My biggest yike: who will they hire to run it? Indonesians? Arabs? Iranians? Pakistanis?

Any chance any of those might someday get pissy, for good reason, and just melt them down for the hell of it?

I'd give it only about 97%.

Will the UAE now pass nuclear technology to Yemen? Sudan? Somalia?

I think they need bigger refrigeration units for the ski resort.

What nature doesn't do to us,
Will be done by our fellow man.

Wolf at the Door said...

"Boy oh boy, are we ever going to drive into that wall with our eyes wide open and our pedal to the metal! If nothing else, it'll sure be spectacular."

Yep....every few weeks I go down to our local bookstore and make my self comfortable in one of their fluffy armchairs with a stack of mainstream business publications and just read through them all from cover to cover for 5-6 hours. Simply to keep a pulse on the accepted "wisdom" of the day.

This round had a lot of what to expect in 2010 type of articles and without exception every single one talked about the worst being over and a return to modest growth and stability in the coming year. Even the "bearish" articles were merely expecting stability and low growth I could not find one that attemtped to shed any light on any of the pending trainwrecks in store for the next 12 months.

Just amazing. Are we insane or are they? Because somebody is very very wrong here. Either way I am living in bizarro world.

el gallinazo said...

@ 6p00e54ff189008833

Very bad analogy between the CIA running crack into Arkansas and the question of who, if anyone, bought the treasuries. The first one centers around motivation. Few would argue that the primary motivation for the CIA running the crack was individual profit. I mean, these guys managing the killing of peasants in the jungles gotta pay their kid's tuition to Yale. The secondary motivation was buying arms for the contras after the Democratic Congress had slapped Reagan's fingers selling arms to the Ayatollah for un poco dinero. And ...... perhaps, the tertiary motivation was to phuck up the inner cities even worse than they were. It's called marketing. And marketing is easy when you are selling an incredibly addicting product. Just have to get more black kids hooked faster than your clients off themselves (or each other). But, hey, they had a high birth rate. But since the CIA honchos had so many motivations, who can figure, even today, which one was more important? But if Usacos weren't such freaking zombie idiots, they wouldn't even care what the motivation was. The CIA was running huge amounts of crack into the USA through Latin America and selling it to drug barons. Period. That should have been enough. But it wasn't. The MSM buried the story because, quite simply, they are scum. They would have found any stupid excuse to bury it. Bury first - excuse later. Entiende?

The reason your post was a bad analogy is that we are not looking for motivations with the bond mystery, we are still looking for facts. And the biggest undiscovered fact is.......drum roll.....who bought them, if anyone? I think your theory as to who bought them is really quite credible. I wish you had posted it without the crack/CIA analogy which included the implication that Gary Webb at best made a serious error and at worst was delusional. Gary Webb was a bigger hero than you or I will ever be.

And then you parley it with the false logic that Ilargi is doing the same thing.

Bankers have only two motivations - greed and fear. They are very simple animals. They think like buzzards. So, as to the motivation, flip a coin. Heads you lose; tails you die.

jal said...

@ 6p00e54ff189008833
You said...
“Those Treasuries were purchased by those who sold their MBS's to the Fed through that portion, the largest, of QEI. Think PIMCO and investment funds and insurance companies and trust funds and so on and so on.

The MBS purchases are not normal Open Market operations through the Primary Dealers but run out of the back room by private managers and evidently there is no lack of sellers. ”

It would be nice to get some numbers to back up your idea.

It assumes that those shady characters are making sure to have the funds to back up their gambling bets. Their preparing for a meltdown in 2010 and are willing to settle/park their money at low interest.
On the other hand ... they don't need high returns to meet their present obligations. (Seems unlikely)

ric2 said...

greyzone and 6p00 -

is there some way to try to verify this explanation (fiduciaries selling MBS to the Fed through the back door and then purchasing treasuries) ?

another zerohedge article by tyler makes a case that hedge funds were not major players in the "other investors" category in the treasury purchases.

also, in the original sprott newsletter, sprott writes

Perhaps the most striking example of the new demand dynamics for US Treasuries comes from Bill Gross, who is co-chief investment officer at PIMCO and arguably one of the world’s most powerful bond investors. Mr. Gross recently revealed that his bond fund has cut holdings of US government debt and boosted cash to the highest levels since 2008. Earlier this year he referred to the US as a “ponzi style economy” and recomended that investors front run Uncle Sam and other world governments into government debt instruments of all forms. The fact that he is now selling US treasuries is a foreboding sign.

so greyzone - you said that PIMCO went heavily into treasuries in the second half of the year. is this the "frontrunning" mentioned above?

it also sounds like PIMCO is now reducing their holdings in treasuries. what does that mean?

el gallinazo said...


"I'd give it only about 97%."

Well, the goods news is that you have started to deal with sure shots instead of long shots.

Unknown said...

To 6p00e54ff189008833:

I'm trying to understand what you are implying. Here is a stab -

Are you suggesting that the Govt is quietly removing large amounts of illiquid toxic assets from the books of firms such as PIMCO by swapping them for more liquid US treasury bonds ?

EconomicDisconnect said...

Question for the crowd:
Say the US says they will simply retire some amount of debt obligations (try 2 Trillion) and it is too bad for you. What can anyone do? Really? Think about it. The current debt overload implies either:
-60% tax rate for anyone that actually works
-strategic default

Whats it going to be?

EconomicDisconnect said...

Obscure title reference:
"I have the pedal to the metal and the thing to the floor"

hint, Sally Field.

el gallinazo said...


"it also sounds like PIMCO is now reducing their holdings in treasuries. what does that mean?"

The way I figure it, it means the Gross one is betting on Treasury yields skyrocketing in the near future. Which means you don't want to be holding any notes or bonds - just bills. This is another way of referring to the previously highly touted "bond dislocation" which Our Lady of the Irrefutable Conception figured (much earlier in the year) would probably hit sometime in 2010.

deflationista said...

anyone here ever consider the baja as an escape hatch from the US...?

Anonymous said...

The Fed committed to 5$1.25 trillion of private, not GSE, Mortgage Backed Securities. The has as of now settled appx. $900 billion of that. They printed the money, thus monetizing these damaged securities. There is no secret in all this. It is in the weekly Fed H41 report.

Hedge funds are not fiduciaries. That would be Pimco and the ABC bond fund and XYZ Trust bank which runs your rich uncles trust fund. These mortgage securities were spread thoughout the financial system. Remember, somebody bought then from the big banks who securitized them and got them out the door as fast as possible. Some were and are held by our banks and Euro banks are stuck with a snootfull and I don't know if those are included in the 'household' number or not.

My thing about Gary Webb was not an analogy about the the cases it was an analogy about how stories are told on the fringe and then discredited in the mainstream because of big or small flaws in the story.

We do not know who is doing the transactions with the Fed because they like to keep secrets for exactly the reason we are discussing this now. It allows wild conjecture which hides the simple story.

This is an exceedingly simple story. ABC bond fund sold to Aunt Mille has XX million in face value MBS's. There was no market for those last winter. No way to mark to market and the interest and principal payments were in question. They wanted out of those in the worst way. Ben obliged. Now we don't know what Ben paid but probably a more than fair price. Now ABC bond fund has to be invested in bonds. So the sell to Ben the MBS in the morning and buy Treasuries in the afternoon. Now their holdings look squeeky clean and everyone lives happily ever after.

Especially the Treasury which sold $700+ billion in new paper with the Feds newly printed money. No mystery, except to the true believers in mystery.

el gallinazo said...

getyourselfconnected said...
Obscure title reference:
"I have the pedal to the metal and the thing to the floor"

Well, I think the image most probably in Ilargi's mind was one of those souped up "hot rods" (in the opening of the Kazzer video) hitting a brick fall running flat out. But you are referring to a line in the Smokey and the Bandit film.

snuffy said...

Its nice to see the sharp analysis of all the information...and the gut-realization by most of us is that this year the Cracks in "reality" with be seen by all.The hardest part of being Cassandra is the knowing want to just go back to grazing with the rest of that wonderfully comforting Herd,and just let the world go by...the Shepard will care for us after all,and evrythings ok...

whats this ramp..ouch..whats this big dark room...

I think being a "Doomer"is mostly being in touch with your inner "Casandra".Understanding you live at one of the most controlled environments ever invented,and by "seeing the matrix"if only a glimpse.. forever ruins you for just being one of the herd.You are spoiled,because no matter how you try,there will always be a small,nagging voice of reason,your "inner Cassandra",telling you what you see is fake...what we have is glass and tinsel and blue smoke,"legit" mind control as well as any and all opiates of the people ,from rampant consumerism to jeusus!jeasus!jeasus! on 12 channels ans 26 stations

I went with my brother to see "Avatar"tonight.[Good flick,great mind candy]To see this film,I paid 10$ to watch an HOUR of commercials,and 30 minutes of pre-views including at least 9,3 minute military recruiting clips.
I did not see the cheering as has been reported by others at the final scenes,but it is powerful spectacle,and has a subtle,and not subtle message that is driven hard at the audience.
We here have something that nourishes our "inner Cassandra",that awareness that we are not alone in those things we see out in public that don't add up.
It was that alone-ness that had me worried that perhaps I was seeing something that really was not there...when you are the only one who smells 4 day old fish whenever the news is on,or things are painted too well for the picture to be truth...

late and sleep calls


ric2 said...

mahalo el gal and 6p00 for answering my questions.

zander said...

