Thursday, September 2, 2010

September 2 2010: Economists? Not a Clue

John Vachon Feel lucky today? April 1940
"Children who live in the slums, Dubuque, Iowa"

Ilargi: Feel lucky?

I have no doubt that a few people made a lot of money in the markets this past week. But I don't care about them. I care about the people who are losing, still losing, because they continue to fall for the pipedreams foisted upon them by the media, politicians and industries that surround them, that literally shape their lives. The people who, looking at a 3% rise in the Dow in one day, once again look at their TV sets, and once again convinced that recovery is here to stay. Robert Reich has some sensible words on the Dow vs people's lives:
The Stock Market Rally Versus the World’s Economic Fundamentals
by Robert Reich

What passes for business reporting in the United States is too often a series of breathless reports about the stock market. When the Dow rises precipitously, as it did today (Wednesday), the business press predicts an end to the Great Recession. When the stock market plummets, as it did last week, the Great Recession is said to be worsening.

Pay no attention. The stock market has as much to do with the real economy as the weather has to do with geology. Day by day there’s no relationship at all. Over time, weather and geology interact but the results aren’t evident for many years. The biggest impact of the weather is on peoples’ moods, as are the daily ups and downs of the market. The real economy is jobs and paychecks, what people buy and what they sell. [..]

Many big American companies have been showing profits because they’re doing ever more business in China while cutting payrolls at home. American consumers aren’t buying much of anything because they’ve lost their jobs or are worried about losing them, and are still trying to get out from under a huge debt load.[..] The U.S. housing market is growing worse, auto and retail sales are dropping, and the ranks of the jobless continue to swell.

Europe is in almost as much a mess. The problem there isn’t just or even mainly that Greece and other nations on the "periphery" have too much public debt. A bigger problem is European consumers aren’t buying nearly enough to generate more jobs. Unemployment remains high, and the trend is bad. Manufacturing growth there has slowed to its weakest pace in six months. Yet bizarrely, Europe’s large economies – Britain, Germany, and France – are paring back their public budgets. It’s exactly the wrong time, and a recipe for disaster.

Ilargi: Reich has it all so right, the Dow Jones indeed is not your world, and then he veers off the tracks like there's no tomorrow.

In his view, both Europe and America should greatly increase their government spending. Why? So they can return to growth. Not that there's even one iota of proof that spending more will spur any sort of growth in today's world, mind you. But that doesn't seem to matter. Neither does the fact that debts and deficits are at unparalleled levels. People like Reich argue that if you don't spend more, you certainly won't get growth. And that's not just bad, it's unthinkable. The reasoning behind this, obviously, is that when push comes to shove, growth will cure all ills.

Economists on all sides of the spectrum suffer from the same delusional perceptions. Their differences, enhanced and illustrated with mathematical formulas and complex graphs, often boil over into near shouting matches, but in the end they all aim for the same goal. Growth. Whether it’s through spending more today, or cutting now so more can be spent tomorrow, the holy grail remains the same identical object: growth.

If you would ask them what happens, what we should do, if there is no growth, or if there’s a huge contraction, one that lasts 10-20 years, before any growth re-emerges, if and when we might go from 10% of what we have now to 11%, they would declare you a fool who doesn't understand their sophisticated models. Which show cyclical trends, with ups and downs, for sure, but which always down the line end in net growth. And not a decade away, or two, but just around the corner.

Just listen to the band of fools:

Economy Avoids Recession Relapse as Data Can't Get Much Worse
• The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good. The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris [.] at BofA Merrill Lynch.

Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago. "It doesn’t rule out a recession," Harris said. "It just makes it less likely than otherwise." The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report.

• "Things can get worse," said Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts, and president emeritus of the National Bureau of Economic Research. "When the economy is moving forward at a very slow pace, very close to zero, the risk is we could slip over into the negative side of zero."

• "With growth at a stall speed of 1 percent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases," said Nouriel Roubini, "A negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double dip," Roubini, chairman of Roubini Global Economics LLC, said[..]

• "My overview is that we have a very disappointing recovery rather than a double dip," said Carmen Reinhart, a professor at the University of Maryland[..]

• The central bank "will do all that it can to ensure continuation of the economic recovery," Bernanke said in his Jackson Hole speech.

• The housing market, whose collapse kicked off the economic decline that began in December 2007, also looks to be stabilizing at a depressed level, after factoring out the ups and downs in sales prompted by a home-buyers’ tax credit and its expiration in April, [chief investment strategist at Wells Capital Management] Paulsen said.

• The U.S. banking industry "has more capital as a percentage of assets right now than in any time since 1935," Richard Bove, an analyst with Rochdale Securities in Lutz, Florida, said [..]

