Wednesday, February 24, 2010

February 24 2010: Bumping along the bottom of the credit cycle

William Henry Jackson The Long View 1902
"View from the Lodge on Mount Toxaway, Sapphire, North Carolina"

Ilargi: "Without growth, we cannot begin the process of restoring fiscal responsibility," said Treasury Secretary Tim Geithner today to the House Budget Committee. And ".... before the federal government can begin attacking soaring deficits and a massive national debt, it needs to increase jobs and ensure economic growth."

That’s just about all you need to know, isn't it? It's the my way or the highway idea, put everything on red and pray for a miracle. There is no way Geithner can be sure that more spending of public funds will actually produce growth, but it's all he can think of (or at least all he talks about). And it’s also of course mighty easy to focus on spending if and when it’s not your own money you’re throwing at the proverbial black hole in the wall.

But illusions persist and the markets are up in the face of today’s what comes close to being the worst series of data on the economy emerging in the press to date. And I’m thinking: what on earth are you guys smoking?

Sheila Bair’s report on the banks is abysmal, lending in the private sector is falling off a cliff while public lending is running up that same cliff, and in that quote above Geithner just told us that there are no plans to quit adding to the debt before spending gives birth to growth in some fictional fairy tale of immaculate financial conception. But it’s beyond foolish not to ask what happens if no such fairy tale ending exists, if only simply because the risk that pervades the entire endeavor is as palpable as it is terrifying.

The taxpayer funds presently spent on the thus far evasive dream of recovery and growth resumption could be spent on programs to soften the blow of possibility number two, where growth never resumes, or doesn’t do so for many years to come. It’s one thing for everyone to want growth, it's quite another to actually get what you wish for.

And if you watch the procedures from a distance, how can you not ask yourself what is wrong with a system in which a bunch of so-called experts acquire the right for a given society to spend many times more per person than what each person earns annually on a notion for which there is no pre-existing evidence that it could even possibly succeed?

It’s as if every single day you hand over the contents of your wallet plus the deed to your home plus the rights to your pension plans, to that smart nephew twice removed who says he's got a sure-fire way to game the house, the table and the dice. Pardon me, but I don't see that as very clever nor as a way toward longer term prosperity, and neither do I see it as a way to organize and legislate a society if you want it to have any chance of survival. It seems to me to be more of an expression of a massive society-wide neuron deficiency than anything else. Or is that a gambling addiction, or is that the same to begin with?

Still, I dare you to elect the politician who says he'll raise your taxes and start you off on a program of austerity rather than vote for his opponent who promises growth and prosperity if only you let him spend your future tax revenues now. Tim Geithner is a doofus, and Ben Bernanke is a douchebag, but they wouldn’t be where they are if you wouldn't let them.

And none of that means that they can deliver anything they promise; it just and only means that you like one prospect better than the other. Well, dream on if you must, but I solemnly promise that you have a whole bunch of nasty surprises coming. And when these surprises arrive, Geithner, Bernanke and Obama will have either entirely vanished from view, or perhaps even step up their public persona a notch to loudly and proudly proclaim that things happened that no-one could have foreseen. And at least if you read this, you know that will be a blatant lie.

US Lending Falls at Epic Pace
U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010. FDIC Chairman Sheila Bair said banks are "bumping along the bottom of the credit cycle" and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.

The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years. Banking groups and their members counter that they're under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn't there.

Initiatives such as the Obama administration's $30 billion small-business lending program will rely on banks making loans at a time when many of those same firms are wrestling with a rising tide of commercial real estate problems or being told to add to their reserves by regulators. Some small-business owners say they could expand if they could just get a loan. Nick Sachs, president of Homewatch CareGivers Cincinnati-Metro, says he's been asking banks for a loan of $150,000 to $250,000 since 2008. He says his home-health-care franchise could hire 20 to 30 aides and even one or two office assistants.

After being rejected for a loan by Huntington Bancshares Inc. over a year ago, Mr. Sachs recently re-applied to the Columbus, Ohio, bank. He did so in part because Huntington said in February that it would double its annual small-business lending over the next three years and extend credit to as many as 27,000 more businesses. "My conversation with the banker was identical to the conversations in 2008," Mr. Sachs said. In both cases, Huntington's representative suggested that a loan from the government's Small Business Administration would be the best fit for the company. The banker collected the paperwork for the application, like tax returns and a business plan, Sachs said, but didn't ask many questions about how the company planned to use the funds. "I am very doubtful," he said. "I've been down this road before."

Maureen Brown, a Huntington spokeswoman, said the bank's "turnaround loans" have been well-received. She said the bank doesn't comment on individual loan applicants. Huntington has posted a string of five quarterly losses dating to 2008. The FDIC said that the decline in loan balances in the quarter hit all major categories—from construction to commercial loans and residential mortgages—with the exception of credit card loans.

It remains unclear whether the sharp decline in loans outstanding stems from banks' tightening standards and a fear of lending or from weak demand from potential borrowers spooked by the downturn. Another cause could be banks actively reducing the size of their loan portfolios, creating a natural decline. Most surveys suggest a combination of factors is at play. A January survey by the Federal Reserve of senior loan officers showed banks have slowed their efforts to tighten lending standards, but have not backed off the more stringent loan terms they put in place over the past two years. The same report, however, also showed that demand for loans from businesses and consumers continues to fall.

"Lending has been weak and spending by businesses and consumers has also been weak," FDIC Chief Economist Richard Brown said. Bankers, on the other hand, say creditworthy borrowers are hard to come by. Fifth Third Bancorp recently extended a $3.5 million line of credit to Chicago-based One Hope United after the state of Illinois, beset by a budget crisis, delayed payments to the child-and-family-services provider. Steve Abbey, Fifth Third senior vice president, said One Hope United is a rare exception of a nonprofit borrower that could qualify for credit from Fifth Third because of a cash crunch. Most other nonprofits that need cash right now, "haven't set themselves up to borrow money and pay it back," Mr. Abbey said. "They just need money."

The FDIC's Ms. Bair said officials are eager for banks to make loans in their communities, putting the onus on the bigger institutions to do more small-business lending. "The larger institutions I think need to step up to the plate here too," Ms. Bair said, describing as "significant" the declines in their loan balances and credit lines. One issue complicating banks' ability to lend is the looming problem of troubled commercial-real-estate loans. The FDIC's Mr. Brown said these loans take longer than residential mortgages to go bad, dragging out the hit to a bank's balance sheet.

The FDIC's report revealed that asset-quality indicators for banks continued to deteriorate in the fourth quarter as borrowers continued to fall behind on their loans. Banks wrote down $53 billion in loans in the final three months of last year. The quarterly write-off rate was the highest ever recorded in the 26 years the FDIC has collected the data. A total of $391.3 billion of all loans and leases, or 5.4%, were at least three months past due at the end of 2009. "While the economy is moving ahead banking results tend to lag behind," Mr. Brown said. "The problem loans and the earnings of the industry will improve somewhat after the economy improves."

Almost 10% of FDIC-insured banks "troubled"
Driven by expanding problems with commercial real estate loans, the number of distressed banks in the U.S. rose to 702 in the fourth quarter, marking the highest level in 16 years, according to a report released Tuesday by the Federal Deposit Insurance Corp. That's up from 552 at the end of September and 416 at the end of June. This is the largest number of banks on the FDIC's "problem list" since June 30, 1993.

Based on the result, roughly one in 11 of the approximately 8,000 U.S. banks are on this list, with regulators expecting a significant expansion in the number of failures throughout 2010, boosted in large part by increased losses on commercial real estate sustained by mid-sized and smaller banks. See more on analyst expectations for 2010 bank failures. "This year, the losses are going to be heavily driven by commercial real estate, we've known for some time and we have been projecting that," FDIC Chairwoman Sheila Bair told reporters. "The pace is probably going to pick up this year and for the total year it will exceed where we were last year. Overall, the banking system is challenged but stable, but is performing its credit extension role."

Bair said it takes longer for losses on commercial real estate to work through the system because frequently borrowers may have cash reserves and can continue to make good on payments for a while, even as a downturn expands. "Tenants may be in longer-term leases, but those leases eventually come due and they don't renew or they renew at significantly reduced rental rates," she said. Also Tuesday, the National Association of Realtors on Tuesday reported that it doesn't expect any meaningful recovery in commercial real estate before 2011. A congressional watchdog group reported on Feb. 11 that it over the next few years, a wave of commercial real estate loan failures could threaten the U.S. financial system, and in the worst-case scenario, hundreds of additional community and mid-sized banks could face insolvency.

Banks insured by the FDIC dropped to a total quarterly profit of $914 million in the fourth quarter ended Dec. 31, compared with $2.8 billion in the third quarter. The result, however, was significantly better than the $37.8 billion loss for insured institutions seen during the fourth quarter of 2008, but well below historical norms. Insured deposits reported full-year net income of $12.5 billion. "Consistent with a recovering economy, we saw signs of improvement in industry performance," said Bair. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."

According to the FDIC, the value of what are deemed problem assets at institutions stood at $402.8 billion at the end of 2009, compared with $345.9 billion at the end of the third quarter. The FDIC also reported that its Deposit Insurance Fund, used to protect depositors, dropped further into negative territory, reporting a $20.9 billion loss for its fund balance in the fourth quarter, worse than the $8.2 billion loss in the third quarter -- and its lowest number on record.

The agency also collected three years of assessments on banks in advance at the end of 2009, along with banks' fourth-quarter assessments, a total of 13 quarters of assessments, which brought in roughly $46 billion of capital to help dismantle failed institutions. With those funds, the Deposit Insurance Fund's cash resources stood at $66 billion as of Dec. 31. The agency's fund reserves are a positive $23.1 billion, including its contingent loss reserve of $44 billion at the end of December. As institutions take a charge, quarterly on their books, for their pre-payments for the deposit insurance fund, the deposit insurance will recognize corresponding revenue.

Bair said she believes the fund's cash balance should be enough to weather the rest of the economic downturn, adding that the FDIC estimates that much of the losses anticipated by the contingent loss reserve can be attributed to losses expected in commercial real estate. She also pointed out that 95% of the 8,000-plus U.S. banks exceed regulatory standards for being well capitalized. "We don't anticipate needing more special funds for the fund," Bair said. "We'll be in good shape this year."

The FDIC hasn't accessed a temporary $500 billion fund of capital, available to it from the Treasury Department, for the insurance fund. The FDIC estimates that bank failures will cost the agency as much as $100 billion over the five years running through 2013, with the majority of the losses likely to take place in 2009 and 2010. The agency made that estimate in September and as of February it still stands, agency staffers said.

The agency may require payment of additional assessments to cover losses to the fund if bank failures expand in greater numbers than the FDIC's currently anticipating. Bair also took issue with larger banks, saying they need to be out lending more. "We'd like to see more of credit extensions, within the framework of prudent risk management, particularly with the larger institutions," she said. "Their declines on loan balances, their cutbacks on credit lines have been significant, and hopefully we'll see some churning of that this year."

Banks Continue To Pull The Rug Out From Under The Economy
Can the economy revive if banks don't start to lend again? Let's hope so. Today the St. Louis Fed released its latest monthly look at commercial and industrial loans at major banks -- a measure that some would say represents the essence of the US banking system. As you can see, this measure is still falling like a knife -- a bad sign for the ongoing health of the economy.  (And also not what we were promised when we bailed out the banks.)

Deflation Is Coming and There's Nothing Bernanke Can Do About It

Contrary to popular belief, noted technical analyst Robert Prechter says the extraordinary action taken by the Federal Reserve to bail out the economy will not lead to runaway inflation. "Deflation is gaining the upper hand very, very slowly, but it's happening," Prechter the founder of Elliott Wave International tells Tech Ticker.  Of course, as anyone familiar with his work knows, he's been saying this for years. Why should we believe him now?

For the first time since 1982 core inflation fell in January as measured by the consumer price index. Prechter says it's even more noteworthy that it's happening "in the face of this tremendous amount of stimulus...from the government and a real attempt at stimulus from the central bank." Prechter describes the forces of deflation as a "socio-nomic" shift in social mood that will prevent Federal Reserve Chairman from printing too much money. "At some point, the voters - as you can already see from the Tea Parties - are going to start saying we've had enough" with government spending and bailouts. How should you invest in a deflationary environment?  We'll get to that in a forthcoming clip.

Bullish a Year Ago, Robert Prechter Now Sees "the Biggest Bubble in History"

In February 2009, Robert Prechter of Elliott Wave International predicted a market rally that would be "sharp and scary for anyone who is short." In recent months, Prechter returned to more familiar territory, declaring here in November the market was in a "topping area." A few weeks ago, the veteran market watcher told the Society of Technical Analysts in London that a "grand, super-cycle top" is at hand, The WSJ reported.

"What has happened is a complete change in psychology from extreme negativity [a year ago] to extreme optimism" heading into the market's recent top in January, Prechter says. Among the many sentiment indicators he watched, Prechter cited the very low levels of cash at mutual funds, which is approaching levels seen near major tops in 1973, 2000 and 2007. "Nobody should be taking risk right now. This is a time to be safe," he says.

But considering U.S. equity funds suffered about $46 billion of outflows from August to December 2009 while bond funds took in about $198 billion, according to ICI, aren't investors already playing it safe -- a bullish contrarian signal? "The individual investor has been more or less abandoning stocks" and buying bond funds, Prechter concedes. "I think that is going from the frying pan into the fire. The bond market is the biggest bubble in the history of the world. " Corporate debt, municipal debt, mortgages and consumer loans will all suffer in the great deflation Prechter believes is already underway, as detailed in his book Conquer the Crash. So is there any way for investors to protect themselves from the carnage?

Junk Debt 'Wall' to Trigger U.S. Defaults, Bank of America Says
A "wall" of junk debt maturing in the next four years will increase the risk of corporate defaults in the U.S., according to Bank of America Merrill Lynch. More than $600 billion of high-yield bonds and loans are due to be repaid between 2012 and 2014, New York-based analysts Oleg Melentyev and Mike Cho wrote in a note to clients. Almost 90 percent of loans outstanding mature in the next five years, compared with an average of 36 percent between 2005 and 2009, according to the report.

"While the wall-shaped schedule of future maturities is nothing new for the high-yield issuer universe, it is more front-loaded today," the analysts said. "This could result in additional default pressures further down the road as issuers deal with a higher concentration of maturities than they what they have been dealing with in the past." The looming payments stem from companies shifting their loans to shorter maturities of three to five years, compared with five to seven years in the past, they said.

Banks stung by $1.7 trillion of writedowns and losses are more reluctant to lend to the neediest borrowers with ratings below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, according to data compiled by Bloomberg. Leveraged loans to U.S. companies shrank 81 percent in 2009 from their peak of $913.5 billion in 2007, the data show. Debt maturities are "a point of particular concern in our view, given that primary loan issuance remains challenged by declining bank lending," the analysts said.

World trade contracted 12 percent in 2009
Global trade contracted by about 12 percent in 2009 but has started to pick up, the head of the World Trade Organization (WTO) said on Wednesday. WTO Director General Pascal Lamy said the Organization had revised its previous estimate of a contraction of about 10 percent in 2009 but gave no forecast for 2010. "World trade has also been a casualty of this (global economic) crisis, contracting ... by about 12 percent in 2009," Lamy said during a visit to Brussels, calling it a huge drop and the sharpest decline since the end of World War Two.

Asked about world trade in 2010, he declined to give any figure but said: "Certainly there is a pick-up. Whether this pick-up is short term ... or whether this is sustainable ... is difficult to say but we certainly are picking up." Lamy told a meeting organized by the European Policy Center think-tank that opening global trade offered a way out of the crisis and that it was "economically imperative" to conclude the Doha round of talks on a new global commerce pact. He caused gloom at the WTO this week by saying there were too many gaps and uncertainties in negotiations to bring in ministers at the end of March to take stock of whether the eight-year-old trade round can be concluded this year.

U.S. New-Home Sales Unexpectedly Fell in January to Record Low
Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand. Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, from a 348,000 pace, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.