A very apt and frighteningly accurate post .... and heres my link addition for anyone interested in the current UK position and QE fiasco... this just about sums it up

not sure about the "immenent collapse" mentioned in the link mind you, boxing day shoppers here have taken leave of their senses as per usual.
still too much fat to be worked off , wool to be shorn ....all analogies apply etc etc.


bluebird said...

zander - That is quite an interesting link, it is more like a book with chapters. Here is a snippet from Chap 16...

16. The collapse of the West

The mechanisms are in place to ensure that the Western democratic governments have no alternative but to destroy their societies. The State might consist of people but as a system they operate as an organic entity in their own right. They have to feed to survive and will continue to consume until nothing is left.

jal said...

@ 6p00e54ff189008833
You said...
“This is an exceedingly simple story. ABC bond fund sold to Aunt Mille has XX million in face value MBS's. There was no market for those last winter. No way to mark to market and the interest and principal payments were in question. They wanted out of those in the worst way. Ben obliged. Now we don't know what Ben paid but probably a more than fair price. Now ABC bond fund has to be invested in bonds. So the sell to Ben the MBS in the morning and buy Treasuries in the afternoon. Now their holdings look squeeky clean and everyone lives happily ever after.”

According to you ...
... they traded their bets so that granny would still have her pension.
There are no laws broken. After all ... they wrote those laws in case of needing to do just those transactions.
Its sure nice to have friends in the right places.

ApleAnee said...

Brian said...

anyone here ever consider the baja as an escape hatch from the US...?

Yes, but the drug war has really geared up on the border. We are going to Costa Rica in March to look around. Seems to be a lot more peaceful than Mexico. I believe El Gallinazo lives in CR.

bosuncookie said...

Delusions in the Face of the Great Contraction

1. My current energy footprint can be maintained.
2. My current ecological footprint can be maintained.
3. I can manage and maintain all of my stuff.
4. My current job is useful and meaningful.
5. I can continue to live beyond my means.
6. I can ignore what I put in my body and mind.
7. I can safely carry my debt and be nimble and prepared.
8. I can gain clarity, wisdom, skill, and community without effort.
9. The systems that support my life will not fail.
10. Ignoring these delusions is okay.

zander said...

@Bluebird ....

yes, I've read it all but the piece you showcase is particularly disturbing.
Actually this was the first site I discovered (about two years ago) that alerted me something was seriously wrong with UK finances and not just the bank failures/credit crunch that was being touted at the time. Now TAE covers all my bases but I backcheck the updates occasionally.

I seem to have travelled a long long way since then, so much has happened.


Bukko Boomeranger said...

OT to the present conversation, but of interest to anyone with an eye to collapse, (especially backyard chicken-growers!) is this article from the Australian press about food security. I had no idea that Michelle Obama might add a chicken coop to the White House as an example to Americans about what they could do to prevent themselves starving to death. Key quote: "The difference between social order and disorder is 36 hours without food."

M said...

A very fine post by Jim Kunstler today on his website. However, I cannot resist in juxtaposing his material and lifestyle asceticism against the inane backdrop of “Drill, Baby Drill.” With 67% of Americans invested in the status quo of elevated house prices, it’s not hard to guess how that tune plays out and it certainly is not going to be a composition of voluntary sacrifice and long-range vision. And in terms of a politician dispensing a needed but unwelcome dose of castor oil, look no further than the legacy of Jimmy Carter. In the lexicon of current American political speak “sacrifice” equals “economic malaise” ---thank you very much sons and daughters of the Reagan revolution.

Ultimately, I find Kunstler’s vision of the world to be positive and therapeutic. Despite the darkness and gloom of winter, sometimes the moisture contained within a snowflake smells like spring, especially when the months of February and March can’t seem to decide which season it really is. Nonetheless, Kunstler seems to be forecasting a long, cold winter, but with the proper preparation and vision society might just pull thru and even enjoy the spring more fully as a result--minus the video game baby food bottles--if and when it arrives.

At any rate, the MSM phonies did their best to pollute the mental imagery of “greenshoots ” with all their talk of economic revitalization right smack in the middle of massive and continuing job losses. How about the honest forecast which allows those receiving the message to pull out the winter coats in order to prepare. After all, it really is winter.

Besides, Spring never needed a text read by a smiling buffoon to announce its arrival. And it certainly does not need to be entwined with the dispensed largesse that only took a tour of a very few favored blocks. At the end of the day, at the end of the life, there is only a certain type of Greenshoot that I will care to recall as worthy of the title.

Hombre said...

"... they traded their bets so that granny would still have her pension."

I'll be sure to inform Mrs. Canine, that the PTB are looking after her! :-)

VK said...

Has the marginal productivity of debt gone negative? This chart I picked up from the Ticker Forum certainly suggests it has! Wow, so the more the Govt borrows, the sharper the economic contraction will be.

Unknown said...

I would appreciate hearing if anyone here has knowledge or an opinion on the veracity of the info provided on the website of the Argentinian fellow who lived through their collapse. I seem to recall hearing something about him here in the past.


jal said...

“Its sure nice to have friends in the right places.”

Geithner: There will be no 'second wave' crisis

"We are not going to have a second wave of financial crisis," Geithner said

... rejected the idea that a serious new crisis could be triggered by lingering problems with commercial real estate loans or with a sudden weakening in the value of the dollar.

"We will do what is necessary to prevent that and that is completely within our capacity to prevent," he said.

"I'm the secretary of the Treasury. I have to spend time figuring out what it's going to take to fix the things that are broken in the financial system," he said.

Geithner spoke on a day when President Barack Obama met with executives from a number of community banks, reiterating his plea for banks to do more to lend to small businesses. Obama took a more conciliatory tone with the leaders of the smaller community banks than he had in a meeting last week with leaders of the country's largest banks.

Hombre said...

From EIA weekly figures show a contracting trend of oil imports into the U.S.

date: Barrels of crude
11/13/09 - 11,027,000
11/20/09 - 11,720,000
11/27/09 - 11,556,000
12/04/09 - 10,647,000
12/11/09 - 10,405,000
12/18/09 - 10,129,000

Just seems to indicate one more example of economic shrinkage.

Unknown said...

6p00e54ff189008833 said...

"The Fed committed to 5$1.25 trillion of private, not GSE, Mortgage Backed Securities. The has as of now settled appx. $900 billion of that. They printed the money, thus monetizing these damaged securities."

Tks. So my summation got it about right.

Part of me thinks that this is absolutely scandalous and another lesser part hopes that TIAA-CREFF (my pension fund) managed to unload a few of those synthetic CDO's they were boasting about a few years back.



Bukko Boomeranger said...

Allen asks about veracity of "that Argentinian fellow" on his blog. Here's a link to it if you don't have the address, Allen. Who knows? I don't think FerFAL is lying about being a guy who lives in Argentina during the economic collapse, if that's what you mean. As for the wisdom of using him as a guidepost for living, like anything on teh Internets tubez, you have to make up your own mind. I don't believe everything I read on any site, including this one. I'm looking for information, not a guru. The more info I have, the more I can form my own opinion.

el gallinazo said...

ApleAnee said...
Brian said...

"anyone here ever consider the baja as an escape hatch from the US...?

Yes, but the drug war has really geared up on the border. We are going to Costa Rica in March to look around. Seems to be a lot more peaceful than Mexico. I believe El Gallinazo lives in CR."

Well, two things:

Before I came to Costa Rica in Mid-October, I spent a month in central Oaxaca City, Mexico. I made a point of walking around the city at least two hours a day, taking in the sights and trying to burn off a little of my ample reserves of fat. At no time did I feel endangered or threatened in the least, and I am very sensitive to this. I did make a point of being home before 9 PM. I don't know if that was necessary or not. The woman who had lent me her apartment, having returned from a short term work assignment in Africa, loves Oaxaca so much that she is putting in some more roots there, making a longer term commitment. She has lived there almost a year now and speaks passable Spanish among five other languages. (Raised in Germany with a Ph. D. in archeology.)

Ric said...

jal—FWIW, I looked up the transcript of Geithner’s NPR interview and it reminded me a little of Neitzsche. Here’s Nietzsche in Beyond Good and Evil:

“Suppose, finally, we succeeded in explaining our entire instinctive life as the development and ramification of one basic form of the will—namely, of the will to power, as my proposition has it… then one would have gained the right to determine all efficient force univocally as—will to power. The world viewed from inside…it would be “will to power” and nothing else.”

Here’s Geithner interviewed on NPR:

GEITHNER: We're not going to have, Michele, a second wave of financial crisis.

NORRIS: You're that confident? You're certain of it.

GEITHNER: We'll do what is necessary to prevent that. We cannot afford to let the country live again with a risk that we're going to have another series of events like we had last year. That's not something that is acceptable. And we will prevent that. We will do what is necessary to prevent that, and that is completely within our capacity to prevent.

NORRIS: You're saying you're confident that it won't happen. What levers can you press or pull to make sure that does not happen again?

GEITHNER: As people saw, when you have the will to act, we have substantial ability to prevent that, and we'll do what's necessary.

Me again--Sounds like he’s intoxicated by a sense of holding the tiger's tail. Remember Nietzsche went mad.

Josh said...


So what's the consensus expectation here for the markets in the 1st and 2nd quarters of 2010?