• "I tend to be cautiously optimistic about growth," said Harvard professor James Stock, who is also a member of the NBER’s Business Cycle Dating Committee. "All the excesses have been corrected." A double dip is "quite unlikely," he added.

Ilargi: In any given society, the people should make sure the best and brightest among them are to be their leaders. We can all agree, that makes a lot of sense. But it's not what we see, is it? Wherever you look, from Asia to Europe to Africa to North America, the political prowess is in the hands of a bunch of power-hungry self-absorbed peacocks (mostly, but not exclusively, male). Democratic, absolutist, what's the difference, really? Sure, there's people getting into the game with the best intentions, but they are either thrown overboard or they adapt to the game. Power corrupts. Not instantly, perhaps, but it is a sure-fire slow grinding way to warp a (wo)man's moral mind space.

These politicians of ours base their economic policies on people who suffer from that same syndrome. Economists, since it’s not a science, and hence its theories cannot be disproved (see Karl Popper on fallibility), get to play the same game as their temporary "masters". That is, what they say doesn't depend on what they feel they should convey on account of inner convictions and morality, but on what they feel people want to hear. Which makes them, essentially, indistinguishable from detergent ads. Who cares how clean this soap washes your clothes, did you see how happy the family on TV is that uses it? Who cares what the meaning of my words is, people so desperately wish to believe in a change from the misery they have.

And so everyone, politicians, economists, and yes, you, is stuck in the growth meme, and that fits the economic system itself, and our human brains, to a T. The fiat money our economies are based on cannot exist for very long in a system that doesn't grow. It has to be issued at an interest rate (or you wouldn't need fiat money to begin with). To pay the interest, you need to issue more money, rinse and repeat. And in order to issue the extra money you need to pay the interest, without killing the goose, you need to have growth.

Here's thinking we won't understand this one, as a society, until we're sitting among its smouldering ruins. Sure, it's the fault of the leaders, the politicians, the economists. But who put them where they are? It's you, it's us, we are as addicted as they are to the perpetual growth paradigm. They talk nonsense, and we hear what we like to hear and swallow it hook line and tinkerbell. It's in our amoeba brains, and we can't fight it, since we are the amoeba brain. "I don't care if you make sense, as long as you make me feel good." Don't blame yourself, blame the amoeba inside of you. You know better.

One that got away (as in one flew out of the cuckoo's nest) is Christina Romer, who was chairman of President Obama's Council of Economic Advisers until this week. Boy, has she said some braindead things in her tenure, preferably from the White House lawn, after yet another session of how do we spin this one. Well, Christina will never tell all, bound by the Washington Omertà, but she had some warnings for the listening ear:
Economist Christina Romer serves up dismal news at her farewell luncheon
Lunch at the National Press Club on Wednesday caused some serious indigestion. It wasn't the food; it was the entertainment. Christina Romer, chairman of President Obama's Council of Economic Advisers, was giving what was billed as her "valedictory" before she returns to teach at Berkeley, and she used the swan song to establish four points, each more unnerving than the last:
  • She had no idea how bad the economic collapse would be.
  • She still doesn't understand exactly why it was so bad.
  • The response to the collapse was inadequate.
  • And she doesn't have much of an idea about how to fix things.

What she did have was a binder full of scary descriptions and warnings, offered with a perma-smile and singsong delivery:
  • "Terrible recession. . . .
  • Incredibly searing. . . .
  • Dramatically below trend. . . .
  • Suffering terribly. . . .
  • Risk of making high unemployment permanent. . . .
  • Economic nightmare."

Anybody want dessert?

Romer had predicted that Obama's stimulus package would keep the unemployment rate at 8 percent or less; it is now 9.5 percent. One of her bosses, Vice President Biden, told Democrats in January that "you're going to see, come the spring, net increase in jobs every month." The economy lost 350,000 jobs in June and July. [..]

When she and her colleagues began work, she acknowledged, they did not realize "how quickly and strongly the financial crisis would affect the economy." They "failed to anticipate just how violent the recession would be."

Even now, Romer said, mystery persists. "To this day, economists don't fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would." Her defense was that "almost all analysts were surprised by the violent reaction."[..]

Without the policy, she had predicted, unemployment would soar to 9.5 percent. The plan passed, and unemployment went to 10 percent. No wonder most Americans think the effort failed. [..]

"As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the act is broadly on track," she declared. Further, she argued, "I will never regret trying to put analysis and quantitative estimates behind our policy recommendations."[..]