The government’s first-time buyers tax incentive, extended and expanded to include current homeowners, may provide less of a boost to the market as many purchases were pulled forward late last year. Builders also face competition from foreclosed properties that have driven down prices at the same time the economy is having trouble creating jobs. "New-home sales may be at rock-bottom levels, but it looks like the housing correction is not over yet," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. "Everyone who was going to buy for the tax credit has already purchased a new home."

Sales were projected to climb to a 354,000 annual pace from an originally reported 342,000 rate in December, according to the median estimate in a Bloomberg survey of 72 economists. Forecasts ranged from 325,000 to 386,000. Three of the four U.S. regions showed declines in new-home sales last month, led by a 35 percent plunge in the Northeast. Purchases fell 12 percent in the West and 9.5 percent in the South. They rose 2.1 percent in the Midwest.

The median price of a new home in the U.S. decreased to $203,500 in January, the lowest since December 2003, from $208,600 in the same month last year. The supply of homes at the current sales rate increased to 9.1 months’ worth, the highest since May 2009. Housing, the industry that spawned the sub-prime mortgage meltdown and triggered the worst recession in seven decades, appeared to be recovering in 2009 after a three-year decline. Purchases of new homes have declined from an all-time high of 1.39 million reached in July 2005. They have declined 6.1 percent from January 2009.

New-home purchases, which account for about 6 percent of the market, are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier. Rising foreclosures are the main threat to a sustained housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast last month. Last year there were 2.82 million foreclosures, the most since the Irvine, California-based company began compiling data in 2005.

The lack of jobs is another hurdle. Consumer confidence in February fell to its lowest level since April 2009 and a gauge of current conditions declined to the lowest level in 27 years on concerns about the labor market and the economy, the Conference Board reported yesterday. Economists surveyed by Bloomberg at the beginning of this month forecast unemployment this year will average 9.8 percent, just a percentage point below the historic post-war peak of 10.8 percent reached in November 1982.

The end of Federal Reserve purchases of mortgage-backed securities, aimed at keeping borrowing costs low, represents another challenge for the housing industry. The program is scheduled to expire at the end of March. "The housing market took several years to recover, following the downturn of the late 1980s and early 1990s," Robert Toll, chief executive officer of Toll Brothers Inc., said in a statement today. Toll Brothers, the largest U.S. luxury-home builder, said its first-quarter loss narrowed. The Horsham, Pennsylvania-based company’s new orders almost doubled in the three months ended Jan. 31 as the housing market showed signs of stabilizing.

Home purchase loan demand at lowest since 1997
U.S. mortgage applications fell for a third straight week, with demand for home purchase loans sinking to the lowest level in 13 years as inclement weather weighed, data from an industry group showed on Wednesday. A continued drop in demand for purchase loans, a tentative early indicator of home sales, would not bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association reported an 8.5 percent decline in its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended February 19. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 1.6 percent. The MBA's seasonally adjusted purchase index fell 7.3 percent, the lowest level since May 1997. "As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak," Michael Fratantoni, MBA's vice president of research and economics, said in a statement.

"With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases," he said. The MBA's seasonally adjusted index of refinancing applications decreased 8.9 percent. The refinance share of mortgage activity decreased to 68.1 percent of total applications from 69.3 percent the previous week. The shares of adjustable-rate mortgages, or ARM, increased to 4.7 percent from 4.4 percent the previous week. A rise in rates may have played a role. Interest rates on mortgages typically play less of a role in home purchase loan demand than in refinancing activity.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.03 percent, up 0.09 percentage point from the previous week. That is above the all-time low of 4.61 percent set in the week ended March 27, 2009, but below the year-ago level of 5.07 percent. The survey has been conducted weekly since 1990. "Demand is waning due to rising mortgage rates and the fear that rates will move higher after March 31," said Alan Rosenbaum, president of Guardhill Financial, a New York-based mortgage banker and brokerage company. Mortgage rates are expected to rise when the Federal Reserve stops buying mortgage-related securities at the end of March.

The MBA said fixed 15-year mortgage rates averaged 4.35 percent, up from 4.33 percent the previous week. Rates on one-year ARMs increased to 6.80 percent from 6.67 percent. The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump. More key insight into the state of the housing market will emerge on Wednesday when the U.S. Commerce Department releases January new U.S. single-family home sales data.

Geithner: Spending and fiscal austerity goals are not in conflict
Assessing a tough governmental juggling act, Treasury Secretary Timothy Geithner assured lawmakers Wednesday that stimulus spending to spur the economy now isn't in conflict with a need for longer-term austerity. Geithner told the House Budget Committee that before the federal government can begin attacking soaring deficits and a massive national debt, it needs to increase jobs and ensure economic growth.

"Without growth, we cannot begin the process of restoring fiscal responsibility," the secretary said in prepared remarks. He offered a forceful endorsement of administration policies, ranging from expanded health care to tougher banking regulations. But Geithner focused his opening comments on the recession relief and job stimulus components of the Obama administration's $3.8 trillion budget for fiscal 2011. Those efforts total nearly $300 billion in proposed spending.

Geithner's testimony came as Obama faces growing pressure to both address stubbornly high unemployment and to confront a rising pool of red ink. But even under Obama's ambitious budget blueprint, unemployment would still be pushing double digits at 9.8 percent and this year's deficit would increase to $1.56 trillion under the administration's accounting. Geithner was sure to encounter sharp questioning, especially from Republicans, over the president's spending plans, his own stewardship of the financial sector, and the state of unemployment despite a massive stimulus package last year.

"My guess is the American people think enough is enough," Rep. Jeb Hensarling, R-Texas, told Geithner. "When they hear more stimulus all they see is more debt." At least one Democrat also weighed in, calling on the administration to do more to expand housing and consumer lending. Rep. Marcy Kaptur, D-Ohio, accused Geithner of making "political choices" in a mortgage assistance program that Treasury has aimed at five states — California, Nevada, Arizona, Florida and Michigan. "Your administration, compared to the last one, is trying," she said. "But you're not hitting the mark."

Geithner pointed to an administration plan to use $30 billion of unused money from the $700 billion Troubled Asset Relief Program to help community banks increase lending to small businesses. In so doing, Geithner conceded that the money should be removed from the unpopular TARP program first to assure bankers they will not face the disclosure and compensation restrictions that financial institutions faced when they accepted bailout funds. "TARP has outlived its basic usefulness because banks are worried about the stigma of coming to TARP, and they're frankly worried about the conditions," Geithner said. He said 600 small banks withdrew their applications for TARP money because they did not want to face the restrictions or the perception that they needed a bailout.

US Federal Debt: Rolling Six-Year Forecasts
by Doug Short

My recent post on federal debt was based on data in the 2011 budget introduced by President Obama on February 1. The main focus was the six-year forecast by the Office of Management and Budget for 2010-2015.

Today's chart examines the pattern of the seven rolling forecasts since the 2005 Bush budget was presented in February 2004. As you can see, 2008 was a pivotal year. In fact, the federal debt from 2000-2008 and the five Bush budget forecasts shown on this chart (2005-2009) deviate only slightly from a linear regression drawn through the debt data and extended to 2015, illustrated here. Despite the war or terror and the cost of wars in Iraq and Afghanistan, federal debt was a relatively simple extrapolation.

The financial crisis that began in 2008 changed everything. Government policies to deal with the crisis have significantly altered the OMB estimates, as the two Obama budgets (2010 and 2011) dramatically illustrate. The 2010 budget (presented February 26, 2009, 11 days before the market low) included a forecast for the fiscal-year-end debt that proved to be 8.3% higher than the 2009 final number, a fact that illustrates the magnitude of uncertainty introduced by the financial crisis. The 2011 six-year forecast has scaled back the numbers for 2010 and 2011, but it closely tracks the later trend of the previous budget.

These federal debt forecasts confirm we what already know — 2008 was a major economic turning point, a metaphoric fork in the road. However, the chart helps us quantify the magnitude of the new direction. The current 2015 forecast of a 19.68 Trillion debt is about 46% higher than the equivalent point (about 13.5 Trillion) on the road not taken.

Source for U.S. federal debt data: Budget of the United States Government. Click on a fiscal year link, and then find the link near the bottom labeled Historical Tables. Table 7.1 presents the federal debt data, including six years of debt estimates.

Nearly 20% of U.S. workers underemployed
Nearly 20 percent of the U.S. workforce lacked adequate employment in January and struggled to make ends meet with reduced resources and bleak job prospects, according to a Gallup poll released on Tuesday. In findings that appear to paint a darker employment picture than official U.S. data, Gallup estimated that about 30 million Americans are underemployed, meaning either jobless or able to find only part-time work. Underemployed people spent 36 percent less on household purchases than their fully employed neighbors in January, while six out of 10 were not hopeful about their chances of finding adequate work in the coming month, the poll said.

Gallup surveyed more than 20,000 U.S. adults from Jan. 2 to 31. The results have a 1 percentage point margin of error. The poll comes at a time when voter anger over the slow economic recovery is running high and President Barack Obama's hopes of boosting employment through government programs have been frustrated by partisan rancor in Congress. The U.S. unemployment rate fell to 9.7 percent in January but remains near record highs. Gallup found that underemployed Americans were more likely to have a favorable view of Obama, with 55 percent approving of his performance as president against 49 percent of the public.

The poll's estimate of U.S. underemployment is higher than official statistics. The Labor Department says 16.5 percent of American workers were without employment or worked part-time for economic reasons in January against Gallup's 19.9 percent. A Labor Department official said the government rate may be lower because it factors out temporary seasonal changes in employment to better reflect the underlying economy.

Dave’s Top 10 Reasons to Fade the Recovery (It’s Not a Business Cycle!)
by David Goldman

This is NOT a business cycle: this is a one-time reversal of twenty years of inflation of the household balance sheet. An aging populationneeds a 10% savings rate (at least) to meet minimum funding requirements for the biggest retirement wave in US history (comparable to Japan’s retirement wave during the “lost decade” of the 1990s). With 17% effective unemployment, many Americans are dis-saving, after a $6 trillion shock to home equity.

10) There is no recovery at all in Europe. European growth ground to a halt during the fourth quarter and German busines confidence unexpectedly fell in February.

9) China won’t collapse, but government efforts to stop overheating by raising reserve requirements make clear that the world’s second-largest economy can’t be the locomotive for world growth.

8. Greece and its prospective rescuers in the European Community are at loggerheads over conditions for EC help. “Greece faces several important challenges in the coming days, including an expected bond auction, a planned general strike on Wednesday, and a visit from European Union officials that began Monday, aimed at pushing the country to take tougher steps to rein in its budget deficit,” WSJ reported today.

7. State fiscal crises continue to worsen. “Doomsday is here for the state of Illinois,” California’s last set of cosmetic measures do little to address a $20 billion deficit, Baltimore has no idea how to close a $120 billion deficit. On top of this year’s $200 billion deficit, states face a trillion-dollar shortfall in pension funds.

6) Commercial real estate is nowhere near bottom, with some sectors (e.g. hotels) at delinquency rates of nearly 10%. Credit Suisse says that delinquencies could reach $60 billion.

5) Regional banks continue to drop like flies, with 702 banks holding assets of $403 billion on the danger list.

4) Bank credit continues to shrink. Total bank credit is still falling at a 5% annual rate, an unprecedented decline:

FRED Graph

3) What bank credit is available is funding the US Treasury deficit in the mother of all crowdings-out, replacing commercial loans on banks’ balance sheets:

FRED Graph

2) Industrial production has bounced of the bottom, but manufacturing is only 15% of US employment.

FRED Graph

And Dave’s top reason to fade the recovery is

1) Employment won’t come back. Today’s consumer confidence number is one more nail in the coffin of exaggerated hopes for a cyclical recovery.

Republicans push Obama to put Fannie, Freddie on budget
A pair of key Republicans on the House Financial Services Committee is pushing the White House to end the long-standing practice of excluding mortgage finance companies Fannie Mae and Freddie Mac from the federal budget. "It is the same sort of financial shell game that has brought governments like Greece to a crisis point. Hiding your debts just leads to a bigger day of financial reckoning down the road," said Representative Spencer Bachus, the top Republican on the panel.

Bachus said he was backing legislation from Representative Scott Garrett, the top Republican on the House Financial Services Subcommittee on Capital Markets, to put the two enterprises on the federal budget. Fannie Mae and Freddie Mac, which play a role in funding three-quarters of all U.S. residential mortgages, came under government control in September 2008 when they received a massive bailout that gave the government a 79.9 percent stake.

Fannie was formed in the late 1930s in the wake of the Great Depression as a government agency and was chartered by Congress in 1968 as a private, shareholder-owned company in order to take it off the federal books. But their congressional charter provided an implicit guarantee from Uncle Sam. As the financial crisis unfolded in 2008, the guarantee was made explicit when then-Treasury Secretary Henry Paulson, a Republican, effectively took control of the firms, though he stopped short of full nationalization by placing them into a "conservatorship" in order to keep the firms off the federal balance sheet.

Just over a year later, on Christmas eve, the Obama administration extended an unlimited credit line to the two companies through the end of 2012. Previously, the credit was capped at $400 billion.
Earlier this month, the White House said it expected Fannie Mae and Freddie Mac's finances to weaken further but did not offer any vision for the future of the two, as analysts had expected. President Barack Obama's budget proposal said Fannie Mae and Freddie Mac will tap a total of $188 billion in government funds by October 2011, up from the $111 billion they have already drawn. That does not count trillions in liabilities for the government-controlled firms.

House Financial Services Committee Chairman Barney Frank has said he wants to see Fannie Mae and Freddie Mac "abolished" in their current form, though he has not specified what that means.
Frank has scheduled a hearing before his panel on the future of the firms, known as government-sponsored enterprises, for March 2 and has invited Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan to attend.

Asked about Bachus' comparison to Greece, Donovan declined to comment directly. On the broader issue of putting Fannie and Freddie on the federal books, Donovan told Reuters it is "putting the cart before the horse to say you will make a decision about what's going to be in the budget before you make decision about what to do with Fannie and Freddie."

The $100 Trillion Problem: Can America Learn From Chile Before It's Too Late?
by Tyler Durden

Jose Pinera provides an Entitlement State 101 lecture, in which Chile's former Labor and Social Security Minister demystifies the U.S.'s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile's entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly "backward" South American country succeeded? 

Some insight from Pinera:

"$100 trillion is the present value of what Americans will have one way or another to pay, unless they default on their obligation to their citizens. And that is the future, and I am extremely worried because you are like passengers in the Titanic. You see the Titanic is going toward the iceberg of aging populations but populations the feel entitled to all these huge benefits that the politicans have promised the people, but they have not funded the benefits for the future. So how are you going to pay them? That is the big issue, the big domestic problem facing America."

And this:

The problem is the entitlement state. The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax. And because the entitlement state is based on promises for the future, you don't have to pay it today, this is growing, because to win elections politicians offer benefits to people that would be paid to people in the future. So this big hole is not only a problem in America, it's exactly the same problem in Greece today, in Southern Europen, in France, in Germany. The west will go bankrupt unless you reform deeply the entitlement state. You are all prisoners of the Bismark unfunded entitlement system...With the aging of population, the extended life, you have been accumulating these huge liabilities that eventually will bankrupt the government. A huge fiscal crisis is coming to the west unless you face it and confront it directly...You either will have to raise taxes big time in America, or you will have to cut benefits. But it is extremely difficult to do that, in a system in which you have people entitled to all this things.

America's failed fiscal policy, its corrupt government, its kleptocratic financiers, its unsustainable deficits have all become the butt of jokes of the former developing world. And here we stand, with the market trading up or down 1%, based on which rumor is leaked on any given day about Greece's upcoming €5 billion auction. In this context why even worry about $100 trillion. That amount, as Feynman would appreciate, is not even digestable in Bernanke (the 21st centuiry equivalent of economic, f/k/a scientific) numbers (just yet). Why indeed, when, as Pinera says, the problem is not contained in some building in downtown Washington, it's in all of us. And those are precisely the problems that, at least so far in America, have never gotten any resolution.

New York Sales Tax Receipts In Unprecedented Collapse
It's a good thing Wall Street bonuses rebounded in 2009 because otherwise the State of New York would be totally screwed.

Yesterday the Comptroller released its survey of the state's sales tax receipts -- a proxy for consumer spending that shows a trend opposite to Wall Street.