Stoneleigh, Bonner and Prechter were predicting collapse to commence at any moment. What happened? Are we still near the abyss or has all that been postponed until the effects of higher interest rates sink-in?

el gallinazo said...

Part II

I am currently residing in Costa Rica and have been for the last 2.5 months. I am not committed to settling down here. There are a lot of things that I love about this country, but there are also some negatives. Since people usually hear such great things about CR, I'll throw you some negatives, just for a little balance, which are causing me to reconsider. This is just some ex-pat info balance to all the happy hippy dippy tourist stories.

The cost of living is far higher than any other LA country I have been in. If you separate out non-San Jose housing and medical, it is fairly equivalent to the rural USA. Single gringos trying to live on a $1000 a month SS check did fine 8 years ago, but are having a hard time now. Coming from Oaxaca, I was shocked, shocked by the prices, particularly the produce and pharmaceuticals. The country is in a real estate Wile E. Coyote moment. I am renting my place for 1% annual of the price that the gringa owner is listing to sell it. A lot of the farmers are now real estate speculators. The economy is tanking, and it appears to me that people are racking up credit card debt to keep up their recently acquired life style the was caused by all the loose gringo and EU money that is rapidly disappearing. Credit cards to the average Tico are so recent that many haven't had the chance to max them out. There are ads from the banks trying to get parents to give their teenagers credit cards as Christmas presents. There are many elaborate up scale construction projects on the tourist Pacific coast that are halted.

I have two pallets of what customs guys refer to as used household goods stored in Southern Florida. It's beginning to look like it will cost me about ten times as much **in duty** to bring them here than I could sell them on eBay. To get a pensionado visa here, you must have your SS check deposited directly into one of the two national banks where it is automatically converted to the local currency. There are constant letters from gringos to the English speaking paper, the Tico Times, about how money was literally stolen electronically from their accounts and they were unable to get it returned. Stuff gets stolen in the mail constantly. My disabled vet gringo neighbor (with local wife and three kids) had his replacement debit card stolen in the mail and now cannot access his account from the cash cow. Fortunately, the PIN number was sent in a separate envelope and he had stuck away a little cash to attend his mother's imminent funeral.

If you get anything bigger than an book in the mail, you have to go to the capital, San Jose, to clear it through customs. It usually takes two days.
The rule to renewing your 90 tourist visa here is that you must leave the country for at least 72 hours. Since I am only 230 km from the Panama border, I have ordered two ex-pat guide books about Panama and am going to check out the northernmost part of the country up in the mountains where it is cooler. Many gringo pensionado have moved to Panama in disgust and frustration. Nicaragua, on the north, is reputed currently to be too dangerous even to consider.

el gallinazo said...

Part III

The racial, ethnic prejudice against Nicaraguan immigrants, but legal and undocumented, is quite intense.

So keep your ears and eyes open, turn the rocks over, kick the tires, and separate what you wish were true from what is true.

Once again, there are many things that I truly love about Costa Rica, but there is also so much hype from people who spent 5 days here and blissed out.


Ilargi, is this 4096 character limit new, or am I just blathering on more than usual?

el gallinazo said...

Coy Ote said...

"From EIA weekly figures show a contracting trend of oil imports into the U.S.

Just seems to indicate one more example of economic shrinkage."

Nah, before she started her book tour, Sarah Palin was drilling of the New Jersey coast. All the extra domestic oil.

el gallinazo said...

Part IV

OK. I felt bad about posting all that negative crap. So let me just write that as a group, Ticos are the happiest, most pleasant, sympatico group of people I have met. I found their dress informality to be relaxing. When they are not driving a motor vehicle, (they are incredibly reckless drivers and I have been to a good many parts of the world), they are very considerate. The women in particular go around laughing and smiling all the time, and just being in the middle of them is an upper. They treat their child with complete kindness. I have yet to see a Walmart moment with a mother totally abusing her toddler. The children cry very little. My physical therapist taught me the proper way for a man to hug another man in Tico style. It should be heart to heart. Most of the problems are with the government.

Ilargi said...

"Ilargi, is this 4096 character limit new, or am I just blathering on more than usual?"

Pick thy fave:

1) Yeah, and I did that just for you, get to the point already!

2) I have no idea what limit you're talking about, but I think I like it.

3) Had I only known earlier....

4) I'm as clueless as only blondes can be.


el gallinazo said...

Steve Keen interview on youtube
in 3 parts; Skype video
Australian with poor sound a little tricky
but worth watching

Bukko Boomeranger said...

El G., the 4,096-character limit is nothing new on Blogger. I've exceeded it a few times, although not at this site.

scandia said...

el G, I too recommend the Keen interview. His statement that the math taught in MBA programs is wrong startled me. As I have no education in mathematics I don't get how the math could remain wrong for so long. I have assumed mathematics to be the ultimate truth teller, to be exact. An almost mystical realm to one such as me. Perhaps there are fewer people on the planet who know how to do mathematics than I thought?
I'd also like to know what pure mathematics means? Does this mean data free? Keen's comments got me thinking about more than wealth creation.

snuffy said...

That response from two-lips timmy has me a bit off...This guy sounds like he had a near death experience[stole more money than anyone in history,and it looks like they got away with it!!!],and because they missed the bullet last time...[by the skin of their rotten teeth]He thinks he is invulnerable.

We shall see.

I keep thinking of capt.[titanic]"Even god couldn't sink this ship".You tempt fate with attitude and hubris,both of which he seems well endowed with.

More popcorn please..


ApleAnee said...

El G:

Thank you for all of your chapters. Appreciate it.

Ka said...


Math never lies. However, by applying the wrong equations, or by improper selection of parameters, one can tell whoppers.

ric2 said...

el gal -

iʻd also love to hear your take on peru from a usacoʻs perspective. (i vaguely remember you mentioning spending some time there.)

my dad is from arequipa and our family has a decent-sized farm about 90km west of the city. unfortunately i havenʻt been able to spend much time there (one visit when i was 10yo and then again in 2001 for a cousinʻs wedding).


VK said...

On Timmy tulips - Uuggh!!
What's that quote, pride is greatest before the fall! The man thinks he's some sort of godlike figure, stopping the financial crisis is my wish and command sort of behaviour. Human beings are just machines that we can program if we can brainwash them enough and make use of the FED's printing powers, blah, blah, blah.

What hubris! I'm going to really enjoy watching these guys squeal next year. All those damned 11% unemployment only economists, CNBS, Obama, Benny and Timmy. Aarrghh! Trying to solve a debt crisis by adding on more and more debt. What a wonderful world we live in.

scandia said...

@ Ka..."" one can tell whoppers " LOL
Could you give me a simple example of a parameter in mathematics? Is that the same as setting the context?

Tristram said...

Just one minor question about the cock-sure explanation by Mr. 6p00e54ff189008833 of who is the treasury security mystery buyer:

If lots of bond funds etc. sold MBS and used the cash to buy treasuries, why would that show up in the "household sector"? Why wouldn't it show up in separate categories appropriate for the institutions in question? The source of the funds used to buy the treasuries should make no difference -- if they found it under a rock or got it from selling MBS to the Fed. 6p00e54ff189008833's example involves a bond mutual fund, and such funds owned lots of treasuries even before they cleaned out the MBS. Their prior purchases were not classified in the household sector; why now suddenly? Seems to me this explanation is more cock than sure, though perhaps I don't understand something.

Anonymous said...

from yesterday... El Gallinazo:

Wonder why you read this blog? You are more of an BET type of person. But I guess Uncle Thomas Clarence does prove your point. All we need is a little diversity.

What is a "BET type of person?"

I didn't say all we needed was a little diversity. However, we do need some diversity. Otherwise, we should drop the wicked pretense to things like "opportunity" and "representative democracy." An ethical triangle grows from the difference between what we say, what we do and who we are.

Understanding Obama's presidency requires not tossing out the baby from the bathwater. It is very socially significant to elect him. For many Americans simply voting for him was a rebellious act and an affirmation of their identities. Simply because other Americans measure the meaning by another standard does not negate the truth of it.

Do I feel he warrants a Peace Prize? Absolutely no way. Do I feel he warrants the same equal chance to screw up the country as anyone else? Of course.

I would be most impressed to see a Native American woman elected into the office before I die, but apparently as I read in the Gospel According to Greenpa hell will 97% certainly freeze over.

Why do I read this blog? Because it is here. :-)

el gallinazo said...


BET - Black Entertainment Television, a cable channel

WgS - I do enjoy reading your posts for the simple reason that they always reinforce my opinion that leaving the "progressive" wing of American politics was the correct choice. Also cutting all ties to the Democratic Party other than Dennis Kucinich.

You remind me of the Trojans who went on one morning about what a great gift from the gods was that horse miraculously appearing before their gate. But rather than get into substance, I will simply link to someone far more articulate than myself, namely
John Pilget.’s-last-taboo/

el gallinazo said...

ric2‬ said...
el gal -

"iʻd also love to hear your take on peru from a usacoʻs perspective."

I spent about ten days in Arequipa about five years ago and I liked it as much as I disliked Lima. The climate is ideal at about 7,000 feet as I recall. It has a huge, 20,000+ foot, snow capped (for the moment) volcano towering over the city, the ice from which the Snow Princess sacrifice was extracted, and she is now comfortably housed in a glass freezer in a local museum.