... the problem is not that Romer did a quantitative analysis; the problem is that the quantitative analysis was wrong. Inevitably, this meant that, as she acknowledged, "the turnaround has been insufficient." And what to do about this? Here, Romer became uncharacteristically hesitant to make predictions. She suggested some "innovative, low-cost policies." But the examples she cited - a "national export initiative," new trade agreements and a "pragmatic approach to regulation" - aren't exactly blockbusters.

"The only sure-fire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less," she said. [..]

The truth is that the Obama administration is pretty much out of options. Any major new effort would be blocked by Republicans, who have few alternatives of their own. "What we would all love to find - the inexpensive magic bullet to our economic troubles - the truth is it almost surely doesn't exist," Romer admitted.

Ilargi: How does that make you feel? The soon-to-be-former chairman of President Obama's Council of Economic Advisers says there is no solution to the economic crisis we're in. Well, okay, no "inexpensive magic bullet". You think there'll be an expensive magic bullet? An inexpensive "non-magic" bullet?

What I think Romer is saying is that she found out that all of the economic theories she learned all through her life have come up empty and wanting. And now she'll return to university to pass them on to a whole new generation of students. Because she still can't admit to herself that the theories she based her entire life upon are worth less than the paper they're written on. But still, completely clueless, and that's what she admits, if you listen closely. No idea what went on, no idea what to do about it.

This woman had daily meetings with Larry Summers and Tim Geithner, and often Obama, for like 19 months. That's almost 400 meetings. And now she comes out and says she hasn't got the faintest idea what to do. And if she doesn't, after sitting through all those meetings, there can be no doubt that means neither do the rest of them. Not a single bleeping clue. Not one of them. Theories abound, but not a clue. Infinite taxpayer fortunes to spend, but your pet hamster could do the same job. Not a clue.

These are the people who determine White House policies, who get to decide which trillion dollars of your children’s potential tax revenues will be spent today, and on this banker, and which trillion tomorrow on the next one.

Still feel lucky?

Economy Avoids Recession Relapse as Data Can't Get Much Worse
by Rich Miller and Simon Kennedy - Bloomberg

The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good. The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago. "It doesn’t rule out a recession," Harris said. "It just makes it less likely than otherwise."

The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report. Federal Reserve policy makers agree that a renewed contraction is unlikely, although the risks have risen. "I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace," Fed Chairman Ben S. Bernanke said in an Aug. 27 speech.

Rising Yield
The Standard & Poor’s 500 Index might increase to about 1,300, while the yield on the 10-year Treasury note would rise toward 4 percent during the next six months or so if the U.S. steers clear of another decline, said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages $342 billion. The S&P index closed at 1,080.29 yesterday in New York, while the yield on the 10-year Treasury note was 2.56 percent at 8:59 a.m. in London today, according to BGCantor Market Data.

"We could have a really violent move," Paulsen said. "The markets have a lot of double dip priced in," he added. "I think the idea of that happening is pretty remote. The risks of a renewed economic contraction have risen due to a spate of disappointing economic data, said Lyle Gramley, a former Fed governor who’s now a senior economic adviser for the Potomac Research Group in Washington. He reckons the chance of a relapse is 35 percent, up from 10 to 20 percent a month ago. "We will probably avoid a double dip," Gramley said. "But we’re in for a prolonged period of subpar growth of 2 percent or less."

Falling Orders
Orders for nondefense capital goods excluding aircraft, a proxy for future business investment, fell 8 percent in July, the biggest decline in one-and-a-half years, while sales of new homes dropped unexpectedly to an annual pace of 276,000, the lowest level on record, according to Commerce Department figures released last week. The department also reduced its estimate of second-quarter growth on Aug. 27 to 1.6 percent from 2.4 percent.

The unemployment rate probably rose to 9.6 percent this month from 9.5 percent in July as employers reduced payrolls by 100,000, according to the median forecasts of more than 70 economists surveyed by Bloomberg News. The Labor Department is scheduled to release the jobs data tomorrow. Bernanke described the recovery in the job market as "painfully slow" and said in his Aug. 27 speech at Jackson Hole, Wyoming, that it had "damped confidence."

‘Slow Pace’
"Things can get worse," said Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts, and president emeritus of the National Bureau of Economic Research. "When the economy is moving forward at a very slow pace, very close to zero, the risk is we could slip over into the negative side of zero." Feldstein served as chairman of the White House Council of Economic Advisers from 1982 to 1984, around the time of the last double dip in the U.S.

He put the possibility of a contraction at one in three and also voiced doubts about the Fed’s ability to combat it, given how low interest rates already are. "I think there is very little that the Fed can do," Feldstein, a member of the NBER committee that determines when recessions start and stop, said in a Bloomberg television interview on Aug. 27.