Here's the top-line view:

Counties across New York State, including New York City, saw one of the sharpest declines in sales tax collections on record, according to a report released by State Comptroller Thomas P. DiNapoli. The report, which compares 2009 to 2008 collections, found a 5.9 decrease in collections statewide. Only four counties saw an increase but these numbers were primarily due to administrative and technical adjustments, not better economic performance.

“This is yet another sign that the Great Recession is having a continuing impact on our communities across New York,” said DiNapoli. “These numbers are sobering. Fortunately, many local governments have taken sometimes painful budgetary steps to stave off disaster. It’s a struggle, but all levels of government have to make every taxpayer dime count.”

Among the report’s findings:

  • Fifty-three of New York’s 57 counties outside of New York City saw a sales tax decline and many of these counties share sales tax revenues with their municipalities;
  • The largest decline occurred in the Lower Hudson Valley, at 8.4 percent;
  • In state fiscal year 2009-10, the state’s sales tax base (value of all goods and services subject to the sales tax) shrank by 7.1 percent;
  • Among New York’s counties, Westchester saw the steepest drop at 10.3 percent;
  • The Mohawk Valley region saw the smallest downturn at 2.5 percent;
  • Only Oneida, Chautauqua, Schuyler and Seneca counties saw increases, but this growth was mostly attributable to factors other than economic growth; and
  • According to the New York State Association of Counties, most counties prudently budgeted little or no growth in their sales tax revenues for 2010.

A few charts exemplify the trouble the state faced:



And here's a breakdown by notable region:



At the same time, Comptroller DiNapoli warned of a $2 billion budget shortfall for the current year.

Here's How The Greece Could Become A Major Victory For The EU
by Peter Schiff

If the global economy could be described as a three ring circus, then the center ring attraction would definitely be the currency and debt exchanges between the United States and China. But for the past month the world's attention has been distracted by an entertaining sideshow in which Greece and the European Union are jostling over a potential bailout for Greek debt and whether the European Union, and the euro itself, will exist for much longer. I believe the short-term problems in Europe are being overblown and the potential demise of the euro highly exaggerated. For those who can connect the dots however, the drama throws some much needed light on the far more daunting problems unfolding within our own fiscal house.

The scenario that is eliciting the greatest fears is that resentment from the more solvent EU members will prevent a bailout for Greece. If the Greek government then fails to adopt austerity measures that will bring it back in line with EU debt requirements, then an expulsion, or withdrawal, from the Union becomes a possibility. This could set off a domino effect that will bring down larger European political or monetary union. On the other hand, if Greece does receive a bailout, a moral hazard will be created that will encourage other indebted countries (Portugal, Spain, etc.) to press for equal benefits. Both scenarios would destroy confidence in the euro, remove the biggest rival of the U.S. dollar, and give a shot in the arm to the dollar's global status.

However, there is a third more likely alternative that few are considering. My gut is that Greek politicians will find the prospect of being forced out of the union and re-creating their own currency, formerly called the drachma, even more unpalatable then swallowing the bitter pill of fiscal austerity. Even if defying the EU might seem like good politics now for Greek leaders, the risks associated with economic independence could be so daunting that politicians will refuse to roll the dice. Their better political choice would be to talk tough against draconian spending cuts but vote for them anyway. By playing the role of callous bullies, politicians in Berlin, Paris, and Brussels can provide Greek politicians with the political cover necessary for them to make the unpopular decisions. That way Greek politicians could have their cake and eat it too.

The best case for Europe would be a solution that is all stick and no carrot. This would mean that Greece would have to get its fiscal house in order with no help from the EU. However, even a solution that involved some help from Brussels, but still forced real reforms in Athens, would be seen as a positive for the euro.

Rather than being the beginning of the end for the euro, the Greek drama may well become the euro's first major victory. If the EU forces Greek politicians to act more responsibly, the Union will show that it cares about the value of its currency and that it has the political will to keep its members in line.

On the other hand, the negative consequences for the EU, and the euro, of an outright Greek bailout would be devastating. Central to the euro's viability is the limit it places on the ability of member nations to run deficits. The moral hazard associated with a Greek bailout would create a situation that would actually encourage all EU nations to run larger deficits because the costs of doing so would be borne by the more responsible members.

While I still have my doubts about the long-term viability of the euro, I feel that there will be many short-term successes before the experiment ultimately fails. In the meantime, if the euro can survive its current trial, its health could be bad news for the dollar. A battle tested euro, backed by a disciplined union, will have greater credibility as the currency capable of dethroning the dollar. This will eventually refocus attention back on the United States and will highlight the significant distinctions between the two economic powers.

First, while the European Union may have several member nations with fiscal problems, the same situation exists in the U.S. where many of our most populous States are currently navigating similarly dire financial straits. Like Greece, California cannot print money. So if leaders in Sacramento can't find the will to raise taxes or cut spending, absent federal bailouts, default will be their only option.

However, my guess is that the political pressure in the U.S. to bailout State governments, or to avoid the huge cuts in State spending that would be required to avoid default, will be too great to resist. While Germans are vehemently opposed to bailing out Greeks, I do not foresee the same level of opposition on the part of New Yorkers to bailing out Californians, especially since New York will likely need its own bailout in the not too distant future.

This is especially true since most voters will not be asked to pay higher federal taxes to finance State bailouts. We will simply "pay" for State bailouts the same way we "pay" for all the others, we will borrow from abroad or print money.

As a result, none of the States will be forced to make the necessary spending cuts, and many will actually increase spending even faster, even as their tax bases continue to shrink. Those States that may have otherwise acted responsibility will likewise be incentivized to run large deficits themselves to get their fair slice of the bailout pie.

Of course, on a Federal level, there will be no one to force Uncle Sam's hand, because unlike Greece, our government can print money. Since printing money is far more politically popular than cutting spending, raising taxes on the middle class, or honest default, it is the most likely option our leaders will choose.

If these two scenarios unfold, the EU holding the line on Greece and Washington caving to California, creditor nations will be presented with a clear message as to where to hold their currency reserves. The stampede out of the dollar will begin, and the greenback's tenure as the world's reserve currency will enter its final act. Such an outcome would also throw light on the solvency of the United States itself, which has its own debt issues which in many ways are far more daunting than those faced by the European Union. The real tragedy will play out not in Greece, but in America.

Nationwide Strike Paralyzes Greece
Greek police clashed with youths in central Athens Wednesday as tens of thousands of people took to the streets in protest at the Socialist government's austerity measures. The strike has affected transport and public services, with government offices, schools and universities all shut and travel around the capital, Athens, disrupted. Athens International Airport was also closed as air traffic controllers joined the action, with no flights in and out of the country's airports. Train, bus and ferry services were canceled nationwide. Banks are also expected to be affected while state hospitals will operate on skeleton staffing. No newspapers will be published because the journalists' union is taking part too.

"In many industries participation in the strike is 100%. Many banks in the center are closed or are operating with skeleton staff," said Stathis Anestis, spokesman for private sector umbrella union ADEDY. "It shows that the working people are totally against the government's austerity plans. We understand the difficulties in the economy, but the average worker can't give anything more. If the EU wants more measures, the rich and those who evade taxes should pay for it."

A group of about 20 youths broke away from the march and starting throwing Molotov cocktails and heavy objects at police, damaging bus stops in Athens' Syntagma square, where the Greek parliament is located. The youths were chased away by riot police, who used tear gas against the protesters. "We hope that's the end of it," a senior police officer said. "But we stand ready to do our duty and safeguard this peaceful demonstration." Most of the shops in the area where the protest is taking place pulled down their steel shutters, fearing violence would break out. "They ruined my shop twice," said shop owner Apostolos Nikou. "I'm closing down and hope for the best."

Greece is under intense pressure by the European Union and financial markets to narrow its budget deficit, which hit an estimated 12.7% of gross domestic product last year, four times above EU limits. The government has pledged to cut that deficit to 8.7% of GDP this year, and below the EU's 3% cap by 2012. In order to meet those goals, the government has announced a series of spending cuts and tax hikes that it says will produce some €8 billion to €10 billion in savings and additional revenues. So far, those measures include a freeze on civil-service wages, cuts in public-sector entitlements by 10% on average, a fuel tax hike and the closure of dozens of tax loopholes for certain professions—including some civil servants—who now pay less than their fair share in taxes.

"It seems to me there is an all out war against public servants, those who earn the least," said Spyros Papaspyros, president of ADEDY. "We will fight to keep the little we have." "On average 80% of our members are participating in the strike and most public offices are closed," he added. "The government and the EU must understand the the crisis must be paid by the rich, not the average civil servant. We will meet in the next couple of weeks to decide our further action." Greek workers also plan to hold two rallies in central Athens later Wednesday.

Concerns grow over China's sale of US bonds
by Ambrose Evans-Pritchard

Evidence is mounting that Chinese sales of US Treasury bonds over recent months are intended as a warning shot to Washington over escalating political disputes rather than being part of a routine portfolio shift as thought at first. A front-page story in the state’s China Information News said the record $34bn sale of US bonds in December was a "commendable" move. The article was republished by the National Bureau of Statistics, giving it a stronger imprimatur.

It follows a piece last week in China Daily, the Politburo’s voice, citing an official from the Chinese Academy of Sciences praising the move to "slash" holdings of US debt. This was published on the same day that US President Barack Obama received the Dalai Lama at the White House, defying protests from Beijing. "There are ongoing spats between the US and China on so many fronts so you have to assume that this is some sort of implicit threat," said Neil Mellor, a currency expert at the Bank of New York Mellon, who cautioned that it can be hard to read the complex signals from China. "We still think China will have to continue buying US Treasuries by the bucket load. Where else can they invest in a liquid market. The euro has become a tarnished currency," he said.

China’s power is growing so fast that it now feels confident enough to raise the stakes on a string of festering conflicts with the US. It has threatened to impose sanctions on any US firm that takes part in a $6.4bn arms deal for Taiwan agreed by the White House. This is a tougher response that on any previous occasion and raises the spectre of a trade war over Boeing, the key supplier. "Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies, and to back off from interference in its domestic issues," said professor Eswar Prasad, ex-head of the IMF’s China division.

Stephen Jen from BlueGold Capital said Chine is probably moving out of bonds from many countries as it prepares for a likely 5pc revaluation of its currency in coming weeks. Other assets might prove better protection against an immediate loss on holdings Use of China’s $2.4 trillion reserves to challenge US foreign policy is fraught with problems, not least because any damage to America will recoils immediately against China – which depends on the US market for its mercantilist growth strategy.

Beijing cannot stop accumulating dollars unless it is willing to let the yuan ride, eroding the margins of its export industry. Some reserves can be parked in gold or even copper, but liquid commodity markets are not big enough to absorb the scale of Chinese surpluses. China and America are locked together by fate. Any petulant action by either side involves a degree of `mutual assured destruction’. But sometimes in politics – as in life – emotion flies out of control.

China Tells Banks to Restrict Loans to Local Governments
China’s banking regulator has told commercial lenders to restrict new lending to the financing arms of local governments, a measure designed to pre-empt potential overheating in the country’s booming economy. Hong Kong, meanwhile, announced plans to increase taxes on luxury-home purchases, an effort to cool red-hot property markets. A flood of lending by China’s state-owned banks, combined with a giant government spending program, helped mainland China stave off the worst of the global economic crisis and expand its gross domestic product by 8.7 percent last year.

The credit binge had the side effect, however, of setting off a surge in property prices, as much of the readily available cash flowed into the stock markets and property. Land prices in mainland China, for example, doubled in 2009 on a nationwide basis, according to economists at Standard Chartered in Shanghai. That has brought worries about a property bubble and concerns that some of the loans might ultimately go sour. Economists are also increasingly worried that the overall economy may be overheating.

Some believe China’s gross domestic product could grow by as much as 10 percent this year, particularly if exports continue to rally, as they have in recent months. The reaction by the authorities has been to rein in the pace of growth in loans in recent months. In January, Liu Mingkang, chairman of the China Banking Regulatory Commission, said he expected the nation’s banks to extend credits totaling about 7.5 trillion renminbi, or $1.1 trillion — more than one-fifth lower than the record 9.6 trillion renminbi doled out last year.

On Wednesday, the state-run Shanghai Securities News reported that lenders had been told to limit credit to local governments and reject projects that lacked adequate capital, according to The Associated Press. Twice this year, the Chinese central bank has raised the amount that banks had to set aside as a reserve against failed loans. Analysts widely expect further increases in the so-called reserve requirement ratio, which effectively reduces the amount of loans that lenders can make, in coming months. Other Chinese measures aimed specifically at cooling the property market include higher down-payment ratios for second mortgages and land purchases.

Likewise, the Hong Kong government raised stamp duties on purchases of luxury flats Wednesday and announced plans to increase the supply of housing in a bid to cool the property market. The city’s overall economy is expanding less dramatically than that in mainland China — the government projected G.D.P. growth of 4 to 5 percent for 2010 — but local property prices have soared in Hong Kong, too, since late last year. Jing Ulrich, the managing director and chairwoman of China equities and commodities at J.P. Morgan in Hong Kong, said she expected the recent measures announced in mainland China to prevent property prices there from rising much more this year.

Overall transaction volumes, however, will probably fall by 20 percent, Ms. Ulrich said, as the buying frenzy last year met much of the demand, and buyers will now remain on the sidelines. But, she said, corporate savings are at a record high, thanks to the lending binge last year, meaning that the government-induced slowdown in lending will not bring an outright credit crunch in China. And the high level of household savings means that higher down-payment requirements, for example, will "not kill the market," as they might do in countries like the United States, where household savings are much lower, Ms. Ulrich said.

Stephen Green at Standard Chartered in Shanghai wrote in a note Tuesday, "China’s stimulus measures were more akin to a blunderbuss than a sniper’s bullet; everything that could be done, was done." China is now moving to moderate the various stimulus measures it has introduced, he wrote.

Harvard's Rogoff Says 'Horrible' China Crisis May Trigger Regional Slump
China’s economic growth will plunge to as low as 2 percent following the collapse of a "debt- fueled bubble" within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff. "You’re not going to go a decade without having a bump in the business cycle," Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday. "We would learn just how important China is when that happens. It would cause a recession everywhere surrounding" the country, including Japan and South Korea, and be "horrible" for Latin American commodity exporters, he said.

China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession. "Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy," said Rogoff, who in 2008 predicted the failure of big American banks. In 2008, China cut interest rates, started rolling out a 4 trillion yuan ($586 billion) spending package and scrapped quotas limiting lending by banks to counter slumping exports.

While Rogoff said he isn’t sure what will cause China’s bubble to pop, he said land is "the best bet" as it is "the most common source" of crises. Real estate values in Shanghai and Beijing have "taken a departure from reality," said the economist, co-author of "This Time is Different," a 2009 book that charts the history of financial calamities in 66 countries. A collapse would depress output gains to 2 to 3 percent, a "very painful" period which would persist for about a year and a half, Rogoff said. The slowdown won’t lead to a Japan- like "lost decade," he added. In a speech earlier yesterday, he said China will do "very well this century."

China, the world’s fastest-growing major economy, expanded 10.7 percent from a year earlier last quarter. The World Bank forecasts a 9 percent expansion in 2010. China may provide more than a third of global growth in this year, according to Nomura Holdings Inc., Japan’s biggest broker. The country’s policy makers aim for a minimum of 8 percent growth annually to create jobs and avoid social unrest. The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year. In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported.

World exporters are increasingly relying on China as consumers in the U.S. and Europe retrench. Honda Motor Co. and Nissan Motor Co. are adding capacity in China, which last year overtook the U.S. as the biggest car market. Rio Tinto Group’s sales to China overtook those to North America and Europe in 2009, reaching 24.3 percent of the total from 18.8 percent a year earlier, the mining company said this month. Chinese policy makers are trying to cool lending that helped property prices in 70 cities climb at the fastest pace in 21 months in January. The government aims to reduce new loans to 7.5 trillion yuan this year from a record 9.59 trillion yuan in 2009. The People’s Bank of China raised the proportion of deposits that lenders must set aside as reserves twice this year to cool the economy.