You would be walking along the streets and suddenly they would line up in such a way that the volcano, which you had quite forgotten about, suddenly appears towering above you. Arequipa is Peru's second largest city, Cusco, the former Inca capital, being its third. Cusco is at over 11,000 feet and can be down right chilly at night, like single digits Celsius. I felt fairly safe in Arequipa and never had a security problem there. It is located near the Chaco Canyon, which one really must see. It is twice as deep as the Grand Canyon in parts. The tour bus climbed to over 16,000 feet on the way and the guide had all of us chew coca leaves to try to stave off the effects of altitude. Fortunately, I was still adjusted from Cusco's altitude. We stopped at a public toilet by the side of the road, and she remarked that this was the highest public toilet in the world. Actually, I had used one quite a bit higher in Nepal, but hey, one must take pride even in strange accomplishments.

City dwellers in Peru have a different energy than many other Latinos. They are hustlers in the best sense of the word. Very entrepreneurial at all levels. Interestingly, the Nuevo Sol has gone from about 3.40 to the dollar to 2.80 in the last five years. Even so, the country is very inexpensive. During a dispute with my ex-girlfriend, I actually rented an acceptable if dingy hotel room in Lima with a decent bed, 24 hour hot water, and 50 channel cable TV for $8 a night.

Lima was downright scary. If you stepped into the wrong neighborhood it could mean your life. My girlfriend, who was both small and careless, was always getting stuff ripped out of her hands, like her cellphone, by the rateros on the buses. Her best friend's brother was shot dead for a few dollars in his wallet.

I could never figure out the economics of Peru. It was like a car getting 300 miles to the gallon. My problem with Peru as a place to settle down is the high incidence of extreme poverty, particularly among the Indigenos. Also, there is a lot of contempt among the moneyed classes for the poor, and they seem to regard them almost as animals (except at election time). Reminded me of the mentality that allowed the Argentine generals to seize power in the '70's and murder people for their amusement.

A tip for travelers in Costa Rica

Ticos regard their entire country as an extended family. And like people in this sort of family, they fell free to criticize the country themselves. But they do not react kindly to outsiders voicing any criticism, even mild and reasonable. OTOH, one must keep one's critical faculties functioning in order to make major choices and decisions. So just keep your eyes open and your lips buttoned in this respect.

Anonymous said...

El G,

Thank you for linking to John Pilger's excellent piece. I urge everyone to read or listen to it.

Here it is once again:

"Power, Illusion, and America's Last Taboo"


Historians call this “exceptionalism” — the notion that the United States has a divine right to bring what it calls liberty to the rest of humanity. Of course, this is a very old refrain; the French and British created and celebrated their own “civilizing mission” while imposing colonial regimes that denied basic civil liberties.

However, the power of the American message is different. Whereas the Europeans were proud imperialists, Americans are trained to deny their imperialism. As Mexico was conquered and the Marines sent to rule Nicaragua, American textbooks referred to an “age of innocence.” American motives were well meaning, moral, exceptional, as the colonel said. There was no ideology, they said; and this is still the received wisdom. Indeed, Americanism is an ideology that is unique because its main element is its denial that it is an ideology. It is both conservative and liberal, both right and left. All else is heresy.

Barack Obama is the embodiment of this “ism”. Since Obama was elected, leading liberals have talked about America returning to its true status as a “nation of moral ideals” — the words of Paul Krugman in the New York Times. In the San Francisco Chronicle columnist Mark Morford wrote that, “spiritually advanced people regard the new president as ‘a Lightworker’ . . . who can help usher in a new way of being on the planet.”

Tell that to an Afghan child whose family has been blown away by Obama’s bombs, or a Pakistani child whose family are among the 700 civilians killed by Obama’s drones. Or Tell it to a child in the carnage of Gaza caused by American smart weapons which, disclosed Seymour Hersh, were resupplied to Israel for use in the slaughter “only after the Obama team let it be known it would not object.” The man who stayed silent on Gaza is the man who now condemns Iran.

Obama’s is the myth that is America’s last taboo. His most consistent theme was never change; it was power. The United States, he said, “leads the world in battling immediate evils and promoting the ultimate good . . . We must lead by building a 21st century military to ensure the security of our people and advance the security of all people.” And there is this remarkable statement: “At moments of great peril in the past century our leaders ensured that America, by deed and by example, led and lifted the world, that a we stood and fought for the freedom sought by billions of people beyond their borders.” At the National Archives on May 21, he said: “From Europe to the Pacific, we’ve been the nation that has shut down torture chambers and replaced tyranny with the rule of law.”

Anonymous said...

el gallinazo,

From what I have seen here you have an ad hominem habit rather than listening to and discussing points of view different than your own.

Since you don't do me the courtesy of substantively explaning your response to me, instead referring me to some other source, I will just assume you don't care whether I understand your point.

I have no idea what black entertainment television is or what that allusion is supposed to convey, so again - shrug.

I wonder, far more than anything else at this point of the dialog, why you and so many others in the bloggerverse seem to respond with contempt to those who do not share your POV.

What kinds of things emanate from this, other than the condition of "always reinforce my (own) opinion?"

el gallinazo said...


To cut right to the nub, not only do we dislike each other, but we are on totally different wavelengths. Each to his own. Nothing productive would come from a further dialogue.

Gravity said...

Credits have the power to both destroy and heal. When credits are neither true nor kind, they can shortchange our world.

Unknown said...

ric2 said...

" my dad is from arequipa and our family has a decent-sized farm about 90km west of the city. unfortunately i havenʻt been able to spend much time there (one visit when i was 10yo and then again in 2001 for a cousinʻs wedding). "

I lived in Peru for a few years in the 1970's. I remember visiting a finca (farm) near Arequipa - owner was a foreign national. If I remember correctly, the farm was expropriated and given to the farm

Que le vaya bien.

Gravity said...

@ VK,
"Has the marginal productivity of debt gone negative?"

Most likely it has, and worse, though this largely depends on jobs being created from said debt, the marginal productivity of (paid) labor may also have gone negative, in aggregate, as measurable within a sufficiently large energy-rational boundary, while also assuming a peak-induced nonlinear feedback between employment and fuel usage/price.

snuffy said...


That article linked by Ahimsa pinned the time he[O-man] was co-opted...when he was in the spook[spy] shop.Hmmm I wonder what he learned there,may be the true nature of the world,and where he was going to be placed in it...

That was a great read,But I still have a room to wire[the new pantry]a couple of door locks to install,and geese& chickens to feed.[I spent yesterday installing a steel door that weighs as much as I do].Commercial steel doors have a "cute"screw hinge system of self-taps that strip at the slightest twist....

Funny, I seem to work harder/ more when I am not gainfully employed than when working for money...

Back to chores..


Bukko Boomeranger said...

A quote I liked from that Pilger piece (good onya Aussie for writing the truth!) gets to the nub of people who are willing to accept less from Obama just because he represents something symbolic to them: (maybe you, WgS?)

Activism doesn’t give up. Activism is not about identity politics. Activism doesn’t wait to be told. Activism doesn’t rely on the opiate of hope. Woody Allen once said, “I felt a lot better when I gave up hope.” Real activism has little time for identity politics, a distraction that confuses and suckers good people everywhere.

By that measure, though, I'm not an activist. I used to be. Mrs. Bukko and I marched in anti-war demos, passed out literature for anti-nuclear groups, wrote letters to politicians, sent them money... It didn't make any difference because no one -- especially the average citizens we encountered -- paid a bit of attention. Preaching to the other converted was fine, good feeling of fellowship. But when people are comfortable with the system as it is, they do not wish to hear anything differing with it.

So we gave up hope and got activist with our feet (i.e. left the country.) Woody Allen was right -- we feel so much better for it. It would be nice to have hope that Hopebama would do the right thing. If we did, we'd be back in the USA, instead of 50 km north of the border. Now my greatest hope is to live as well as I ethically can for as long as I can, and then to have as painless a death as possible without a lot of pain or cold/starvation beforehand.

As for the propaganda/sales job America has always done, that's been one of the country's greatest genius acts -- selling the sizzle of "democracy" at the same time the stake of tyranny was right there with slavery, Indian genocide imperial conquests of Mexico etc. and repression of women's rights was in plain sight. People worldwide believed in the notion of America for the same reason that USAcos believe in Obama -- the dream is sooooo good.

FWIW, I see that the sales job is still working in Canada. My activism, such as it is, involves talking to my co-workers, patients, their families, store clerks, etc. about stuff like peak oil, American war lunacy and bankster maggots. I don't rant like a crazy person, just make sardonic humourous observations. In Australia, people were receptive to that line of cynical thinking, but most of the people I've met so far in Canada still have a good opinion of the U.S. and don't want to hear anyone slagging their Big Brotherly neighbour.

Ka said...


Example of a parameter: in the bank stress tests they used the parameter "8% unemployment rate" as the "worst-case scenario".

By the way, in answer to your earlier question "what is pure mathematics", it is math without regard to any application (e.g., application to physics, economics, etc.) It has happened, though, that some pure mathematical structures were later found to have applications, like non-Euclidean geometry, and group theory, both now used in physics.

Unknown said...

Thanks for the link and your thoughts. True, no one knows exactly how things will unfold so gathering information from a variety of sources is important.

VK said...