"With growth at a stall speed of 1 percent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases," said Nouriel Roubini, the New York University economist who predicted the global financial crisis.

‘Negative Feedback Loop’
"A negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double dip," Roubini, chairman of Roubini Global Economics LLC, said in an Aug. 25 e-mail message. History argues against such a setback now, said Randall Kroszner, a former Fed governor who is now a professor at the University of Chicago Booth School of Business. Other industrial nations that experienced major financial crises, such as Spain in 1977 and Sweden in 1991, avoided double dips, though their recoveries were slow.

Even Japan, which suffered a lost decade of minimal growth after a real-estate bubble burst in the early 1990s, managed to stage a three-year rebound before its economy was knocked back down by the 1997-98 Asian financial crisis. "My overview is that we have a very disappointing recovery rather than a double dip," said Carmen Reinhart, a professor at the University of Maryland in College Park who co-wrote a book on crises with Harvard professor Kenneth Rogoff.

Credit Controls
The only double dip in the U.S. since the end of World War II occurred 30 years ago, when the economy turned up in mid-1980 only to fall back into recession a year later. That situation isn’t applicable today, said Gramley, who was at the Fed at the time. The initial decline in 1980 was triggered when President Jimmy Carter imposed credit controls. He quickly reversed himself when the economy collapsed in response.

Postwar recessions traditionally have been prompted by the Fed boosting rates to fight inflation, oil prices rising sharply or businesses suddenly reducing inventories, Gramley said. None of that looks likely this time, he added. The Fed cut the overnight bank lending rate to close to zero percent in December 2008 and has signaled it intends to keep it there for an extended period. The central bank "will do all that it can to ensure continuation of the economic recovery," Bernanke said in his Jackson Hole speech.

Falling Oil Prices
Oil prices have fallen as growth has slowed. Crude oil for October delivery settled at $73.91 a barrel yesterday on the New York Mercantile Exchange, down from the 2010 high of $86.84 set on April 6. The inventory/sales ratio for U.S. businesses was 1.26 in June, just above its all-time low of 1.23 in March and April and below 1.37 a year ago, according to Commerce data.

The housing market, whose collapse kicked off the economic decline that began in December 2007, also looks to be stabilizing at a depressed level, after factoring out the ups and downs in sales prompted by a home-buyers’ tax credit and its expiration in April, Paulsen said. Residential construction totaled $358.1 billion at a seasonally adjusted annual rate in the second quarter, compared with $813.3 billion in the first quarter of 2006, at the height of the housing boom, Commerce Department data shows.

‘Postponable Purchases’
What Harris calls "postponable purchases" -- housing, spending on durable goods such as cars, and business investment in equipment and software -- stood at 16.8 percent of gross domestic product in the second quarter. That compares with a postwar low of 16 percent in the same period a year earlier and the post-war average of 20.6 percent, according to calculations by Bank of America-Merrill Lynch. "Even if they fall back down, you probably wouldn’t get a recession; you’d get a period of stagnation," Harris said.

Vehicle sales in the U.S. clocked in at a seasonally adjusted annual rate of 11.46 million in August, off 32.4 percent from 16.95 million in August 2005, according to statistics from Autodata Corp., a research company based in Woodcliff Lake, New Jersey. It would probably take a flare-up of the financial crisis to push the economy back down and that’s less likely than it was prior to 2007, said Jacob Frenkel, chairman of JPMorgan Chase International in New York. "The likelihood of a financial meltdown is now much lower than it was in the past," he said.

Banking Capital
The U.S. banking industry "has more capital as a percentage of assets right now than in any time since 1935," Richard Bove, an analyst with Rochdale Securities in Lutz, Florida, said in an Aug. 26 interview with Tom Keene on Bloomberg Radio. The positive yield curve -- with long-term interest rates higher than short-term ones -- also argues against a fall back into recession, according to Arturo Estrella, professor of economics and department head at Rensselaer Polytechnic Institute in Troy, New York. The yield curve has turned negative prior to all of the last seven recessions, with no false signals since 1967, his research shows.

Bernanke said in Jackson Hole that U.S. households have also made "greater progress in the repair of their balance sheets." He pointed in particular to the rise in the personal- savings rate, which was 5.9 percent in July, compared with a 3.3 percent average since the start of 2000. Fed policy makers have also highlighted the strength of demand overseas as a plus for the U.S. economy, especially for manufacturing companies.