"If there’s a this-time-is-different story in the world right now, it’s China," Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. People say China "won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah," he added. "I say of course China will have a financial crisis one day."

Harvard’s Rogoff Sees Sovereign Defaults, 'Painful' Austerity
Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks. Following banking crises, "we usually see a bunch of sovereign defaults, say in a few years," Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. "I predict we will again."

The U.S. is likely to tighten monetary policy before cutting government spending, sending "shockwaves" through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger "very painful" tax increases and spending cuts, he said. Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

"Most countries have reached a point where it would be much wiser to phase out fiscal stimulus," said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better "to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation." Rogoff, 56, said he expects Greece will eventually be bailed out by the IMF rather than the European Union. Greece will probably announce an austerity program "in a few weeks" that will prompt the EU to provide a bridge loan which won’t be enough to save the country in the long run, he said. "It’s like two people getting married and saying therefore they’re living happily ever after," said Rogoff. "I don’t think Europe’s going to succeed."

Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S., he said. The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.’s will reach 94.1 percent and Japan’s will spiral to 204.3 percent. "In rich countries -- Germany, the United States and maybe Japan -- we are going to see slow growth. They will tighten their belts when the problem hits with interest rates," Rogoff said at the forum, which was hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. Japanese fiscal policy is "out of control," he said.

So far concerns about the euro zone’s ability to withstand the deteriorating finances of its member nations have outweighed the U.S.’s deficit woes, propping up the dollar. "The more they suck in Greece, the lower the euro goes, because it’s not a viable plan," Rogoff said. "Clearly the dollar is going to go down against the emerging markets -- there’s going to be concern about inflation and the debt." The dollar has surged more than 9 percent against the euro in the past three months. Ten-year Treasuries yielded 3.72 percent as of 10:16 a.m. in New York. The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said.

"The U.S. is in a state of paralysis in its fiscal policy," he said. "Monetary policy will tighten first, and I don’t think it’s the right mix." The Federal Reserve last week raised the discount rate charged to banks for direct loans, and plans to end its $1.25 trillion purchases of mortgage-backed securities in March. President Barack Obama’s administration is proposing a $3.8 trillion budget for fiscal 2011 to spur the recovery. "When they start tightening monetary policy even a little bit, it’s going to send shockwaves through the system," Rogoff said.

In an interview a month before Lehman Brothers Holdings Inc. went bankrupt in 2008, Rogoff said "the worst is yet to come in the U.S." and predicted the collapse of "major" investment banks. His 2009 book "This Time Is Different," co- written with Carmen M. Reinhart, charts the history of financial crises in 66 countries. "We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that’s happening," he said. "Greece is just the beginning." Greece’s debt totaled 298.5 billion euros ($405 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.

The cost of protecting Greek bonds from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December. "Greece just highlights that one of those risks is sovereign default," said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, "it doesn’t justify the situation where we’re all in a panic and are going back to cash in the post-Lehman shock."

Death of U.S. capitalism: The final 10 scenes
by Paul B. Farrell

Good news, Americans are "downbeat about today. Upbeat about tomorrow," says the latest USA Today/Gallup Poll. "Americans feel battered by hard times, record home foreclosures, stubbornly high unemployment rates and war." And yes, we are "fed up with Washington and convinced more than 3 to 1 that the nation is heading in the wrong direction," yet there's "confidence that there will be better times ahead, that the classic American dream endures and hasn't been extinguished. It's not even at its low ebb." Why? Because we're in denial!

Do Main Street's 95 million investors know something Warren Buffett's long-time partner, Charlie Munger, doesn't know? Munger is warning us "It's Over" for America. Yes, "o-v-e-r," America's in decline, at the end-of-days, coming to "financial ruin," says Munger. Optimism has always been the enduring spirit that made us a great nation, brought us back from overwhelming challenges and impossible odds -- WW II, the Civil War, the 1776 Revolution. Yes, that spirit still burns in our soul, says the poll.

But we also know, as we said earlier in "The Death of the Soul of Capitalism," that over the long-term, through many centuries, historians give nations an average of about 200 years before they burn out. Why? Because the "blind optimism" that makes a nation great in the early years of its rise to power and glory becomes, paradoxically, its worst enemy in the end-days. Their arrogance traps them in a self-sabotaging cycle that weakens their resolve, makes them vulnerable to new, unpredictable challenges, ultimately destroying them from within. That happens over and over throughout history, even as their optimistic brains tell them they're still the greatest.

So for a moment, please set aside your "optimism," listen to our translation of Munger's drama as a 10-scene crime-thriller about America on the "road to ruin."

Plot notes: Warning, America is on a 'road to financial ruin'

Turns out that like Buffett, whose tales we detailed earlier, Munger's a good storyteller. His parable, "Basically It's Over: A parable about how one nation came to financial ruin," appeared in Slate magazine. Clearly he's warning about the end of capitalism, the end of democracy, the coming end of America. In his parable Munger calls America "Basicland ... rich in all nature's bounty." In our recasting it as a drama, we'll use "America" rather than "Basicland" in the narrative to drive home the full impact of Munger's powerful message.

Scene 1: Power and wealth create false sense of invincibility

Significantly, Munger says 2012 is the turning point, a signal, the moment setting up the final crisis scene. We've often made a similar timing prediction, one tied to the 2012 election, and a reminder of the warning made by Jared Diamond in "Collapse: How Societies Choose to Fail or Succeed." In the late stages of a nation's cycle: A crisis hits. Everyone, leaders and citizens, act surprised. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power." Just 20 short years to ruin?

Munger warns: "Even a country as cautious, sound, and generous as America could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of America had created a peculiar outcome: As their affluence and leisure time grew, America's citizens more and more whiled away their time in the excitement of casino gambling." Yes, Main Street "feels battered" while Wall Street gambling casinos generate billions.

Scene 2: Greed consumes America: Gambling replaces real work

In Munger's brilliant parable "the winnings of the casinos eventually amounted to 25% of America's GDP, while 22% of all employee earnings in America were paid to persons employed by the casinos" and "many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called financial derivatives." Yes, the same derivative bets Buffett targeted when he warned against "financial weapons of mass destruction."

Scene 3: Wall Street's casinos prosper as Main Street suffers

Munger's also not talking about just the million or so gamblers working in Wall Street's "too political to fail" casino-banks. No, "gamblers" are also among Main Street America's 95 million average investors, though most of the high rollers are the slick pros on casino payrolls where "most casino revenue now came from bets on security prices under a system used in the 1920s." Think of Goldman's trading operation that often makes $100 million profits daily, while America has close to 20% underemployed.

Scene 4: America's side-bet debt to foreign casinos skyrockets

Now comes the crucial turning point in Munger's crime-thriller: "Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts ... They feared big trouble if the gambling-addicted citizens of America were suddenly faced with hardship." They were right.

Scene 5: Nations in denial rarely prepare for disasters in advance

"Then came the twin shocks," a plot twist borrowed from "Avatar," "Wall-E" and Al Gore, the kind of shocks that most "optimists" (especially those hell-bent on voting Obama and the liberals out of office by 2012) always deny. So, "hydrocarbon prices rose to new highs." Munger must mean a twist like oil hitting a scene-stealing $1,000 a barrel.

Scene 6: In the later stages, get-rich-quick beats real work

America seeks the advice of the "Good Father," a tall ex-Fed chairman who suggests "America change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees -- and former casino patrons -- to produce and sell items that foreigners were willing to buy." Never happen: Not as long as Wall Street's gamblers can make more in a year trading derivatives than most Americans make in a lifetime. Why "work?"

Scene 7: Wall Street CEOs, economists, lobbyists love gambling

Sounds great, many approved, "but others, including many of America's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market -- even wild growth in casino gambling -- is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when America would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008."

Scene 8: Wall Street gamblers love Reaganomics, hate change

Though Munger and his partner got rich in this bizarre parable, his plot turns dark as America's "investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father." Wall Street "came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve" by leaving today's free market gambling casino operations untouched, so it could quickly return to pre-2008 "greed is very good" reality.

Scene 9: Main Street investors join Wall Street's 'Happy Conspiracy'

The endgame now unfolds rapidly. Munger warns that America's investors, workers and citizens have become so jaded they merge with Wall Street's self-sabotaging conspiracy: "Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district." They "saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers."

Scene 10: Politicians love Wall Street's derivative casino: Game over!

The 86-year-old Munger is himself a metaphor for America's version of the classic historical cycle: He was an optimist as he and Warren built their $267 billion company over four decades. But sadly, his parable, his vision of America's future, has no optimistic finale. Rather it's reminiscent of Diamond's "Collapse," Bogle's "Battle for the Soul of Capitalism," and so many other recent reminders about how America just went over a cliff and how Wall Street's casino-banks will soon drive us off a bigger cliff into the Great Depression II by 2012.

Munger's parable is more than a Hollywood suspense-thriller, it's another example of the classic historical life-cycle of a nation. In the final scenes "politicians ignored the Good Father one more time," the casino-banks returned to gambling in derivative "securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. America is now under new management, using a new governmental system. It also has a new nickname: Sorrowland."

Epilogue: Your moral dilemma: a no-win scenario or historical destiny?

Do we really have a choice? Ask yourself, what's ahead after 2012? Can you see beyond a destructive campaign: Obama at war with Palin and the "Tea Party of No?" What are the long-term prospects of our "civilization." Do you share Munger's dark vision? Or does the USA Today/Gallup Poll tell you guys like Munger, Buffett and Volker do "lack any understanding of important and eternal causes of human progress that the bankers are trying to serve" with their gambling casinos. "Optimists" in those polls are just politicians, bankers and citizens like you, in denial, can't hear the warnings. So we get no changes, no action, no preparations because at this stage in the long-term historical cycle, optimism has turned into our worse enemy, wishful-thinking.

Solution? Get into action, let's launch the "Second American Revolution." Got any constructive, optimistic strategies? Share them.

European banks face showdown over €1 trillion of debt
by Ambrose Evans-Pritchard

European banks need to roll over €1 trillion (£877bn) of debt over the next two years at a much higher cost and in direct competition with hungry sovereign states, according to a report by Morgan Stanley. The bank has advised clients to prepare for chillier times as monetary tightening begins in the US and China, causing major spill-over effects in Europe. Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.

"The scale of such issuance could raise a significant 'crowding out' issue, whereby government bonds suck up the vast majority of capital," said Graham Secker, Morgan Stanley's equity strategist. "The debt burden that prompted the financial crisis has not fallen; rather, we are witnessing a dramatic transfer of private-sector debt on to the public sector. The most important macro-theme for the next few years will be how easily countries can service and pay down these deficits. Greece may well prove to be a taste of things to come."

Lenders will have to cope with a blizzard of problems as new Basel rules on bank capital ratios force some to retrench. State guarantees are coming to an end, which entails a jump of 40 basis points in average interest costs. They must wean themselves off short-term funding as emergency windows close, switching to longer maturities at higher cost. Worries about Europe's second-tier banks help explain why Berlin is warming to plans for a €25bn rescue for Greece. Germany's regulator BaFin has warned that €522bn of German bank exposure to state bonds in Portugal, Italy, Ireland, Greece and Spain may pose a systemic risk if contagion causes "collective difficulties of the PIIGS states".

A BaFin note obtained by Der Spiegel said Greece could be the trigger for a "downward spiral in these countries, as in the case of Argentina", leading to "violent market disruptions". Citigroup said Europe's 24 largest banks must raise €720bn over the next three years, in a world where investors want a higher return for risk. "This could eventually drive up funding costs meaningfully," it said. It said a mix of higher credit spreads, rising rates, and Basel III rules could "eat up" 10pc of bank earnings. While most lenders can cope, it will dampen economic recovery. Morgan Stanley said the benchmark cost of capital – known as the 'risk-free rate' – is rising because governments themselves are becoming a riskier bet, with ripple effects through the entire economic system.

Investors should be cautious about corporate bonds, sectors such as transport, media and telecoms with high net debt to equity ratios and certain countries. The net debt to equity of the corporate sector is 189pc in Portugal, 141pc in Spain, 85pc in Italy, and 82pc in Greece, compared to 46pc for Germany, 39pc for Britain and 26pc for Sweden. Morgan Stanley expects equities to prosper, but not until the current "growth scare" is digested by the markets. "The current correction phase in equities is not over: there may be rallies but we recommend selling into strength."

Marc Faber warns of partial US debt default
4-part interview at the Financial Times

2009 Wall Street bonuses up 17 percent to $20.3 billion
Wall Street paid out $20.3 billion of bonuses in 2009, up 17 percent from a year earlier, New York State's comptroller said, as the financial industry recovered fitfully from a near meltdown. Speaking on CNBC television, Comptroller Thomas DiNapoli said profit for all of Wall Street could top $55 billion for 2009, when the economy began to stabilize and as lenders raced to repay federal bailout money they had come to view as a stigma. Average taxable bonuses on Wall Street rose to $123,850 in 2009, he said. Compensation at Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley, three of New York's biggest banks, rose 31 percent, DiNapoli said.

The comptroller's annual report on Wall Street pay is closely watched not only by Wall Street but also by politicians eager to rein in runaway pay in a still-weakened economy where unemployment remains high and tax revenue remains depressed. While bonuses are well below the level set in 2007 and are now more closely tied to company performance, DiNapoli acknowledged that many might consider them outsized given the lingering problems in the economy. "It's still a bitter pill for many people," he said.

German Budget Deficit Hits 3.3 Percent of GDP
Germany's budget deficit grew more than expected in 2009 as a result of the economic crisis and reached 3.3 percent of GDP, exceeding the euro zone limit of 3 percent. The economy may contract again in the first quarter due to the harsh winter, but the falling euro is brightening the outlook for export industries. Germany's budget deficit for 2009 has been revised up to 3.3 percent of GDP from a previous estimate of 3.2 percent, and the economy didn't grow at all in the fourth quarter, Germany's Federal Statistics Office announced on Wednesday.

The deficit is above the 3 percent limit set by the Maastricht Treaty on European monetary union and was driven up by the economic crisis and the government's stimulus packages totalling €50 billion ($68 billion), which were launched last year. In 2008, Germany balanced its budget with a 0.0 percent deficit. Last year was the first time Germany exceeded the EU deficit limit since 2005. The Bundesbank, Germany's central bank, projects that the deficit may rise to 5 percent in 2010 due to higher public spending as a result of increasing unemployment, and continued weak economic growth. The German Finance Ministry is even predicting a deficit ratio of 5.5 percent this year, but plans to push it back down below 3 percent by 2013.

But Germany is still doing significantly better than other euro member states. Greece reported a 2009 deficit of 12.7 percent, followed by Ireland and Spain with more than 10 percent. Concern over Greece's creditworthiness has led to a sharp depreciation of the euro in recent weeks. Germany suffered its worst economic slump since World War II last year but managed to exit recession -- classified as two consecutive quarters of GDP contraction -- in the second quarter of last year. However, the tentative recovery ground to a halt in the final quarter of 2009. The statistics office on Wednesday confirmed preliminary figures which showed that real fourth-quarter GDP, adjusted for seasonal and calendar factors, was unchanged from the previous quarter, and down by a calendar-adjusted 2.4 percent from the year-earlier period.

Wednesday's data followed bad news on Tuesday of a decline in the country's main leading economic indicator, the Ifo business climate index, which dropped for the first time in almost a year in February. That indicates Europe's largest economy may fall back into contraction in the first quarter of 2010, economists said. The Ifo index, released by the Munich-based Ifo institute, is based on a monthly survey of some 7,000 firms. It fell to 95.2 in February from 95.8 in January. Ifo said the decline was largely due to poor sentiment in the retail sector, possibly as a result of the unusually harsh winter weather.

The gloomy retail outlook was confirmed on Wednesday with the release of the closely-watched GfK consumer sentiment index which showed consumer confidence stagnating amid worries over the economic outlook as well as the possible impact of Greece's debt crisis on Europe. ''Public discussion of the precarious budgetary situation of Greece and some other European countries is also unsettling consumers, as they fear negative effects on Germany's economic development,'' the GfK market research group said. But it's not all doom and gloom. The depreciating euro is good for German industry because it makes exports cheaper outside the euro area. Economists said that, in the coming months, the economy may make up the ground it lost over the winter.