@ Gravity

in aggregate, as measurable within a sufficiently large energy-rational boundary, while also assuming a peak-induced nonlinear feedback between employment and fuel usage/price.

I lost you there! LOL. But from what I can gather, every dollar of borrowed money now contracts the economy by 15cents. That's quite horrid.

This also might invalidate my flattening of the yield curve theory (my hamster is none to pleased), we might actually see a rising long end of the curve regardless of stocks falling down due to a flight to safety. Let's see, but such a move would seriously kill the economy. Think of rising rates in a time of epic deflation. I reckoned that would happen 1.5-2 years from now. Now might occur much faster as the marginal productivity of debt has now gone negative.

Josh said...

What explains the silence?

Stoneleigh has, in the past, repeatedly and emphatically claimed that we'd be lucky if S&P500 was above 100 by the end of 2010. At the time, that type of claim certainly caught the attention of many readers and it certainly caused me to circulate your writing to friends and family. Now that it seems more and more far-fetched, there is no further comment on this issue.

Do you still stand by this comment or do you now disown it?

Stoneleigh said...

Lord Bacon,

Stoneleigh has, in the past, repeatedly and emphatically claimed that we'd be lucky if S&P500 was above 100 by the end of 2010. At the time, that type of claim certainly caught the attention of many readers and it certainly caused me to circulate your writing to friends and family. Now that it seems more and more far-fetched, there is no further comment on this issue.

The silence comes from my having a significant number of hard deadlines at work. Work comes in peaks and troughs and I have no control over when they occur.

The comment I made over a year ago was that I would be surprised if the Dow was above 1000 by the end of 2010. That is not to say it's impossible, as I have been surprised before.

What I don't think is in any doubt is that the market will make new lows this year, and that will be quite dramatic enough for most people. My view as to more exact targets will evolve over time as a decline unfolds.

scandia said...

@ Ka, thanks for the instruction on mathematics! I understand parameter now and can see how one could get the wrong answer with the wrong parameter.
Could one say pure mathematics is like music?

YD said...

More likely to say music is a acoustic expression of mathematics.

Asmita said...

An over 90% decline from here, in one year. I know hyperbolic statements are good for attracting the doom and gloom crowd, but you've got to back that sort of claim up with some facts. DOW at 1000 by the end of 2010. That's ridiculous. The taxpayer is the backstop and there's plenty more taxpayer wealth to promise before any sort of significant correction occurs. Unemployment is declining Stoneleigh. It'll turn positive within a matter of a month or two. Hard to see how you get a 90% decline with improving employment.

Ka said...


As an analogy, one could say that pure math is like non-programmatic music, that is, when one tries to imitate or suggest birds or waterfalls in music, that is more like applied mathematics.

I should add that the doing of applied math and pure math is the same, that is, the applied mathematician works in the same way as the pure -- trial and error in getting the right concepts and conjectures, and then figuring out the proofs. It is just the original motivation that is different. In the applied case there is some physical world problem being addressed, like figuring gambling odds or gravity.

Stoneleigh said...


Unemployment will rise sharply once the next phase of the decline begins, and that's not far off IMO. A lot of businesses have been hanging on waiting for the green shoots to materialize. When they don't, those businesses will shed a lot of staff. Also, states and municipalities are heading for a budgetary brick wall at a figurative 90 miles per hour. Their tax revenues are plummeting as demand upon them increase. That's a recipe for mass layoffs, all manner of user fees, more fines for minor transgressions, and tax increases on anyone still able to pay.

My prediction is for a new low this year, and I think we should make that by a wide margin. Whether it will amount to a 90% decline from here within one year is considerably more debatable. We'll have to wait and see.

Greenpa said...

CIA Covert Disinformation Manual; Section XXIV; Generating Doubt; and Section XXXII; Making the Opponent Waste Time:

"Challenge statements endlessly; state doubts repeatedly. Many researchers have demonstrated conclusively the humans remember as factual those things they have heard repeatedly, regardless of truth."

"Whenever possible make your opponents "prove" what they say; demand evidence, particularly if it will require work to produce. An hour putting together an an ancient "proof" is an hour they cannot use to forward their projects."

Tord Kimba con- "but you've got to back that sort of claim up with some facts."

Please, S & I - DON'T waste your time this way. The probability you'll "reach" them is- 0.


Might be worth your while to reply with some version of "Nice try, spook! Yo mamma wears combat panties!"

Ric said...

Bukko says, My activism, such as it is, involves talking to my co-workers, patients, their families, store clerks ... {with} humourous observations.

This sounds rational. Activism as a strategy is over-rated and often not ethical. Activism assumes one's actions have influence and meaning, while ethics is right action no matter whether it has influence or not. Taoists speak of wu-wei--doing without action, as an example they point to plants which grow naturally. When Arjuna in the Bhagavad Gita despairs that he has to go to war and kill others in a fight against evil, Krishna tells him about Karma Yoga, doing one's duties in life as part of one's duty, without concern of results - a constant sacrifice of action. Christians speak of not letting the left hand know what the right hand is doing. Activism is a phase one hopefully outgrows early, as it justifies much pain. People I respect act ethically today to the best of their ability and let tomrrow take care of itself--anything else is delusion. This is Obama's mistake--and that of many who get caught up in too much strategizing. They think they can watch both hands.

Top Hat Cat said...

A couple thoughts. Nice link to the John Pilger piece. The sordid history of the birth of 20th century techno/media driven propaganda doesn't get a lot of air time in U.S. public education much less at a college level.

That evil little phuck Edward Bernays, Sigmund Freud's bad seed nephew deserves a brief review.

(Bernays is not to be confused with Béarnaise, "that hot emulsified butter sauce made of clarified butter, egg yolks, tarragon, shallot, chervil, peppercorn and wine vinegar reduction")

From Zimbio ( titled:

Edward Bernays and the Assassination of Democracy

"Here's a little history that few are aware of... but if you know it, it explains much about how we got to where we are today.

When the Rockefeller group was under widespread popular attack in the early part of the 20th century, they hired a man named Ivy Lee to help them rehabilitate their public image. He was very successful at his task.

The Rockefellers loaned Lee to the Nazis to help them with their 1930s PR problems in the US. While, it may be hard to believe now, US press accounts of Hitler's rise to power in Germany were mostly positive.

Edward Bernays, a close colleague of Lee's, was another master of public manipulation.

One of Bernays' biggest fans was none other than Joseph Goebbels, the director of internal propaganda for the Nazi government.

Goebbels was the man who "sold" the Germans on the Nazis (much the way Roger Ailes has sold the US on Bush-style (i.e. criminal) Republicanism....

Edward Bernays bragged that his book "The Crystalization of Public Opinion" was prominently displayed in Goebbels private office."

Quite an endorsement, Goldman could use a creature like Bernays to buff up their Image.

Oh, I forgot, they obviously already employ bunkers full of them on 'K' and Wall St. So much for democracy, big 'D' or little 'd', if it every had a foothold at all, it died long ago.

I regard the establishment of the Federal Reserve in 1913 to be the coup date when any semblance of liberty was sucked out of the AhhMerican Public.

Job One was to finance World War I, actually loaning funds to all parties (France, England AND Germany). Bankers make the maximum return on loans pimping War.

Job Two was to 'sell' the U.S. public on the 'goodness' of this war and to subsequently send in U.S. troops to backstop U.S. banks 'investment' in not only this war, but the brand War itself.

Job Three was to try and recoup the war loan losses after it became obvious that neither Germany nor France nor England could or would repay their war debt to U.S. (FED) banking interests.

And thus the speculative bubble created in the mid to late 1920's by the FED and it's member pimp banks to extract the WWI loan losses not from Europe but from the U.S. public.

Mission Accomplished.

How history does rhyme.

ogardener said...

By now everyone is familiar with the alleged terra incident aboard some almost extinct airline carrier. Acts of terra always preclude another round of loss of liberty and freedom as we must always strive to fight them there instead of here. Acts of terra are like acts of illusion. While people focus on another great Speilberg production the bankers pull the wool over your eyes. Now you see it, now you don't. Simple.

I saw 'Avatar' this past weekend as well and I really felt sad that another magnificent tree fell victim to greed and corruption even though it was virtual reality. It's a sad state of affairs this business of buying and selling Nature.

I plugged into the forest, the bird, the animal, the fish and every living thing a long time ago.

Now that Joe Lieberman has declared war on Yemen, I guess it's time to prepare for a scenario similar to the one portrayed in the novel and recent movie 'The Road'.

ric2 said...

Aloha Kimberly -

At what data source are you looking to support your statement that "Unemployment is declining" ?

Iʻve been spending time compiling data to convince my stubborn Peruvian dad to take action. He also has said "unemployment is declining."

Well, itʻs not.

I have summarized unemployment data from the US Department of Laborʻs Quarterly Unemployment Insurance Data Summary reports available here.

Since my family lives in Maryland I included data for Maryland and for the entire US.

PDF with my summary tables.

Clearly, unemployment is increasing in the US and in Maryland.

-the number of unemployed people has increased every quarter since Q1 2008 to Q3 2009

-yes, the number of people making initial claims and the number of people receiving regular state ui benefits has decreased from Q1 2009 to Q3 2009

-but, the number of people exhausting unemployment benefits has increased every quarter since Q3 2007 to Q3 2009

-and, the number of people receiving all benefits (which includes the emergency federal extended benefits and euc programs) has greatly increased since Q3 2007 to Q3 2009

-also, look at the depletion of the UI Trust Funds

So the this data seems to show that unemployment is INCREASING.

ric2 said...

more unemployment data for the state of maryland, pulled from the board of labor statistics LAUS program here.