Europe at risk of double-dip recession
by Ambrose Evans=Pritchard

A blizzard of bad data from France, Germany, and Italy have raised concerns that Europe's fragile recovery is stalling already, with mounting risks of a double-dip recession this year. French household spending dropped 2.7pc in January, led by a 19pc collapse in car sales following the end of France's scrappage scheme. Germany's IFO business confidence index dropped for the first time since the depths of the crisis in December 2008, partly due to bad weather. Confidence relapsed in Italy.

Mervyn King, the Bank of England's Governor, said Europe's rebound "appears to have stalled" , posing fresh risks for Britain as well. "My particular concerns at present derive from the state of the world economy and our largest trading partner, the euro area," he said. Mr King said surplus countries around the world are not stimulating enough to offset belt-tightening by deficit states such as the UK, US and Spain, citing the eurozone as a "microcosm" of the problem. "I was struck by the mood at the G7 meeting in Canada, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth in their economy. That can't be true of everybody," he said.

The eurozone grew by just 0.1pc in the last quarter of 2009 as government stimulus wound down. Germany was flat; Italy contracted again; Spain and Greece were still in recession. Outside EMU, the Czech, Hungarian and Romanian economies all shrank. "We're treading a precarious path: things will have to go well in the rest of the world for Europe to avoid a double-dip recession," said Julian Callow from Barclays Capital. "Banks are facing bad loans and tougher Basel III rules. We've seen the deindustrialisation of Europe's core caused by the strong euro, which has helped Chinese exports penetrate the market. Unless the risks of debt deflation are mitigated, the European Central Bank may have to start buying assets."

Gabriel Stein from Lombard Street Research said Euroland is reaping the bitter fruit of tight fiscal and monetary policy, and the over-strong euro. "It is extraordinary for the ECB to stand back and do nothing as the (M3) money supply contracts. They have done almost no quantitative easing and seem paralysed by splits. This is as bad as any policy error since World War Two," he said. Falling prices in France and even Italy last month suggest that deflation may yet prove a threat. "Germany is exporting deflation to the rest of the eurozone," he said.

Greenspan Says Crisis ‘By Far’ Worst, Recovery Uneven
Former Federal Reserve Chairman Alan Greenspan said the financial crisis was "by far" the worst in history and called the recovery from the global recession "extremely unbalanced." The world economy has undergone "by far the greatest financial crisis globally ever," Greenspan said today in a speech to the Credit Union National Association’s Governmental Affairs Conference in Washington. Greenspan said that while the economy was in worse shape in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s because "never had short-term credit literally withdrawn."

Greenspan said that the gross domestic product may recover to the level of previous peaks earlier this year, even though traditional drivers of growth such as housing starts and motor vehicles were "dead in the water." He also said small businesses show few signs of improving because lenders are struggling with commercial real estate mortgages. The "extremely unbalanced recovery" is being led by high- income consumers and large businesses that are benefiting from a recovery in stock prices, he said. The Standard & Poor’s 500 Index fell 1.3 percent to 1,096.01 at 1:27 p.m. in New York. That level is 62 percent higher than the closing value of 676.53 on March 9, 2009, the lowest level since the financial crisis began.

Greenspan said that the financial system is "not yet to the point where the capital positions of the largest banks is built up to where they’re freely lending." Earlier this month, the Fed’s survey of senior loan officers said that banks continued to tighten terms of loans in the fourth quarter of 2009. Greenspan also said "fiscal affairs are threatening this outlook" for recovery, as Congress and the White House face difficulty raising taxes or cutting spending. He said that every day he checks the interest rate on 10-year Treasury notes and 30-year Treasury bonds, calling them the "critical Achilles Heel."

The financial crisis was caused by a "fundamental misjudgment in the marketplace," Greenspan said. Greenspan defended markets, because other forms of economic organization are worse. Greenspan said he wants the subprime mortgage market to return. "I hope we can find a way of resurrecting the subprime market," because it was working well until those mortgages were widely securitized, he said.

The deathbed of Keynesian economics
The UK has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance. So it may be fitting that the UK will also become the deathbed of Keynesian economics. Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalised almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy. The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked "bankruptcy imminent." At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

The public debate about the state of the British economy was enlivened last week by a brawl between economists. On February 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.

Keynesian backlash
That brought a stinging response from the Keynesians, who are urging the UK to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a "a sharp shock" now "would be positively dangerous". So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere. The UK has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.

Budget blowout
And just as the Keynesians were wrong three decades ago, they are wrong now. The UK has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 per cent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 per cent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable. Retail sales excluding gasoline in January fell 1.2 per cent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on UK government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 per cent.

Triple whammy
In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices. The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger. It is the argument quacks always push: if the medicine isn’t working, increase the dosage.

And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value. Stimulating the economy isn’t working. In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the UK imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

Recipe for recovery
What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment. And yet the real lesson of the UK in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more. In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.

Hiring Freezes Hamper Weatherization Plan
President Obama’s plan to create jobs and rein in energy costs through a steep increase in money for weatherizing the homes of low-income Americans has so far borne little fruit, with many of the biggest states meeting less than 2 percent of their three-year goals to date, the Department of Energy’s inspector general said in a reportTuesday. The inspector general, Gregory H. Friedman, called the lack of progress "alarming." Far into the nation’s winter heating season, the program for the most part has neither saved energy nor put people to work, Mr. Friedman wrote.

"The job creation impact of what was considered to be one of the department’s most ‘shovel ready’ projects has not materialized," the report said. The assessment, issued a year after the weatherization program was created under the fiscal Recovery Act, comes as Congress moves toward passing a second bill to stimulate employment. Republicans and Democrats have been arguing over whether that second bill will add enough jobs in time to help revive the economy.

Responding to the report, Cathy Zoi, the Energy Department’s assistant secretary for energy efficiency and renewable energy, acknowledged Tuesday that the weatherization program could have gotten off to a faster start but said that it was gaining momentum quickly. "Since September 2009, we have tripled the pace of Recovery Act-funded home weatherization," Ms. Zoi said in a statement. She added that the department was bolstering federal oversight of the program to ensure that the states continued to strengthen their efforts.

Most of the weatherization projects involve improving insulation and replacing leaky windows and doors in the homes of low-income residents. Under the 2009 Recovery Act, $5 billion was allotted for weatherproofing apartments and houses over three years, up from $450 million in the previous fiscal year. States were authorized to spend up to 50 percent of the money they received by the end of December, the report said. Yet the report said action was hobbled by bureaucratic delays and by the recession itself, as spending cuts resulting from the economic downturn forced states to trim personnel expenses.

Many states either furloughed the state employees who would administer such programs or instituted hiring freezes that prevented state offices from processing additional work — even though the federal government would have paid the additional salaries, the report found. Another stumbling block was a decision by Congress to require contractors on the weatherization jobs to pay prevailing wages, the report said. To determine what those salary levels were, the Labor Department undertook a survey.

In the meantime, the Energy Department instructed states to go ahead and put people to work and to keep records so the federal government could make retroactive payments if necessary. But most states did not begin hiring until the wage question was resolved last fall, the report said. As a result, as of mid-February, one year into the stimulus plan, less than 8 percent of the money had been disbursed, the inspector general said. The pace of actual weatherizations was also dismal, the report said. New York State, for example, had a goal of weatherizing 45,400 units over three years, but by December had finished only 280, a completion rate of 0.62 percent, the report found. One reason, it said, was a hiring freeze in New York City.

Progress in Pennsylvania, which weatherized 1.28 percent of the houses and apartments it had intended to, was slowed by a deadlock over the state budget, the report said. Illinois wanted to hire 21 workers to oversee work on nearly 27,000 homes; it hired none because of a spending freeze, and completed only 331 homes, or 1.23 percent of its three-year target. But some state officials said that the numbers did not reflect current progress.

Gordon Anderson, a spokesman for the Texas Department of Housing and Community Affairs, which administers the weatherization program there, said that as of Tuesday, the state had carried out 1,057 weatherizations under the federal program and that it expected another 459 to be completed by the end of next week. Mr. Anderson cited logistical complications for the slow start-up. "We went from a budget of $13 million for weatherizations to $327 million," he said, "so we needed to get a serious plan in place to assure that our agency and all our contractors had the inadequate capacity to administer the funds."

Officials in other states also emphasized that the program required some time to put in place properly. Many said the number of houses they were weatherizing with the recovery money was now rising sharply. Jim Plastiras, a spokesman for the New York State Division of Housing and Community Renewal, said that action had been delayed by the confusion over wages, which was not resolved until October, but that efforts were now gathering steam. The state now has 17,400 homes in progress, Mr. Plastiras said. The government commissioned the inspector general’s report to ensure that forceful safeguards were in place to ensure that the $5 billion achieved its purpose of creating jobs, improving the quality of life in low-income households and reducing the waste of energy.

Study: Costly Health Care Not Necessarily Best

ROBERT SIEGEL, host: Does paying less for hospital care mean that you get lower quality care? Well, according to a new study in the archives of internal medicine the answer is not necessarily. Dr. Lena Chen is a clinical lecturer at the University of Michigan Health System in Ann Arbor. She was the lead author of that study and she joins us now from member station WUOM. Dr. Chen, welcome to the program.

Dr. LENA CHEN (Clinical Lecturer, University of Michigan Health System): Hi.

SIEGEL: Your study examines the records of care for congestive heart failure patients - all of them Medicare patients - in more than 3,000 hospitals. Tell us what you found.

Dr. CHEN: Well, we found that the cost of caring for a patient does not necessarily correlate with the quality of care delivered. So, for same conditions such as congestive heart failure, higher-cost hospitals provided higher quality care. But for other conditions such as pneumonia, the converse was true.

SIEGEL: You mean, that actually lower cost hospitals for some conditions in the end provided better care than higher cost hospitals.
Dr. CHEN: Yes. Although the differences were very small in terms of quality differences between the high and the low cost hospitals.

SIEGEL: Some of the ranges in price for treating the same ailment are pretty stunning here. For example, for congestive heart failure, you have a range of what was the cheapest and what was the most expensive?

Dr. CHEN: For congestive heart failure, the cheapest was $1,522, and the highest was $18,927.

SIEGEL: Eighteen thousand?

Dr. CHEN: Yes, it's definitely a huge range and we'd like to understand why there is such a range between hospitals.

SIEGEL: But what's driving that difference? Is it how many days you spend in the hospital? Is it how many people are checking up on you, medication, what's doing it?

Dr. CHEN: In part, it is probably the length of stay so - we found that the higher cost hospitals did have longer length of stay meaning the patient was in the hospital for a longer period of time. But beyond that we were unable to identify the specific reasons why high-cost hospitals cost more. Some of the reasons could be what you mention, such as different testing patterns.

SIEGEL: Does part of the country figure in it? I mean, are there just places where medical care is much more expensive because of, you know, real estate or utilities cost for the hospital?

Dr. CHEN: We did try to factor in the wages of a particular area. So, for example, a hospital in New York City versus a hospital in a small town, their wages might be slightly different. So, we adjusted for that in our in defining what was a high-cost hospital.

SIEGEL: But the range that you just cited to us for the cost of congestive heart failure, I mean, you'd have to find the highest labor market in the world versus a very, very cheap one to account for that.

Dr. CHEN: That's true. Definitely, it's in part driven by what the hospital does. But we don't have an answer as to what that is. Some of it may also be driven by differences in patients seen by different hospitals. We did try to adjust for that. But there maybe some residual differences that we could not account for.

SIEGEL: When we say that the outcomes at hospitals that cost less, that charge less are no different or essentially no different than at the more expensive ones per hundred patients, I mean, how many more have a really bad outcome at the loser in that comparison?

Dr. CHEN: Yeah, I mean the mortality rates for congestive heart failure in the lowest cost hospital was 10.8 percent and in the highest-cost hospital it was 9.8 percent.

SIEGEL: So you're saying the ranges, whether 10 people or 11 people did not make it through treatment - which does sound pretty small - and the range of cost can be what you described as eight or nine fold in terms of cost?

Dr. CHEN: Right, there's a much bigger difference in dollars.

SIEGEL: So, if people are prone to think that, you know, some hospital must be good because people pay a lot to go there and be treated, that would be misguided, and to think that because that hospital is cheap doesn't mean you're going to some low-rent medical facility.

Dr. CHEN: That is true. And I think that when you're going to a hospital, if you have the luxury of looking at the cost that it would be important to look at their quality measures as well, not just cost as a predictor of the type of care you're going to get.

($1=6.828 Yuan)

Green Revolution in India Wilts as Fertilizer Subsidies Backfire
India's Green Revolution is withering. In the 1970s, India dramatically increased food production, finally allowing this giant country to feed itself. But government efforts to continue that miracle by encouraging farmers to use fertilizers have backfired, forcing the country to expand its reliance on imported food. India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.

Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy. On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it. The setback of the Green Revolution matters enormously to India's future. The country of 1.2 billion has positioned itself as a driver of global growth and as a significant commercial power in coming decades.

India likely will struggle to get there, and to return to the heady days of 9% economic growth, unless it figures out how to reinvigorate its agricultural sector, on which the majority of its citizens still rely for a living. Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2% growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians. India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7 million tons in 2008, up from about 1,300 tons in 2002. Food prices rose 19% last year.

To be sure, there are bright spots. Indian officials say the country may produce a record wheat harvest this year because of good weather conditions, unless rain or hail appear. The wheat harvest last year was better than expected, making some hopeful that the importing trend will be reversed. Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertilizer industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.

Mr. Singh's government, recognizing the policy failure, announced a year ago that it intended to drop the existing subsidy system in favor of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70% of the electorate, political observers say. The ministers of fertilizers and agriculture each declined requests for interviews. "This is politically very difficult," says U.S. Awasti, managing director of the Indian Farmers Fertilizer Cooperative Ltd. and an informal adviser to government officials on the issue. The cooperative of 50 million farmers is the largest fertilizer producer in the country.

Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts. Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulfur, magnesium and calcium. The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land. Kamaljit Singh is a 55-year-old farmer in the town of Marauli Kalan in the state of Punjab, the breadbasket of India. He says farmers feel stuck. "The soil health is deteriorating, but we don't know how to make it better," he says. "As the fertility of the soil is declining, more fertilizer is required." Increased demand and the soaring price of hydrocarbons, the main ingredient of many fertilizers, have taken India's annual subsidy bill to more than $20 billion last year, from about $640 million in 1976. "The only way for agricultural yields to rise again is for the government to give farmers the incentives and the products to provide balanced nutrition to their crops," says Bimal Goculdas, chief executive officer of Dharamsi Morarji Chemical Co., one of the oldest fertilizer firms in India.

Agriculture experts say the country can't afford to wait. "There are big problems for the future of food production in India if these problems are not addressed now," says Reyes Tirado, an agricultural scientist and researcher for Greenpeace Research Laboratories, an arm of advocacy group Greenpeace International. Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients. Ultimately, the government plans to pay the subsidy directly to farmers, who will be able to buy products of their choice, including but not limited to urea. Mr. Singh's government, however, said it would continue to subsidize urea, although it would set the price 10% higher.

Mr. Awasti, the fertilizer cooperative head, says the continuing urea subsidy means that farmers likely will still use too much of it. "The government is opting, as with any very difficult change, to adopt it in phases," he says. He says he believes that the urea subsidy will be dropped altogether in a year. In the early years after India gained independence in 1947, the country couldn't even dream of feeding its population. Importing food wasn't possible because India lacked the cash to pay. India relied on food donated by the U.S. government.

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities. Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter. Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment. Fertilizer manufacturing companies sprang up around the country. Nagarjuna Fertilizers & Chemicals Ltd. became one of the most profitable publicly listed companies in India. In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.

"The business interests lobbied and the business interests prevailed," says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea. "That's when the imbalanced use of fertilizers began," says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India. With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show. "This type of ratio is a disaster," Mr. Gulati says. "It is keeping India from reaching the production levels that the hybrid seeds have the power to yield." Producers of phosphorus-based fertilizers struggled. The government reintroduced a small subsidy on phosphorus fertilizers, but at times it didn't cover the difference between the government-set price and the actual cost of production. Dharamsi Morarji, one of the oldest fertilizer companies in India, closed some plants.

With scant domestic supply, India had to import seven million tons of phosphorus-based fertilizers last year, according to a senior official at the Ministry of Chemicals and Fertilizers. Twenty-one percent of the urea, 67% of the phosphorus-based fertilizers and 100% of the potash-rich fertilizers sold in India in the fiscal year ended March 2009 were imported, according to a report this month from Fitch Ratings. In the northern state of Punjab, Bhupinder Singh, a turbaned, gray-bearded 55-year-old farmer, stood barefoot in his wheat field in December and pointed to the corner where he had just spread a 110-pound bag of urea. "Without the urea, my crop looks sick," he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. "The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield."

Mr. Singh farms 10 acres in Sohian, a town about 25 miles from the industrial city of Ludhiana. He said his yields of rice have fallen to three tons per acre, from 3.3 tons five years ago. By using twice as much urea, he's been able to squeeze a little higher yield of wheat from the soil—two tons per acre, versus 1.7 tons five years ago. He said both the wheat and rice harvests should be bigger, considering that he's using so much more urea today than he did five years ago. Adding urea doesn't have the effect it did in the past, he said, but it's so cheap that it's better than adding nothing at all.

Land needs to be watered more when fertilizer is used, and Mr. Singh worries about the water table under his land. When his parents dug the first well here in 1960, the water table lay 5 feet below the ground, he says. He recently had the same well dug to 55 feet to get enough water. "The future is not good here," he said, shaking his head. Balvir Singh, an agriculture development officer for Punjab state, says it is as if farmers have become addicted to urea. "One farmer sees another's field looking greener, so he adds more urea," he says. "A farmer will become bankrupt, but he will not stop using urea."

The fertilizer industry, which had lobbied to retain subsidies back in 1991, now sees them as a problem. That's because the government, trying to rein in spending, has been squeezing the reimbursement promised to fertilizer companies. The subsidy theoretically gives companies a 12% profit margin. Today, in part because of the way the government calculates the subsidy, it offers the average company a 3% margin, according to K. Rahul Raju, joint managing director of Nagarjuna Fertilizers & Chemicals, and Mr. Awasti, the fertilizer cooperative head. Farmers in Punjab are increasingly glum. "Farming is in shambles," said Kamaljit Singh, standing with fellow farmers in the courtyard of the village agriculture cooperative. "If we have to support our growing families and our increasing population on this land, we must get higher yields. Otherwise our families and our nation will suffer."


sensato said...

Yes, it was an excellent synthesis Stoneleigh gave in Ottawa last night. I would like to have the impacts of peak oil, and maybe climate change, added back into the economic picture toward the end.

Ilargi said...

2 Prechter videos added above.

Phyll said...

Who needs Muslim terrorists when we have Toyota to strike fear into the U.S. populace? It hard to watch that collection of Congress stooges berate someone with the standing of Mr. Toyoda. Is there some other reason for this? Is Japan threatening to sell treasuries, so we decided to take their flagship corporation to the doghouse? Is this just about car sales or is it just another circus spectacle to keep the sheep’s eyes away from the real problems?

Ilargi said...

"I argued that energy and finance interact dynamically, but that energy provides the constraints as to what gets done in the physical world.

Ilargi says this is false. That energy doesn't drive our economy."

Any idea who wrote this nonsense? People feel free to twist and turn one's words in any given way if it fits their agendas. Or do they simply lack the active neurons? I get so sick and tired of this stuff. As if I have nothing better to do than respond to hollow statements.


Hombre said...

Phyll - "Is this just about car sales or is it just another circus spectacle to keep the sheep’s eyes away from the real problems?"

I have been pondering this for several days, wondering what was really going on here.
Since all the automobiles manufactured today, foreign and domestic, are made with CNC machines and robots and are interconnected with similar parts and systems with only cosmetic differences, it is rather silly to see them jump onto Toyota with both feet!
(I am a former GM worker BTW)
I can't figure it out and can't find anyone else who has?

Of course, the whole shebang is rather without a future, at least in the sense of the last couple of decades.

VK said...


Any idea who wrote this nonsense? People feel free to twist and turn one's words in any given way if it fits their agendas. Or do they simply lack the active neurons? I get so sick and tired of this stuff. As if I have nothing better to do than respond to hollow statements.

Wow! They really twisted your words on that one. No idea who wrote that but that is a really, really poor understanding of your viewpoints and of TAE's.


Phlogiston Água de Beber said...


Dreaming and lying, wishing and hoping have been staples of the American way since the day Sir Walter Raleigh landed in Virginia. Nothing lasts forever and our run has been longer than some. My esteemed and wise fellow mutt, Joe Bageant, has a new post up that I think calls the game and I would dare call it a Magnum Opus.
Round Midnight: Tortillas and the Corporate State

Weaseldog said...

Ilargi, feel free to delete this comment.

That previous comment wasn't directed to you. Nor was it intended that you respond to it.

Dishonestly, you took my words out of context to change the meaning.

I actually wrote, 'Ilargi says this is false. That energy doesn't drive our economy. At times it does, but right now, finance dictates events.'

Which in context is exactly what you've been arguing.

You sir, are a liar.

Phlogiston Água de Beber said...


Really first rate post today. Counterpunch has an article today that falls right in with the story on Indian corporate/state agri-disfunction. It concerns the emerging and predictable disaster of GMO crops.
The Fairy Tale of GM Crops

Ilargi said...


You don't have the brains for this sort of discussion. I'm sure there's been previous evidence of that, and multiple times, in your life.

Frank said...

@Toyota issue. Regardless of the politics, every geek I know is convinced Toyota has a problem in their electronics (hardware, software or both). Without admitting a problem, they are announcing failsafe changes in the programming of model after model.

Is it still a witch hunt if the quarry really is a witch?

Ruhh said...

Thanks again for the presentation last night in Ottawa.

For those of you that were there and are interested in connecting with others in the Ottawa Area please visit the Transition Ottawa website.

There you can also find more info and join the Sierra Club Peak Oil Discussion Group [we discuss much more than energy;)]

Ron St. Louis

Phlogiston Água de Beber said...

Frank said...
Is it still a witch hunt if the quarry really is a witch?

Corollalary question.

If a robot kills you, could it really be called murder?

Unknown said...

The "consensus trance" that James Howard Kunstler identified is what keeps people like President Obama and Treasury Secretary Geithner yammering about the necessity of restoring long term economic growth. They are not thinking outside the trance.

The collapse of financial capitalism and the accelerating decline in net energy from fossil fuels will end industrial civilization. We have created a civilization-ending suicide machine and we are caught in its maw.

The quickness of the collapse will come as a surprise to most people, which will make World War III inevitable as everyone begins fighting over the remaining wealth and resources because they have no other plan for survival.

Peak oil = peak credit = peak capitalism, which means that economic growth is no longer possible on a capital and thermodynamic basis. Game over.

Humans have lived on this planet without "economic growth" for 99.999 percent of their time here. So relax and set your watches back 1000 years and see you in the Olduvai Gorge.

Anonymous said...

VK (yesterday),

Thank you for your thoughtful contribution connecting the dots on the ethics of eating.


Hombre said...

Frank - I am sure there is a problem, and I take your point about Toyota, they may have a witch of one, indeed.

All the car companies have continuous problems, some get news, some don't, and there are millions of recalls each year. These vehicles are quite complex and increasingly so which means there are bound to be glitches.

It just seemed to me that this situation was blown into a Congressional inquiry and I smelled something sinister, or at the least, unusual--especially given that Congress is now the part owner of GM, Ford, and Chrysler.

thethirdcoast said...

@ twessels:

"Consensus trance" is an excellent way of expressing the mass delusion currently gripping America.

I have a difficult time speaking with my coworkers due to the hold the trance exerts on their psyche. I believe this is due to the fact our firm has been a weird oasis of growth in the face of the ongoing financial crisis.

They continue to pour money into their saltwater aquariums and rickety homes like it's 1999.

They talk about changing jobs like their next position is just a hop, skip, and jump away. I just shake my head and wonder if they've even glanced at an unemployment report lately.

Zaphod said...

Any control system schematic for an industrial plant has to be signed off by a licensed engineer, who has the responsibility to insure that the design is robust and fail-safe. Software, though, has no such sign-off, and its complexity can be huge.

Why would anybody design a car in which the ignition switch did not positively, physically, disable the engine? Why would the brake not instantly override any throttle above idle? Why would a shift to neutral or reverse, if not actuated, at least not shut down acceleration?

From a systems perspective, you'd almost have to think a car was designed to ENABLE computer mayhem.

Why doesn't out gov't, who loves to do things for us, not include an On-Star emergency function for every car? Reduced thefts with enhanced recovery, better accident response, improved statistics, and, of course, an ability to shut off an engine remotely?

Unknown said...

It is hard to believe there is not one agronomist in India with a soil probe to test soil PH and nutrient levels. No wonder these people are still pissing in their drinking water.

Top Hat Cat said...

Been working on the Doomstead with accelerated motivation, still thrilled the banking mafia and their ilk have delayed the implosion a bit longer with slight of hand and a majority of the populous' willful ignorance being the wing beneath their wings, bless their pointed little heads and ears.

I catch Mad Max's shows often while working in the yard because I can listen to them and still be using both hands and eyes to tote barges and lift bales. TAE needs to be read, which gives it the edge in detailed analysis, but not as accessible while toiling in the vineyards of plenty as an audio feed.

I find doing manual labor works better with music. The Global Financial Apocalypse (GFA) however, could use a good sound track mix. I'm collecting Songs for the Cliff Dive®

I had on Eliza Gilkyson's album "Beautiful World" and it had several possible GFA sound track candidates.

...a tip of the hat to twessels® for this encapsulation of our dilemma, it makes a great segue intro to the song lyrics that follow:

"The collapse of financial capitalism and the accelerating decline in net energy from fossil fuels will end industrial civilization. We have created a civilization-ending suicide machine and we are caught in its maw."

First and foremost on "Beautiful World" is the song Runaway Train. A surprisingly rockin number from a women with folk/country roots. It starts slow and builds up a head of steam, just like a Ponzi!

Everyone knew she was gonna be fast
Everyone said they could build her to last
10,000 tons of hurtlin steel
screamin round the curves nobody at the wheel

Everyone said don’t pay it any mind,
there’s a pot of gold waitin at the end of the line
Just move with the eye of the hurricane,
you’ll never get off this Runaway Train

Nobody cared when they piled on board,
and the doors snapped shut and the engines roared
They pushed to the front, they fell to the back,
buyin and sellin every inch of the track

Deep in the engines, fire in the hole
dark skinned workers shovelin coal
All singin this sad refrain,
"We’ll never get off this Runaway Train"

Up in the diner everybody decked out in their finery,
can’t see the wreck comin up ahead
With their bellies full of wine,
it’s the last thing going through their minds

So proud of the engine, proud of the speed,
call for the porter, give them everything they need
Stare through the glass feel no pain,
don’t even know they’re on a Runaway Train

Long after midnight, a pitiful few, sound the alarm, don’t know what else to do
They're bangin on the doors of the cabin and crew,
hey we gotta slow down or we won’t make it through

Sleepy riders don’t want to wake,
or suffer the shock when they put on the brake
Don’t want to question, don’t want to complain,
rather keep ridin on this Runaway Train.....runaway train.....

btraven said...

You nailed it! Thank you.

Reluctant Poseidon Hamster said...

Thanks, Top Cat. Runaway Train captures the dread sense of fated, uncontrollable acceleration so well.


Ilargi: Well, dream on if you must...

"Don't blame me. I voted for Edward Longshanks."

Anastasia said...

At those who believe that energy, in particular oil, does not drive the economy I'd like you all to participate in a little thought experiment.

What do you suppose would be the effect on the economy of filling up every car and truck with sand, instead of oil?

Ilargi said...

The overall IQ level around here sure got whacked upside the head in the past few weeks.


zander said...


It would be a good time to buy garage chain stocks?


zander said...


Thanks for the heads-up on the Bageant piece, you're right, it is an awesome, terrifying masterpiece.

Unknown said...


My partner and I got around to watching Food Inc. last night. Some of the information was new, some was not, but the presentation certainly made it more... astounding. We've been moving towards local and organic food slowly for a while, but it's been easier for veggies and fruit than other things... I think a fire has been lit underneath us to make more efforts to find local/regional, non-industrial sources of meat as well, and go from there. Milk is a tricky one. We switched to soy a while ago to try and avoid the large carbon and water footprint of cow-based milk, but I really wasn't cognizant of the massive industrial background of soy, either, although... I guess I simply hadn't thought enough about it. I drink a lot of milk; this is going to take some figuring out.

I kept seeing parallels in the film between, on one hand, the inverse relationship between the massive increase in complexity of food production over the last 30-40 years and the level of oversight and regulation of that industry, and on the other hand Tainter's general thesis on complexity and the inability of societies to keep up with the costs of their own continual desire to solve problems with greater complexity. In one instance, that basically came out of one of the farmer's mouths who was interviewed, when he talked about how the beef industry's solution to feedlot problems wasn't to back out the feedlot system, but just to add another step to the end to try and push out the bad results. Also, good lord, ammonia-scrubbed beef looks disgusting.

It really seems to me that the last half century of north american food production and regulation of that industry makes a good case for overshoot in Tainter's paradigm.

Anonymous said...


Joe Bageant noted something that has long struck me. He wrote:
"The most profound slavery must be that in which the slaves can conceive of no other possible or better world than their bondage. Inescapable, global, all permeating, the commodities economy rules so thoroughly most cannot imagine any other possible kind of economy."

Precisely that incapacity on the part of many people from the U.S. to see beyond the status quo and to even imagine that something else might be possible has often left me frustrated in discussions. Their future is a dead-end, it is what already exists.

Other countries have their blind spots, of course. Some pretty big ones, too. But I find it surprising that a country's blind spot can be its entire political future.


Gravity said...

"None are more hopelessly enslaved than those who falsely believe they are free."
-Johann Wolfgang von Goethe

bluebird said...

@FB - What I continually find, even within my circle of family and friends, is that people can't imagine any other possible kind of life. That they will always be able to maintain the style of living they have become accustomed to. They can't imagine a life without fast food, they can't imagine a life without any food at all, that there will always be gas to put in their cars, that there will always be money in their retirement accounts. It's apparent they have forgotten history and how people fought and died for the very things they enjoy today. They can't imagine that these things could ever possibly disappear. I am amazed at their complacency and wonder what happened to their critical thinking skills.

zander said...


Ditto UK, Bageant absolutely nailed it with that observation, and since the days of listening to Rocket to russia I have long wondered how my fellow beings cannot see the oh so obvious trap they happily lead themselves into AND defend to the hilt against any and all reasonable argument ponting out the myriad flaws and the usury inherent within the framework of the system they embrace, its akin to the poor fool woman who goes back again and again to the wife beater whilst justifying the unjustifiable,
it's toe curling really.

Talking of framework that Bageant post needs putting in one.


Hombre said...

Bluebird - Same lack of understanding and coherence around here and I am sure throughout the country.
But to most it is inconceivable that things could go bust! We've never experienced severe times. Our parent have never experienced tough times. And only some of our grandparents (the 30's depression).
But let's say folks did "get it" and were angry and wanted to do something... what would that be? Where to start? Where is the enemy?
Violence in the streets?
Here's an interesting paragraph from Joe Bageant's recent piece...

"As Chris Hedges recently pointed out, violence today only assures the survival of the most violent, criminals of one sort or another, petty or international. Beyond that, the state now has the technological capability to inflict the most violence in every case, and therefore win. Realistic thinkers say aloud that what is so far advanced can no longer be stopped or turned around by revolution, violent or otherwise. Most other thinkers on the subject secretly suspect the same."

Gravity said...

In several countries the fiscal spending multiplier offset by the taxation multiplier should equal significantly less than 1 by now, which is likely an intractable and cumulative problem for deficit spending. In such countries also suffering from a persistent trade deficit, keynesian devilry cannot be reversed at all.

Anonymous said...

Rumor said:

"Milk is a tricky one. We switched to soy a while ago to try and avoid the large carbon and water footprint of cow-based milk, but I really wasn't cognizant of the massive industrial background of soy, either, although... I guess I simply hadn't thought enough about it. I drink a lot of milk; this is going to take some figuring out."