PDF tables generated from the excel files showing maryland data up to November 2009:

Seasonally adjusted

Not seasonally adjusted

For the SA data, there was a dip from July to Aug 2009, but it started increasing again in Sept 2009 and November 2009 total unemployed is the highest since Q1 2007.

The NSA data had a larger drop from July to Sept 2009, but it started rising again in Oct and Nov 2009.

So the monthly data for Maryland also shows that unemployment is increasing.

ric2 said...

More data, this time involving the number of people receiving food stamps (USDA SNAP program, but administered by local agencies). Data starts at April 09 and goes up Nov 09.

This PDF shows the number of recipients by month for Baltimore City, Baltimore County, the State of Maryland, and the US. US data only goes up to Sept 09 and Maryland data is up to Nov. 09.

Clearly, the data shows that the number of food stamp recipients has increased for every month since April 09.

Phlogiston Água de Beber said...

@ Kimberly

The world is awash in facts. The problem, as always, is in determining which are true and which are false. You have asserted that unemployment will decline in two months. That implies that you have factual knowledge as to which employers are gearing up to add headcount. How about naming some names?

BTW, since math has crept into the comments today, hopefully you do understand that as unemployment is defined, mathematically it would be possible for both unemployment and employment to go to zero. I'll leave it as an exercise for the reader to figure out what that would do for the DOW.

gylangirl said...

Cui bono

The MSM was burying the Yemen connection yesterday. How exactly to say to TV viewers "the Yemeni alqaida terrorists claim it's retaliation for - oops we forgot to report last month about Obama bombing Yemen - after all the Tiger story was so much more important to you" No, the dumbed down American audience can't handle the truth: better just say "Arabian peninsulars" did it and not explain any background. Just like the 1979 revolution in Iran had no causation either, they're just crazy A-rabs! Better not use the word blowback either. Wouldn't want to confuse the message of the day. They're out to get you and shall be avenged!

So today its lets go bomb em [again] in Yemen in retaliation for this inexplicable unprovoked [sic] act.

Blowback from Obama's bombs almost got those passengers and crew killed. And Obama answers retaliation with even more blowback risk for a bump in the polls amid floundering legislation. Look how resolute and presidential he can be! Very Churchillian.

Meanwhile names of peaceful dissidents are kept on the no fly lists and denied visas but the frigging bomber is let in despite warnings to the US embassy from his own dad?. That list descrepancy didn't come up in the ad nauseum MSM "coverage" either.

I think they are not as stupid as they lead us to believe. I think they purposefully let this known threat in to keep up the domestic scare tactics. Why? For obfuscating more government-authorized theft. For changing the subject domestically. For rallying the sheeple. For reversing poll numbers. For war in Yemen over control of oil routes. Yes the system "worked" exactly the way they wanted it to work!

It is only a miracle that those passengers and crew are alive today.

Expect more inexplicable multi-layer security bungles from the "system" that mysteriously always works for the war mongers and their power mongrels in Washington.

snuffy said...


From somewhere,I forget where,I was informed that the trigger was 2k folks participating,either by reading[lurking]and/or posting..that trigger being when you are "Officially"on the radar so to speak.
I honestly can't remember where I hear that #,but supposedly if you have a couple of thousand folks taking the time to read your work..that might be enough to trigger a "viral"spread of information.Probably the only way to squelch information that is damaging is to have an idea what "people that pay attention"are looking at.
Seen a lot of stuff on the net over the years,and you never know what will turn out to have been "hot"information until you can correlate it from other places to understand what it means.[When I first really got into peak,and had to analyze a whole bunch of unfamiliar data concerning a field in which I had no "ground"to start from it took me forever it seemed to sort the dross from the gems]
I knew about a year before it was general knowledge that the Mexican oil fields were toast.Little good it did me.
That we have some fairly sophisticated attention simply means we have some good information here I think...Good information stands out in the "white noise"of the net


jal said...

To our American friends:

Move your money to small community banks.
This way the big banks will not be able to use your money to buy the lawmakers and to give themselves big bonuses.

Make this into a black swan.

Tristram said...

It's funny (and a little creepy) how Greenpa assumes anyone who challenges the TAE agreed line is a CIA-sponsored saboteur. More likely, Kiimberly is just lazy. Her challenge is legitimate, but still a waste of time strictly speaking, since it's already been addressed over the last couple of months.

The problem of occasional or recent readers who can't be bothered to comb through weeks of past comments for their answers has always been there. The solution has always been primers. Perhaps I&S should write one on this topic also. Call it "Those crazy doomers" and summarize what it means that collapse has not come as quickly or intensely as they originally projected.

zander said...

Unemployment turning POSITIVE????

Now thats IS ridiculous.
not coming to a town near me anytime soon.
Signs this morning are that we could be heading for a SIXTH ten and a half K dow failure....... Iknow , Iknow, I keep on about it, but one of these times it's gonna break very hard if it doesn't clear this hurdle.
Keep an eye on.


APC said...

Was wondering. You have no fan page on Facebook, and I have sent a request to add you to my "friends" list. Do you not take such requests? Thanks in advance...

PS, I did identify myself as APC on TAE in the request.

scandia said... are kind to explain some basics to me....I am trying now to imagine what the motivation is for pure mathematics.I know people have tried to explain beauty( concept) using mathematics...Is pure mathematics a response to " knowing " that comes " out of the blue", an attempt to reveal other dimensions of reality? Looks like I am circling back to the mystical :)
Words fail me here...

Gravity said...

"If in other sciences we should arrive at certainty without doubt and truth without error, it behooves us to place the foundations of knowledge in mathematics."

When marginal productivity of debt is indeed negative, jobs created or funded solely with said debt, say by the government, would also have negative productivity.

Mathematically this would be true, since the additional monetary gains from said employment must already be contained within the parameter boundaries of the calculated negative productivity of said debt, or it has not been expressed correctly.

el gallinazo said...


If Kimberley's little foray into factual misstatement inspired Stoneleigh to take a five minute break from her day job to make a cameo here, so much the better.

Of course the greatest irony of the Bernays saga is the fact that he was ethnically Jewish. I doubt Goebbel's admiration would have shielded him much if he had been living in Berlin or Vienna instead of NYC. Reminds one of the old saw of the capitalist selling the hangman his death rope. And for those of you who don't know it, Adolf Hitler was a huge fan of the older Henry Ford.

For a video presentation of Bernays, may I suggest the excellent four part series, The Century of the Self, available for free download.

A moderate use of time to respond to foolishness here can pay dividends. I am rather pleased with my analogy of Obama as the Trojan Horse and liberals and progressives as wide-eyed Trojans opening the gates. And we all know that The Lloyd (a heroic Achilles figure) and his cohorts are in the belly of the Horse. Or to put it another way, Obama is doing the Lloyd's work. (Yeah, I know, Achilles died before the Horse, but the resemblance to Lloyd was too great to resist).

On another subject:

I regard the Durden analysis in the current posting as very important. What Durden proves through simple arithmetic is that 2010 must be the year that TSHTF. After proving that, he finishes up the piece with the "bottom line," which states that there are three ways that the Fed and Treasury can respond to this. It reminds me of an airliner cruising along at 30,000 feet, and the pilot looks down at that pesky blinking red light and notices that the tanks have about three minutes of fuel left. They then desperately search the ground for the best place to crash land, then they rob the passengers at gunpoint, bail out with golden parachutes, and take a boat to Paraguay heading for the Bush family ranchero.

1) The Fed can renege on its promise to stop eating its own vomit in the first quarter and extend the program.

2) Engineer a rapid increase in sovereign interest rates. In true courtesy, Durden refers to the Plunge Protection Team (PPT) by its official "legal" name of the President's Working Group.

3) Precipitate a crash of the equities market, forcing the terrified theatre goers into rushing for the exits and into treasuries.

He then finishes up by stating that perhaps the fuel is already used up, the engines have sputtered to stillness, and our Wizards have already lost all control.

I have two questions for Stoneleigh if she should care to make another cameo:

Why does Durden state that option #2 would result in immediate inflation? I would think it would be equivalent to Volker's move in the early 80's and would be equivalent of hitting what remains of the economy over the head with a giant club, resulting in accelerated deflation.

Question number two: Which one do you think that the PPT will choose and does it make a difference?

el gallinazo said...


Pure mathematics is to the brain as sexual activity is to the sexual organs. Once humans discovered that they had them, they couldn't help but to max them out for the sheer fun of it :-)

Hombre said...

Kimberly - "Unemployment is declining Stoneleigh. It'll turn positive within a matter of a month or two."
By what/whose data?
Please let us know where you live! That's not happening here in Indiana. We might want to consider relocation! ... ... ...

Stoneleigh said...

El G,

I have two questions for Stoneleigh if she should care to make another cameo:

Why does Durden state that option #2 would result in immediate inflation? I would think it would be equivalent to Volker's move in the early 80's and would be equivalent of hitting what remains of the economy over the head with a giant club, resulting in accelerated deflation.

Question number two: Which one do you think that the PPT will choose and does it make a difference?