Rumor, thought this might help. My family and I have eaten organic and plant-based for the last 16 years and I make my own soymilk from organic soybeans I buy in bulk, grown in the USA or Canada. I use SoyaPower soymilk maker ( When I buy already made soymilk, I stick to Edensoy organic soymilk ( -- a reputable, smaller company which uses soybeans grown in Canada or USA) or if in Vermont I buy soymilk from Vermont Soy, a local company in Hardwick, which uses local certified organic soybeans.

We don't consume much soymilk, just for breakfast. Most of the times we consume soybeans is in the fermented form -- miso, tempeh, etc. We love all beans and legumes and eat them every day -- lentils, split peas, great northern beans, kidney, black, pinto, etc. As you probably know, beans and legumes are very rich in protein, calcium and iron, among other things. BTW, my family and I are all very healthy. :)

Happy eating!

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

"As Chris Hedges recently pointed out, violence today only assures the survival of the most violent, criminals of one sort or another, petty or international. Beyond that, the state now has the technological capability to inflict the most violence in every case, and therefore win. Realistic thinkers say aloud that what is so far advanced can no longer be stopped or turned around by revolution, violent or otherwise. Most other thinkers on the subject secretly suspect the same."

Coy Ote, thanks for pointing out Bageant's words. I totally agree.

Re understanding what's transpiring before us:

I think people in Vermont, for example, are more aware than people in Florida. Degree of understanding in the USA varies by region IMO.

trojanhorse said...

"The weed of censorship bears bitter fruit. That crime does not pay....

The Shadow knows!"

Erin Winthrope said...

Martin Wolf and Paul Krugman have capitulated. Plan A won't work, and plan B doesn't exist.

Martin Wolf -- The world economy has no easy way out of the mire

Paul Krugman -- Wishes he disagreed

Phlogiston Água de Beber said...

As I have come to expect, The Onion has answers to two of our most important questions.

How and why did we get to where we are?

Why do we feel like we're doomed?

VK said...

@ Gravity

Correct me if I'm wrong but what you're saying is that in a deficit country if the multiplier goes below 1 than the Govt won't withdraw from Keynesian stimuli?

Sounds correct till it ain't. But it doesn't necessarily have to be a deficit country, look at Japan. They've rode on the same keynesian pony for 20 years and still have a multiplier less than 1.

Ultimately it all comes down to when the bond market says no. Till than Govt's will do everything they can and turn it into $hit in the process of trying to raise the multiplier.

So the question now is, how long can any country survive before being sucked in by the gravity of national debt? At what point do we cross the event horizon?

soundOfSilence said...

Gravity said…

"None are more hopelessly enslaved than those who falsely believe they are free."
-Johann Wolfgang von Goethe

For what ever reason this brought to mind Krishnamurti gosh darn it there was something he said... (well there were a lot of things he said) but in this case it was that “no measure of health to be well adjusted to a profoundly sick society” remark. In trying to put my finger on why Krishnamurti suddenly popped to mind Googling around I stumbled on

...there’s a wiki to explain what Goethe meant. God help us all.

Ilargi said...

"Ed_Gorey said...
Martin Wolf and Paul Krugman have capitulated. Plan A won't work, and plan B doesn't exist.

Martin Wolf -- The world economy has no easy way out of the mire

Paul Krugman -- Wishes he disagreed"

Just read what both propose as "solutions" and then realize these are leading thinkers. If you weren't depressed before.........


Anonymous said...

Please read The 21st Century Economic Breakdown, posted at

That article summarizes my personal understanding of this crisis in one short easy to read article. It's the fraud that caused the financial crisis and it's peak oil (and other peak resources) that place a hard ceiling on any growth out of that crisis.

I would state that correlation is not causation. It takes far more than correlation to confirm a cause-effect relationship and I have not yet seen the data that suggests peak oil is a cause of the financial crisis, but instead has been merely a symptom thereof.

el gallinazo said...

Top Cat said...
" I'm collecting Songs for the Cliff Dive®"

How about Arc of The Diver by Traffic with Lord Blankfein on the album cover in a Speedo?


Completing my move to Panama by early next week. If I weren't a dirty blond with grey around the edges, I would consider changing my handle here to Panama Red. But plenty of Gallinazos here as well, circling overhead with hope in their hearts.

Phlogiston Água de Beber said...

@ el g
If I weren't a dirty blond with grey around the edges, I would consider changing my handle here to Panama Red. But plenty of Gallinazos here as well,

Umm, I really don't see why it would be a problem. In case you've forgotten, you're not actually a buzzard either. :)

Anonymous said...

Regarding Martin Wolf and Paul Krugman - the only way out of a debt crisis is to reduce the debt. The only way to reduce the debt is to pay it off or default on it. Even "Jubilee" is a kind of default, simply granted by the creditor as a gift.

All of the Keynesian clowns simply cannot understand this and thus prescribe lunacy on top of silliness. But in the end the debt crisis WILL be resolved, either by default or payback or some combination of the two, simply because that is the only way the crisis can be resolved.

Thus, any solution which fails to resolve the debt crisis is not a solution at all.

trojanhorse said...

I wish I disagreed. What we really need now is (a) higher spending and lower trade surpluses in surplus nations, China especially but also Germany (b) some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.[Krugman]

So where does the energy to do these fine green things, in the quantity needed, come from and what would that do to the price of energy if the deed t'were to be done? Is there no sense of Deja-vu in la-la land?

The only durable recovery that will come will be when we cut our cloth and live within the economy of this planet.

Gravity said...


I'm thinking that if it goes below 1 there is no way to lower budget deficits or repay sovereign debt
for trade deficit countries, because every unit of currency gained by taxation drains more than a unit from circulation, and any spending of taxes adds less than a unit. Furthermore, this would effect the marginal gains of debt, so that it may become negative, even in surplus countries with said budget multiplier at sufficiently crippling levels.

I thoroughly confused myself there,
since I'm likely using the wrong concepts to describe this idea, and these would be dynamic variables which are never static, yet according to a simplistic balanced budget multiplier of exactly 1, deficit spending makes perfect sense.

So presumably, in several countries the fiscal spending multiplier offset by the taxation multiplier does equal significantly less than 1, which poses an intractable and cumulative problem for any deficit spending. In such countries also suffering from a persistent trade deficit, keynesian devilry cannot be reversed at all, nor can austerity yield solvency.

Hombre said...

Greyzone - I read the linked article and it lines up pretty well with my present perspective.
I don't quite go along with this...

"Foreign lenders from China, Japan, and the Middle East know what he's doing. They'll be the long-term losers in this scenario. At some point in the next few years they will balk at buying more US debt. A “Weimar Moment” will strike the United States like a sledgehammer.

What I mean is, that eventuality is begginning and/or will happen, but I rather think the PTB understand that and will prop up and filter and assuage things so that events won't quite ne as much a sledgehammer as a slap with a rolled up NYT.

By Powers That Be I don't mean necessarily the ones we know, but those rather behind the scenes. In any case we live in interesting times.

Bryan McNett said...

>It's the fraud that caused the
>financial crisis and it's peak oil
>(and other peak resources) that
>place a hard ceiling on any growth
>out of that crisis.

i'd add climate change and environmental degradation to the end of that list. once the cheap fuels are gone, we'll really get going with the deforestation in one final orgy of consumption.

this sequence of crises (finance, peak oil, environment) is completely outside the scope of acceptable conversation.

otherwise smart liberal friends refuse to see the end of jobs and cars, and prefer to discuss the big ice melt that happens afterwards.

Gravity said...

But actually, who can tell whether someone is free if not themselves?

These hopelessly enslaved people cannot know if they're free or not, but could anyone else? As if freedom was an absolute concept and externally quantifiable, judged apart from the moral actor who encompasses these self-referential degrees of freedom.

Against a static frame of reference, the bill of rights perhaps, one can say the inalienable and available liberties as applied to the citizen must be respected under the law, but what of the spiritual and moral freedoms that are not guaranteed or given, those that are only taken, self-empowered and begotten by personal emancipation?

mistah charley, ph.d. said...

Here's my response to Joe Bageant powerful piece cited above, which I sent to him:

Too late for revolution or reform? Probably, but maybe not

The military industrial congressional financial corporate media complex has the money, and the guns - but although they can kill us, and destroy our ability to get food, and bribe us - at some point their ability to brainwash and coerce is not as strong as the power of the Universal Principle of Animal Behavior - "Under carefully controlled experimental conditions, the animal does what it damn well pleases."

The limits of power have been shown in Vietnam, and Iraq, and so on - here at home they've got their mitts on our information and entertainment sources, as well as their weapons, and they know the audience better, so they have more of an advantage.

Still, as Vonnegut said in Breakfast of Champions, when he entered the novel himself - he'd imagined that he controlled his fictional characters with steel rods, but it turned out it was more like stale rubber bands.

See also the post and comments - including mine - at re his "Bring America Home" united front platform

Unknown said...

Gravity, your multiplier idea makes my brain hurt, but it feels very important.

Anastasia said...

@ Greyzone

I have not yet seen the data that suggests peak oil is a cause of the financial crisis

The (price) volatility signature (of oil) that formed over the 2000s has been too ponderous and below the radar for most to register. But to the overleveraged global economy, this near decade-long pattern of pulsed instability may have acted like repeating blows of a wrecking ball - each spike slamming with greater force into financial markets.

Oil Caused Recession, Not Wall Street
by Tom Therramus

mistah charley, ph.d. said...

Songs for the Cliff Dive®

I suggest Grateful Dead - "Hell in a Bucket"

NZSanctuary said...

I. M. Nobody said...
"Counterpunch has an article today that falls right in with the story on Indian corporate/state agri-disfunction. It concerns the emerging and predictable disaster of GMO crops."

Whatever. I'm sick of people not having faith in our ability to prevail. Give the scientists and politicians a few years and the world hunger thing will be history.

See, it goes like this: when you are in overshoot you do not return to equilibrium smoothly – you crash past it! Once we've done that there will be plenty available for the meagre few who are left. Have faith ;-)

NZSanctuary said...

soundOfSilence said...
"None are more hopelessly enslaved than those who falsely believe they are free."
-Johann Wolfgang von Goethe
For what ever reason this brought to mind Krishnamurti gosh darn it there was something he said... (well there were a lot of things he said) but in this case it was that “no measure of health to be well adjusted to a profoundly sick society” remark."

You've been watching Zeitgeist II. SOME good stuff, but I hope you had your information filter on...

Hombre said...

Mistah Charley - Bringing the troops home and diminishing the reality AND the appearance of empire would certainly have a lot of direct and indirect, positive consequences. I'm for it! I've always been (well, for most of my adult life.)
A great retraction from our expansionist posture would not solve our predicament but it might, as you and the article author state, save us a huge portion of the pain and suffering that is likely coming.
At the very least it is a giant step in the right direction.

Unknown said...

Friday the 26th would be Johnny Cash's 78th birthday. His family requests that people wear black in his memory. Since this site is so great with mixing music with the times, I think "The Man in Black" is worth another listen.

Thanks to Illargi and Stoneleigh for their brilliant analyses.

Bryan McNett said...

>But actually, who can tell whether
>someone is free if not themselves?

No person has ever been free from dependency on clean air, water, food, and mates. Modern society's extreme degree of specialization enforces extreme dependencies. Nobody has ever been free of material wants, and nobody ever will.

>Against a static frame of
>reference, the bill of rights
>perhaps, one can say the
>inalienable and available
>liberties as applied to the
>citizen must be respected under
>the law,

In the beginning, the Bill of Rights applied only to rich whites. Today it doesn't apply to "terror suspects" or "enemy combatants." There is always a large class without rights.

>what of the spiritual and moral
>freedoms that are not guaranteed
>or given, those that are only
>taken, self-empowered and begotten
>by personal emancipation?

I can parse this, but I don't understand it. You mean, the freedom to think rationally and act accordingly? IMHO adaptation to modern life is, perforce, a commitment to irrationality.

There are many many cases in everyday life where we see four fingers, but remember five, because that's what the party says.

Some of them, like "debt as the solution for a debt crisis," can be discussed on this blog, and others are verboten.

VK said...

@ Anastasia

That is simply incorrect.

Was peak oil and subsequent oil prices a factor in the rise and decline of the following bubbles?

The Tulip Bubble?

The South Sea Bubble?

The Mississipi Bubble?

The 1840's railroad bubble?

The Panic of 1873?

The Great Depression?

The Tech Bubble?

The current credit bubble had been expanding for 25 years, since 1982. Credit bubbles by their very nature collapse. The housing bubble was caused by the Federal Reserve's efforts to prevent deflation in 2001.

They unleashed a torrent of credit and it led to overconsumption and overcapacity which was unsupportable by income growth.

What weighs more on a nation's behaviour? A decline in national wealth of over 14,000,000,000,000 or the fact that you're paying one dollar more for gas per gallon.

Unknown said...

Guys, look. Peak oil was clearly not a primary factor in past major asset bubbles, but that doesn't mean it wasn't a factor in this one. I don't think it was, at all, but referring to past bubbles as evidence that peak oil was not the cause of the current bubble is illogical. Please stop doing it. Refer to the actual evidence. It pains me to keep seeing references to past bubbles as definitive evidence of the cause of the current one, because it's just a bad argument. Moreover, it's unnecessary to rely on it.

eeyores enigma said...

In an attempt to raise the level of discussion;

Was he insane or was he a terrorist?

"Intentions of Whale in Killing Are Debated"

This in not the onion by the way.

Phlogiston Água de Beber said...

@ NZSanctuary

Have faith the Kiwi says. The overshoot to the downside will leave the survivors well fed. Yes, I saw the winky smile.

I may be an atheist, but that doesn't mean I don't have faith. My faith in the capacity of our scientists and politicians allied with their good friends the financiers to screw things up beyond our meagre ability to imagine is immeasurable.

I won't go into it now, but based on something I've just learned, the farmers are going to have their own overshoot. Food is going to be a lot less plentiful than might be imagined.

Now for yet another musical interlude. A number I used to love on the radio long long ago.
Kingston Trio: Reverend Mr Black

Ric said...

For my TAE friends--Came across this in The New Yorker: The Sixth Extinction?

Over the past half billion years, there have been at least twenty mass extinctions. Five of these—the so-called Big Five—were so devastating that they’re usually put in their own category. The fifth, the end-Cretaceous event, which occurred sixty-five million years ago, exterminated not just the dinosaurs but seventy-five per cent of all species on earth. Once a mass extinction occurs, it takes millions of years for life to recover, and when it does it’s generally with a new cast of characters. In this way, mass extinctions have played a determining role in evolution’s course. It’s now generally agreed among biologists that another mass extinction is under way.

It seems good to take the long view. ;-) Mass extinction is a natural process--it doesn't need humans to start it. People just push it along.

Today, came across a retired 70 year-old teaching colleague, who has come back--he drives 250 miles from his "dream" home with a mortgage in Central California and sits in a lab for five hours. Then he drives back home. He says he lost most his money in the stock market and looks desperate. He asked what he could do and I said: "Help people be poor." He didn't seem to grasp what that meant and I knew nothing I said would make sense and was glad when he walked away. Students have changed. Most people's eyes seem clouded--they are trying to work things out and are discouraged. The hard-core sociopaths are confused, (who are relatively easy to spot because they are the first to come to you with an angle) and their eyes are darting about with uncertainty. At some point, their eyes will become focused and I know my days will be numbered. Administration is now talking about a "bloodbath" in the fall.

el gallinazo said...

Hey Ilargi,

I was impressed with Durden's article on Jose Pinera, General Pinochet's chief domestic financial advisor. Of course Uncle Miltie, may his foul faux nobel soul rot in hell, was Pinochet's chief non-domestic advisor.

Didn't Adolf Hitler write some stuff on economics also that could enlighten us. Like how to beat labor leaders into plowshares - things like that.

NZSanctuary said...

I. M. Nobody said...
"I won't go into it now, but based on something I've just learned, the farmers are going to have their own overshoot. Food is going to be a lot less plentiful than might be imagined."