Happy to oblige ;)

I agree with you that rising interest rates would amount to hitting the emergency stop button on the economy and would be highly deflationary. Against a backdrop of contracting credit, even zero is not low enough to avoid the liquidity trap (where the real rate, at the nominal rate minus negative inflation, is too high for much economic activity).

I don't think the 'PPT' has any choice in the matter though. The market will determine what interest rate can be defended without bankrupting the country (at least not as quickly). I think we could see long and short term rates diverge, with longer term rates attracting a risk premium while short term rates fall even further on a flight to safety. I also expect a divergence between public and private debt, with record credit spreads between high and low grade debt.

el gallinazo said...

Further to my theme of most Usaco liberals and progressives being pie eyed Trojans opening up the gates of the city to the Horse, may I suggest the recent Bill Moyers interview with Matt Tiabbi and Robert Kuttner, the economics editor of the American Prospect. Kuttner is a prime example of what I am writing about.

I am almost ready to forgive Matt Taibbi for his travesty of a book on 9/11 and his ludicrous hatchet job on David Ray Griffin in their written web debate. He is doing an excellent job with the economy now.

I am getting the video podcasts by going to the Itunes Store and subscribing to Bill Moyers Journal and then hitting the get toggle for episodes that interest me.

Mike said...

Not sure if it was posted here already, but Jim Kunstler has his 2010 predictions up, well worth the read:

M said...

I’ll cut across the grain here and state that I’m with Kimberly on this: Dow at 1000 at the end of 2010 does not sound the least bit likely. And as far as unemployment goes, I would guess that Kimberly is simply factoring in what is officially tallied in the rate of unemployment decline. Although I see no chance of positive employment in a couple of months, the main source of her contention is not nearly as outlandish as some of the incredulous reaction would suggest. Clearly there is a “certain type” of directional trend going on and it has been doing so for a number of months now. No doubt, this is a “recovery” on splints, carefully pampered and cultivated in a very controlled environment. Which is all the more reason for me to doubt that the Dow will be at 1000 at the tail-end of 2010--the higher-ups are simply not going to withdraw the life-support system. Treasury Secretary Geitner has officially stated as much. And once again, with 67% of Americans either owning outright, or in possesion of a mortgage, there is a national consensus for the propping up of home prices--not an insignificant point.

What Kimberly does fail to realize, however, is that a prediction around here is not a direct shot at the center of the bull’s eye. It is a generally tossed boomerang that eventually is going come around again and clip the predictive sweet spot. The predictions for the collapse in the fall of 2009 get another circular trip on the wings of the prognosticative boomerang, just you wait till the end of 2010. And if you don’t believe that, well, obviously, you’re just yet another in a long line of CIA disinformation specialists and agents provocateurs disrupting the TAE consensus, or so Greenpa incessantly insists.

And speaking of boomerangs, maybe all the calls for cataclysmic collapse--Ilargi’s invoking of “The Road“--is some sort a Fin-De-Siecle yearning for sensation and a higher resolution as a result. I do, however, appreciate the underlying message of angst and frustration that is expressed here at TAE devoid of all the conspiratorial silliness. And in terms of economics, I think Ilargi and Stoneleigh really do have an empathetic feel for the ever-diminishing pulse for the men and women of Main Street.

So here is my prediction.It’s a trickle slowly turning into a slower drip. Only this time the “boiled frog’ will be too dehydrated to jump out of the pot. Which brings me to the real value of TAE: the message of voluntary and strategic downsizing. The alternative really does present the potential for something less than serenity.

But I’m just a nutty Gemini who reads National Review for the alternative perspective and most recently, a unbelievably ignorant hate-filled Neo-Nazi rag.(I was unwittingly directed to the site as a result of doing a Jewish genealogy search into my mother's surname of Ochs. It seems the ’ancestors’ were among the many Germans of the period who buckled under to coercive religious conversion.)

Top Hat Cat said...

The 'liquidity trap' in the pseudo-science of 'economics' is similar to the engineering capitalist's real science example of 'vapor lock'.

Doesn't matter how much fuel you got, it's phase changed to a gas in the fuel line or carburetor and prevents the engine (economy) from receiving any of it's luscious liquid power.

To extend (and torture) the airliner analogue of El G, from Wiki on vapor lock:

"Vapor lock has been the cause of many forced landings in aircraft. That is why aviation fuel (AVGAS) is manufactured to far lower vapor pressure than automotive gasoline (petrol). In addition aircraft are far more susceptible because of their ability to change altitude and associated ambient pressure rapidly. Liquids boil at lower temperatures when in lower pressure environments."

The rarefied financial altitudes that the criminal class imagine themselves operating in (lofty self-reinforcing parasitic hubris) have shielded them from Reality, they think they create It at will, just like they create 'money'.

Credit, the fuel which powers our modern economies, has been boiled into a wispy gossamer vapor, a ghost of it's former robust substantial liquid density.

"Fasten your seat belts, it's going to be a bumpy night."

Greenpa said...

Scandia- oh, well done! :-)

Beautiful, beautiful questions. Beautiful cross connections.

You give me hope. :-) Which is always very dangerous, but like math and music, feels good at the time.

I'll pass by answering. Answers are nice; but good Questions are more certain, and more satisfying, I think.

Greenpa said...

El Gal- I'd be the last to deny Stoneleigh a break; but this kind of break is the equivalent of taking 15 minutes to clean up a shattered glass bowl full of kitchen wastes- instead of using that 15 minutes for a nice cup of tea, or to make cookies; or bread.


I'm trying to express my support for more cookies; less mopping on hands and knees.

Weaseldog said...

Lord.Bacon, you seem concerned that the end of 2010 isn't turning out the way Illargi suggested it might.

There is something you should know. It's only 2009 right now, and the end of 2010 is a year away. It's not coming in two days.

I know it seems like 2010 must nearly be over when you're all excited about how it will turn out, but we've got a ways to go.

A lot happens in a year. Be patient. I know, adults probable tell you that all the time, but there's not much else you can do but wait and see.

Stoneleigh said...

To reiterate what I said above, am not staking my life on Dow 1000 by the end of the year (and I never said anything specific about the S&P anyway). It's possible, but debatable at this point. Predictions made well over a year in advance often need to be updated as time goes by. What I said I would stand by is a new low for the Dow this year, as I have a much higher degree of confidence in that outcome. I'll keep this list posted over the year as events unfold.

Weaseldog said...

Kimberly said... "The taxpayer is the backstop and there's plenty more taxpayer wealth to promise before any sort of significant correction occurs."

Do you say this becuase you believe that...
The taxpayers are all independently wealthy and will take suitcases of cash out of their mattresses and invest in the markets?

I would guess not.

Where is this wealth? Are thinking of 401k, IRA and pension funds?

Those aren't forms of wealth. Those are bets that are already in play. The people who place these bets are gambling that they can sell at a higher price than they bought in at.

The market holds it's value by taking in as much money + fees as is going out. If more money is going in, then it rises. If less, then it sinks.

The folks who are still paying into their retirement funds are gambling that not too many people will retire at once. But demographics makes it clear that there is going to be a big rush to withdraw these funds.

Even now, the every increasing unemployment rate has people attempting to borrow or withdraw from their accounts at increasing rates.

Google "401k locked denied".

You'll find that many investors are discovering that the money isn't really theirs. They simply placed bets. The house chooses if and when it will pay out the winnings.

It may or may not happen in 2010, but the day when too many people are trying to withdraw funds at once, will come.

And if allowed, it will crash the markets.

There are steps the government can take.

The bankers that write the US financial policies also wrote Argentina's policies. In Argentina, the banks simply stole all of the money and closed the funds. It was legal, because their concubines in the government made it legal. They have many concubines in the White House, House and Senate, so it could happen here.

The Government could limit the rate of withdrawal and let people have a small portion of the money to which they are entitled.

Or finally, the government could really rev up the presses and bloat the markets.

Of course, a bit of each will likely take place.

One thing I see coming though, is huge fees for withdrawing funds from these instruments. Desperate people will do anything for a little money. They'll even accept huge losses on their 'investments'.

Weaseldog said...

Kimberly said... "Unemployment is declining Stoneleigh."

You mean the rate of increase in unemployment is declining, right?

Meaning that unemployment is is falling slower, but still falling.

If you've had some higher math, then we're talking about the second derivative.

But, that news has been busted hasn't? Weren't the corrected figures recently released and this rate of change is now nothing to brag about?

You know the cycle. The Government releases the happy lying numbers as front page news, then later releases the slightly more truthful numbers later on page 12.

ned said...

I have been wondering recently what would prevent/stop the Fed from continuing to purchase MBS after March. Is it the Chinese? Is it Congress (the Fed starting to feel unease about a potential audit)? Is it the bond market?
I would love some thought on the subject.

Anonymous said...

Lord Bacon suggests that Prechter has been calling for a collapse any day now for months.

Sir, I debunked this lie when Cheryl told it about a month ago. I reviewed every video she provided as "evidence" of Prechter calling for an immediate crash and found no such evidence at all.

To restate, what Prechter said was he got into the market in late February (a bit above its March low) and he predicted a high around 1000-1100. When the market reached over 1000 in late August/early September, he got out to protect the gains made by those who invest in his fund. In his opinion we were not going to see significant gains above the 1000-1100 range and he therefore went to cash. He did say that he expected a correction and was not sure when but that he saw no need to stay in a market that wasn't going anywhere. Cash is safer. And he's been right. The market has moved mostly sideways in the interim while the dollar has finally begun to gain ground. Better getting in or out a bit too early than being too late and getting crushed, eh, Lord Bacon?

scandia said...