Pardon my lack of faith in your faith in the lack of good sense in those who will "fix" our problems, if only we have faith in them and their techno-faithful ways.

Please go into it. I'm always interested in farming/food issues, and I'm sure many others here are too.

Phlogiston Água de Beber said...

I am really perplexed as to why there is so much non-sense written concerning the cause of our present civilization destroying fuffle. The exact cause is not a mystery and, remarkably, it can be laid at the feet of one man. It was quite clearly the decision, against much opposition, by Brian France to allow Toyota branded cars to race in Nascar's Cup Series races.

It is now well established that Toyota is evil inanimate. Crushing out the futures of global civilization and individual motorists. And before you object Handsome Grandson, yes Toyota has the power to reach back in time in order to crush out the hopes of all those earlier episodes of bubblicious bullishocity. :)

Woody said...

BryanM @5:05pm

"...we'll really get going with the deforestation in one final orgy of consumption."

Here in the southeast US, there's already a noticeable increase in forest harvesting, mostly of 40-yr-old pine plantations, although pulpwood prices have remained relatively stable so far.

However, there's serious effort both here and in Europe toward biomass torrefaction to convert wood chips to a clean burning coal equivalent for a $72/ton electric utility carbon credit.

Also many others are experimenting with biochar to duplicate the long term agricultural success of Amazonian Terra Preta.

While these are "green" technologies, they may add greatly to pulp demand for paper etc.

I'm reminded of hikes through dense New England forests where one frequently encounters stone walls. A century ago, many of those picturesque mountains were bare, cleared for farms, fuel, railroad ties and trestles. In those days of strong men, oxen and crosscut saws, it probably took a century to clear those forests. Today, while diesel is available, the deforestation is less arduous and a bit faster:

Peak Deforestation

Anastasia said...

@ VK
February 25, 2010 8:38 PM

Every bubble needs a pin to burst it, no?

This bubble's burst was triggered by stagnating oil supply and yo-yo prices, it seems.

But yes, there are other voices.

Richard Heinberg has a synthesis explanation which is compellling.

Stoneleigh said...


Every bubble needs a pin to burst it, no?

No, it doesn't, although something will be rationalized as the 'pin' after the fact. Bubbles (Ponzi schemes) are self-limiting.

Phlogiston Água de Beber said...

@ NZSanctuary

Please don't use the word faith that many times in one sentence again. I could get confused as to what it is I do or do not have faith in. :)

The cake is not baked yet and I generally like to limit my rumor mongering to things that probably aren't real. It could be awhile before I would be willing to say more. At this point I could be extrapolating too much.

Phlogiston Água de Beber said...


This statement by Anastasia Every bubble needs a pin to burst it, no? clearly deserved a stronger smackdown than you so graciously, as usual, served up.

Even small children are well aware that bubbles pop all by themselves, with no pricking required. There can be no such thing as an infinitely inflatable bubble. I can only assume that Anastasia has been deprived of the opportunity to blow soap bubbles or balloons.

Now I beseech you my Empress not to punish my impertinence. :)

g-minor said...

Administration is now talking about a "bloodbath" in the fall.

Is this part of the California budgetary meltdown?


Anastasia said...

@ Stoneleigh

Point taken, but I am not entirely convinced that oil had nothing to do with the end of the last bubble.

@ I.M. Nobody

Don't be such an ass. I did include other viewpoints, and the idea that oil didn't have a bearing on the current situation is still gelling in my mind.

Ilargi said...

OK, that's all for the "discussion" on energy and finance. I don't feel like answering any more questions on things I've never said. If I want ways to waste my time, rest assured I can find more grueling ones.

zander said...

@ Ric.

Could you elaborate on the "bloodbath in the fall " statement?

Ta in advance


mistah charley, ph.d. said...

Re the killer orca:

This animal is a prisoner and a slave. Like other large mammals in this position, he resents it and communicates his resentment by "acting out".

For historical context, see Jason Hribal's essay "Orca Resistance at Sea World - The Struggle of Nootka and Tilikum" at Counterpunch dot org, an excerpt from his forthcoming book Fear of the Animal Planet: The Hidden History of Animal Resistance. For a sympathetic portrayal of the plight of a captive animal (in this case an elephant named Vera), and a humane resolution of the dilemma, see "Larger than Life", a gem of a movie from 1996, with Bill Murray, Janeane Garofalo, and Matthew McConaughey as the demented trucker Tip Tucker.

ogardener said...

Duh gee, I wonder why they call them killer whales?

Next up I propose people ought to be allowed to raise grizzly bears as pets. That should help cull some of the idiots from the gene pool.

Hombre said...

I would like to hear some responses from our more astute contributor's on Prechter's latest (the videos) and what his prognostications are. It seems he has changed his mind to some extent (which a smart person does with changing input data).
Does that "biggest bubble in history" mean what I think it does?

ogardener said...

February 25, 2010 10:26 PM

I'm reminded of hikes through dense New England forests where one frequently encounters stone walls. A century ago, many of those picturesque mountains were bare, cleared for farms, fuel, railroad ties and trestles. In those days of strong men, oxen and crosscut saws, it probably took a century to clear those forests. Today, while diesel is available, the deforestation is less arduous and a bit faster:

Of course when diesel is scarce or no longer available and with millions of freezing New Englanders from Bangor to Hartford trying to heat their cracker box McMansions (via their fireplaces no less) I expect deforestation to continue at accelerating rates until the place resembles Easter Island. That Deere John video reminded me of the Dr. Suess book The Lorax. Everyone needs a Thneed.

Woody said...


Besides peak deforestation, another concern I have with most newfound uses for "waste" biomass is that perhaps there is no such thing since it all naturally recycles in some fashion. Biochar may be an exception since it appears to sequester carbon for at least hundreds of years while enabling substantial soil improvements.

Ilargi said...

Sorry, Tom, that discussion is closed, at least around here.

scandia said...

Finance and energy are fascinating subjects. However we have moved on to the political crisis. Our posts do not reflect that reality.
Our immediate threat is bloodlust.

trojanhorse said...

If I want ways to waste my time, rest assured I can find more grueling ones.

Maybe join Steve Keen on a bit of a Aussi outback stroll? Oh then again maybe not -- I forgot, you hedge your bets:) (Steve on Max about halfway in)

zander said...

Iceland has walked out on the talks to restructure the 2bn debt repayments to the UK, and not a dicky bird has been mentioned on any MSM.
I get the feeling the UK is shitting itself over this as it has no contingency plan on how to deal with an Icelandic refusal to agree to the current terms that would not leave it looking weakened or indeed cause further havoc within EU circles as one restructure/default would surely start a cascade of EU nations in trouble heading in the same direction.
I suspect Icelanders will reject a deal for repayment next week and this is about to get very very interesting. Keep an eye.


zander said...

Iceland link


Tom Therramus said...


Understood. All the best.


Hombre said...

"If I want ways to waste my time, rest assured I can find more grueling ones."
Like watching Ann Coulter while listening to Rush!

trojanhorse said...

Rainy day? nut hair in curlers? nothing better to do? so do that with Charlie Brooker:

ogardener said...

February 26, 2010 9:39 AM

In Nature nothing is wasted. I'm going to start experimenting with trying to replicate the process of Terra Preta. Much research needs to be done on my part though as soil pH, soil chemistry, soil nutrients, moisture, fluctuations in soil temperature and physical properties are much different in Amazonia than where I live in New England. I have used wood ashes from deciduous hardwood trees for decades to raise soil pH and to add potash (potassium carbonate) to garden soils. I'll add more charcoal instead of ash to an experimental raised garden bed this year and see if I can duplicate the Terra Preta process. I additionally agree this is a good method to sequester carbon.

My efforts to try and test the Terra Preta hypothesis is likely futile. I strongly doubt I will have the necessary years to complete the experiment.


trojanhorse said...

may have given that first link incorrectly, and on a day like this, one just cant miss the dowdy man:

Sheesh ilargi how about letting the dogs run free. a lot of us are impetuous as well as barely literate and need some way to edit without waiting half an hour for moderation - eyes begin to roll and lips drool!

jal said...

What are the odds of a reset?
Some Big Wild Guesses About the Future   (February 23, 2010)

He list 47 books that have different scenarios of how the RESET will play out. Then he has the following links. (Of course I’m not familiar with most of them)

For our complete list of recommended books and films (600+ titles), please go to books & films.

Here is another possible scenario.

Borrowing involves putting up some sort of guarantee that you will be able to pay back the loan.

Trust is gone out the window. Saying that you will pay it back is no longer acceptable collateral.
Therefore, a written contract, whereby you pledge the transfer ownership of some asset that you own, which can be enforced in a court of law, is the way to guarantee the repayment of a loan.
China lends money to the US. by buying t-bills. China wants more than promises and higher interest. China demands a contract. US puts up the assets of F&F. US cannot pay. Defaults. Assets are transfer to the China.
Management is replaced if it does not manage the assets as per the will of the new owner.

US debt is reduced. Rinse and wash. US deficit is manageable. Everyone is happy.

China has conquered USA without firing a shot. USA now becomes serfs of China instead of USA using the serfs from China.
Debt slavery continues in the USA but the income goes to new masters.

Punxsutawney said...

ogardener, or anyone?

I saw you mention putting ashes in your garden. I have been wanting to ask this question of someone for a while. I have been thinking about doing that here in Oregon, but was told not to do so many years ago. I assume it’s because most of the wood up here is resinous e.g. Fir, and contains or produces toxins when burned; though maple and alder are also widely available here.

Currently, I return the ashes we produce back to our timberland in the hopes of returning some of the base elements back to the soil, and any toxins would be spread over a wide area. It seems like ashes would be a potential source of nutrients as well as a base material. Soil here tends to be acidic due to all the rainfall. So should only deciduous tree ashes be used?

The East Coast is a firewood paradise with all the deciduous hardwoods available. Silver Maple being one of my favorites. Yes, I know there are environmental issues with wood burning that come with even the most efficient wood stoves.

Frank said...

@Punxsatawney The advice against using wood ash is usually because of the risk of drastically raising your soil pH, which is very bad, and very hard to reverse.

Apparently many people back in the 70s applied so much ash that this happened to them.

Assuming you use a pH tester and adjust your rate of application accordingly, you should be fine, and not have to buy lime.

trojanhorse said...

Rogers: British Pound Could Collapse 'Within Weeks'

Well maybe like Jesse says the pound will likely not collapse but all the same there is still going to be some other mad financial booger in the woods.

I will stand pat and not fire into the whites of my brokers eyes until his teeth are cracking from the utter cold of the Kondratiev winter.

Ilargi said...


You been punked.

CAUGHT: The Man That Impersonated Jim Rogers And Called For The Pound To Collapse


Nelson said...

Frank's right about everything except the lime - it will raise pH, just like potash.

I live in unincorporated Washington County OR, and here we have lots of alkaline clay - "blue goo." But with all the compost and composting mulch that I add to my raised beds, I'm more concerned about acidity from the excess nitrogen.

IOW, we all need horse sense more than a pH tester! Keep your ash additions within reason, and keep an eye on your produce.

trojanhorse said...

Sheesh you think after reading here I would have learned to double check everything, oh well good fun, but it is just to bad that, I understand, Rogers is not too vindictive.

Here is what the real Jim Rogers has to say (maybe):

"I am on record as saying the U.K. has serious problems over the next few years and the pound sterling has serious problems over the next few years as well," Rogers said in the interview. "I would say the same about a lot of currencies. All paper money is suspect these days."

sv koho said...

Very fascinating post with some great comments out there. I wish you guys would ease up a bit on Ilargi and I wish he would ease up as well.We need to keep him and Stoneleigh happy! With moderated comments, the trolls should be invisible. Quinn's Minyanville piece was well constructed and presents almost irrefutable evidence that many black swans are circling the homestead and it's small comfort that it is a GLOBAL PHENOMENON. Greece, Illinois, the UK and Sacramento share a lot of congruent fiscal foolishness. Quinn suggests that an Obama or Palin budget will bring the total debt up another 12 Trillion by 2019 or so. Actually it is much worse. It is not $12.2 Trillion today as Quinn states. There is another $6+ Trillion in debt at Fred and Fanny and Ginny and the rest that is agency debt which is every bit as much real debt as is the official so called national debt. That takes you to $19 Trillion today. If you don't add one penny to Freddy's Fanny, by 2019 you will have something pretty close to $30 Trillion in debt. Also I wish you Chinaphobes would ease up a bit. China sold off over $30 Billion of Treasury securities in December and now ranks below Japan as the dominant holder of Treasury debt only hold about $750+ Billion or so. Also, of that $12.2 Trillion of debt, almost 50% is held domestically.
Changing the subject, Ogardiner and Punxsutawney: I have been using Terra Preta technology on our glacial rubble here at 6500' in Wyoming shoveling pure charcoal into our raised beds for more than 5 years. I have gardened organically here for over 30 years with acceptable results but the charcoal has certainly improved yields for the past 3 years or so. Our soil is neutral so ashes are a no-no. We burn fir and pine, very resinous woods, and once they reach the charcoal stage, the organic volatiles are long gone. We use a lot of composed leaves from the few deciduous species and so we hope a lot of those trace elements are returned to the soil in that fashion.

Philip Rutter said...

"Frank said...
@Punxsatawney The advice against using wood ash is usually because of the risk of drastically raising your soil pH, which is very bad, and very hard to reverse."

weeeeelll. It really all depends. That could be perfectly true for Frank's soils; but I desperately need to raise my soil pH right now. It's running around 5, and it needs to run around 6.8 or so.

We definitely use wood ash, without harm. The key is to know your soil. Everybody's soil is different, and what's true for one is actually not likely to be true for another. Your best resource is your local ag extension agent.

Given my soils and crops, limestone has been useless. That's calcium carbonate, with only moderate solubility in water- slow stuff. If your fires are hot the primary chemicals in wood ash will be potassium and calcium oxides; much more soluble, much "hotter", too; you have to be careful with it. As soon as they get wet, they change to potassium and calcium hydroxides- very caustic. And very mobile in the soil, which is what I need.

Your needs- may vary. :-)

Ric said...

Hi G & Z,

Could you elaborate on the "bloodbath in the fall " statement?

Wish I could. This was made by my department chair referring to the fact the college is cutting $5 million from it's Fall 2010 budget. We are a small public college with a yearly budget of about $65 million. Administration has been cutting for the last 18 months. Enrollment is increasing while faculty and classes are decreasing in number. Adjunct instructors are let go and their classes are given to full time instructors, who have up to 8 classes, perhaps more, a week. Almost everyone I speak with believes it's all a "business cycle" and eventually it will be BAU. As a result, no one has a plan "B." To suggest it might be needed, or what it might look like, is bad form--a sign you're not a team player and contributing to the downturn through negativity. A large number of teachers my age are planning to retire ASAP. Everyone wants to cash out while the cashing is good. When I suggest we face reduced or lost pensions and SS, they look blank, as though the computer behind their eyes has to reset. ;-)

When my chair used the term "bloodbath," he's ignorant that he's more prescient than he knows. California is imploding and everyone is frozen--staring at the process in disbelief, similar I imagine to the way most people stared frozen while looking at the Twin Towers burn and fall, not comprehending what was happening.

As an aside, a relative who worked for California called to say a group of five--three retired, one wanting to retire and one unemployable--want to move together to the midwest where it's cheaper and their pensions will go further. They have no savings or equity and are trying to borrow money to make their dream reality. I'm sorry to say I used to consider these people sane.

g-minor said...

@ Frank & Punxsatawny

Assuming you use a pH tester and adjust your rate of application accordingly, you should be fine, and not have to buy lime.

If you never apply lime, you'll probably end up with insufficient calcium in your soil. Plants need some calcium for health, quite aside from the question of soil pH.

Ilargi said...

New post up.

Who does George Soros bet against? You?


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


when i buy cow milk of a national brand it's Organic Valley.

The Cornucopia Institute is a good resource for food choices.

Eden beats Organic Valley, apparently, when it comes to soy milk.

ben said...

ahimsa. eat your heart out. ;-)

when i lived in santa cruz in 1999 word on the street was that he was observed, some years prior, eating a chicken pot pie in the 7-11 on Ocean Street. when confronted he replied that he was fasting.