@ gravity...your comment," ...the additional monetary gains from said employment must already be contained within the parameter boundaries of the calculated negative productivity of said debt,or it has not been expressed correctly." Is this point common knowledge?
@Greenpa, another question...I've been thinking about mathematics in past civilizations, especially the abacas( spelling?) Did they do pure mathematics with such a tool? and who came up with the idea of an abacas in the first place?

@board, I want to invest in an English dictionary with as many words as I can afford:)
Not an online version.Is there one better than The Oxford Dictionary? Any recommendations?

Ka said...


On the pure mathematician's motivation, what El G. said. Pure math is, for some people, just enormously interesting, like art or science is for others. And, to pursue El G.'s analogy, it has its orgasmic moments, as in one famous example, Euler's identity.

As to whether it is revealing "other dimensions of reality", well, that leads into a long-standing argument among philosophers of mathematics. Some (called Platonists -- Godel was one) say "yes", others (called formalists) say "no".

jal said...

I’ve been looking at the past year reviews and projections for 2010.

Except for the obvious “Pump and Dump” the consensus seem to be ...


What COULD HAVE, what SHOULD HAVE, what WOULD HAVE happened did not.

Now ... for 2010 ... WHAT WILL HAPPEN ... (middle of the road view)

by Howard Kunstler

Bottom line for markets and money in 2010: so many things will be out of whack that making money work via the traditional routes of compound interest or dividends will be nearly impossible. There's money to be made in shorting and arbitrage and speculation, but that requires nerves of steel and lots and lots of luck.  Those dependent on income from regular investment will be hurt badly.  For most of us, capital preservation will be as good as it gets - and there's always the chance the dollar will enter the hyper-inflationary twilight zone and wipe out everything and everyone connected with it.

The past 20 years we've seen the institutions of capital finance pretend to create growth where there is no growth by expanding financial casino games of chance and extracting profits, commissions, and bonuses from the management of these games - mortgage backed securities, collateralized debt obligations, credit default swaps, and all the rest of the tricks dreamed up as America's industrial economy was shipped off to the Third World.  But that set of rackets had a limited life span and they ran into a wall in October 2008. Since then it's all come down to a shell game: hide the giant pea of defaulted debt under a giant walnut shell.
The commentators are across the spectrum.
I see only one positive action that can be taken.
It must come from the well to do middle class.
They can send a message to the too big to fail bankers by withdrawing their deposit and putting them into small banks.
This would have a minimum positive impact of 10 to 1 for the small banks. $100,000 improves the banks position by $1,000,000 but would negatively impact the big banks by more since their leverages are much higher.
They would have less money for big bonus and less money to buy out the lawmakers.
Want to try another prediction ...
naked capitalism

“2010: Foreseeable and Unforeseeable Risks ~ The Room For Policy Error is Enormous”
By John Bougearel Domestic Risks and Uncertainties
TAE is no better or worst in predicting that any of the other bloggers.

ALL agree that 2010 is going to be a year of volatility and change with more to come thereafter.

If you want nothing to change in 2010 then take a pill. (The new prescription kind that keeps you nummmmm.)

sv koho said...

Very powerful post Illargi and you saved the best contributor for last:John Kozy's analysis how the American economy jumped the tracks. I also wrote about the subject on my blog but I do not believe in listing my blog on someone's blog. Poor taste don't you know.

ben said...

thanks for your effort regarding unemployment. would you mind explaining the reason the shadowstats number went down to 22 from 22.1?
surely the umbrella number went up, or does this mean holiday hiring actually outpaced those falling off the back end?
my seasonal employment survey consists of the experience of my brother's girlfriend, hired by the inspirational, clean, retail outlet anthropologie. upon hire they dangled in front of her face full-time work starting in january. i callously told my brother she'd be lucky to last until christmas. she expected to be working twenty hours a week but instead she and four girls like her are each getting four hours a week.
i asked the shadowstats question last week but it was posted after ilargi's announcing a new post. i am wondering whether it was the question or the timing.
cheers, ben.

Gravity said...

If the effect of negative marginal productivity of debt does actively shrink the economy (in VK's example for every additional dollar in debt, 0.15$ is actually lost) then the possible gains from additional employment fueled by this debt, and only by this debt, must be negative also, so adding jobs created out of such disfunctional debt will ultimately not grow, but contract the economy.

The calculation of debts' negative marginal productivity must include the aggregate effects of anything that this debt may facilitate, any gains that would offset additional interest payments, so if it can be said that further debt is somehow contractive, making jobs out of this debt must logically also be contractive.

Anonymous said...

Mugabe said...

More likely, Kiimberly is just lazy. Her challenge is legitimate, but still a waste of time strictly speaking, since it's already been addressed over the last couple of months.

The problem of...

Anybody's question, challenge or statement is legitimate. So long as you are operating a public forum people have the right to ask any questions they like and to frame it however they chose.

You can ignore it because it doesn't meet your standards, but then who is being lazy?

Dietary issues get discussed ad nauseum here even when one of the authors explicitly states he dislikes such topics. Yet, a question on the economy is a "waste of time."

Do you even see why some readers say "wow?"

The opposite of activism is what?

Top Hat Cat said...

@ Scandia

Having studied math, science and engineering, I always secretly wanted to be an archaeologist and this book was wonderful for connecting the different fields under one tent.

Number Words and Number Symbols: A Cultural History of Numbers

You need a certain level of math to appreciate some of it's finer points but the overview of how math evolved with culture is breath taking, hope it helps.

Anonymous said...

Scandia said:

@board, I want to invest in an English dictionary with as many words as I can afford:)
Not an online version.Is there one better than The Oxford Dictionary? Any recommendations?

Yes, my librarian-husband says the Oxford English Dictionary is the best. At 20 vols. the latest (1989) edition is about $1,000. I have a used set reduced to 2 vols. with print size reduced accordingly -- needs the magnifying glass that comes with it, for sure, and then some! Even used the 20 vol. OED is expensive. Are you of the scholarly bent? Lots more words, etymologies, and quotes of word usage than you may need.

Iconoclast421 said...

It was/is nearly impossible to predict unforeseen levels of crookedness and criminality. Since that is what holds the markets up, if you cant foresee the corruption you cant make accurate predictions. Who would have thought one year ago that the Fed would actually monetize the ENTIRE 2009 federal deficit? I never imagined that they'd do that and pull it off, but they did. Here we are going into 2010, and less than 1% of the population even understands what the Fed has done.

That's just one thing. There's also FAS 157 and the marks to fantasy. What kind of bull is that, and who could have predicted it? There is also Fannie and Freddie being used as a dumping ground for unlimited toxic assets. Who would have imagined that they would actually do it? It's like betting that Hitler would actually invade Poland. How can you possibly believe these things could happen, until they happen?

It's only possible to predict this type of rampant institutional criminality if you believe that the world is a dark and power-corrupted place.

The question is can it continue into 2010? Keep in mind that this rampant criminality, while impressive, has done NOTHING to actually solve the problem. The criminality MUST continue, and ACCELERATE in order to continue this scheme. I have no doubt that if we remove the effect of just the things I mentioned (illegal monetization, mark to fantasy, eliminate all GSE backstops) the DOW would easily make its way down below 1600. That was my target before the looting began in earnest.

Remember, 90% of the value in the equity markets is based on the earnings of the past quarter, the current quarter, and the following 4 quarters. If earnings for all 6 of those quarters are expected to be zero, then the DOW would be trading at 1000. It could happen very very easily. All it would take is a loss of confidence in the dollar. The Fed does not have the power to prevent a price spike which could wipe out 20 million jobs. All it can do is cause spikes and bubbles, it is powerless to stop them. If one starts then they can only stand back and watch the tsunami go. 20 million more jobs could very easily be wiped out in the next year, and corporate earnings could very easily go to zero for 6 straight quarters. That means the DOW could very easily go under 2000.

There is not a thing the Fed or the government can do to stop a bond market dislocation after one starts. And one could start any moment. The malfeasance and criminality required to prevent it is simply too great. Real interest rates are going to rise dramatically. It's already happening and has been happening for months. Regardless of the Fed funds rate. But that too will be pulled higher. Watch as they are helpless to prevent it.

Gravity said...

Say the government creates two million of the most productive jobs available purely through deficit spending, then if increased tax returns and increased consumptive capacity and related multifracters are still not sufficient to outcompound the incurred interest, then this would definitely be negative marginal productivity of this specific kind of debt, if not, then perhaps not.

What is being measured is probably not enough to state with certainty that no debt can now be productively used, its likely the intensified insane deficit spending that has heavily impacted the aggregate cost-effect of debt, small businesses should still be more efficient in using debt to create productive labor, but gov. partially drains from the same pool.

el gallinazo said...


After I figured out 9/11, I realized that the US government, the Fed, and their puppet masters would do absolutely **anything** that they think will increase or maintain their hold on power. Absolutely anything. If they can do it, and they think it will help them, they will do it. Absolutely anything. Nothing is off the table, as they like to say when discussing nuking populations centers.

Ilargi said...

New post up:

The Year for Plan B