Faster Pace
Manufacturing in the U.S. expanded at a faster pace than forecast in August as the Institute for Supply Management’s factory index rose to a three-month high of 56.3 from 55.5 in July. Readings greater than 50 in the Tempe, Arizona-based group’s index signal growth. The figure was projected to drop to 52.8, according to the median forecast in a Bloomberg News survey. "I tend to be cautiously optimistic about growth," said Harvard professor James Stock, who is also a member of the NBER’s Business Cycle Dating Committee. "All the excesses have been corrected." A double dip is "quite unlikely," he added.

Economist Christina Romer serves up dismal news at her farewell luncheon
by Dana Milbank - Washington Post

Lunch at the National Press Club on Wednesday caused some serious indigestion. It wasn't the food; it was the entertainment. Christina Romer, chairman of President Obama's Council of Economic Advisers, was giving what was billed as her "valedictory" before she returns to teach at Berkeley, and she used the swan song to establish four points, each more unnerving than the last:
  • She had no idea how bad the economic collapse would be.
  • She still doesn't understand exactly why it was so bad.
  • The response to the collapse was inadequate.
  • And she doesn't have much of an idea about how to fix things.

What she did have was a binder full of scary descriptions and warnings, offered with a perma-smile and singsong delivery:
  • "Terrible recession. . . .
  • Incredibly searing. . . .
  • Dramatically below trend. . . .
  • Suffering terribly. . . .
  • Risk of making high unemployment permanent. . . .
  • Economic nightmare."

Anybody want dessert?

At week's end, Romer will leave the council chairmanship after what surely has been the most dismal tenure anybody in that post has had: a loss of nearly 4 million jobs in a year and a half. That's not Romer's fault; the financial collapse occurred before she, and Obama, took office. But she was the president's top economist during a time when the administration consistently underestimated the depth of the economy's troubles - miscalculations that have caused Americans to lose faith in the president and the Democrats.

Romer had predicted that Obama's stimulus package would keep the unemployment rate at 8 percent or less; it is now 9.5 percent. One of her bosses, Vice President Biden, told Democrats in January that "you're going to see, come the spring, net increase in jobs every month." The economy lost 350,000 jobs in June and July.

This is why nearly two-thirds of Americans think the country is on the wrong track - and why Obama's efforts to highlight the end of U.S. combat in Iraq and the resumption of Middle East peace talks have little chance of piercing the gloom as voters consider handing control of Congress back to the Republicans.

Romer's farewell luncheon had been scheduled for the club's ballroom, but attendance was light and the event was moved to a smaller room. Romer, wearing a green suit, read brightly from her text - a delivery at odds with the dark material she was presenting. When she and her colleagues began work, she acknowledged, they did not realize "how quickly and strongly the financial crisis would affect the economy." They "failed to anticipate just how violent the recession would be."

Even now, Romer said, mystery persists. "To this day, economists don't fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would." Her defense was that "almost all analysts were surprised by the violent reaction."

That miscalculation, in turn, led to her miscalculation that the stimulus package would be enough to keep the unemployment rate from exceeding 8 percent. Without the policy, she had predicted, unemployment would soar to 9.5 percent. The plan passed, and unemployment went to 10 percent. No wonder most Americans think the effort failed.

But Romer argued, a bit too defensively, against the majority perception. "As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the act is broadly on track," she declared. Further, she argued, "I will never regret trying to put analysis and quantitative estimates behind our policy recommendations."

But the problem is not that Romer did a quantitative analysis; the problem is that the quantitative analysis was wrong. Inevitably, this meant that, as she acknowledged, "the turnaround has been insufficient." And what to do about this? Here, Romer became uncharacteristically hesitant to make predictions. She suggested some "innovative, low-cost policies." But the examples she cited - a "national export initiative," new trade agreements and a "pragmatic approach to regulation" - aren't exactly blockbusters.

"The only sure-fire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less," she said. But asked about the main Republican proposal, extending George W. Bush's tax cuts for those earning more than $250,000, Romer replied that doing so would be "fiscally irresponsible."

The truth is that the Obama administration is pretty much out of options. Any major new effort would be blocked by Republicans, who have few alternatives of their own. "What we would all love to find - the inexpensive magic bullet to our economic troubles - the truth is it almost surely doesn't exist," Romer admitted.

The valedictory was becoming more of an elegy. At the end of the depressing forum, the moderator read a question submitted by a member of the audience: "You seem like you'd be a lot of fun at parties. Are you?" The economist blushed. "You'll have to just take it for granted," she said. Like 8 percent unemployment.

Seven lean years: No recovery till 2016
by Paul B. Farrell - MarketWatch

Summer of recovery? Dead. How dead? Remember Genesis? The Seven Lean Years? Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if.

"The idea behind 'seven lean years' is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years." That's Jeremy Grantham talking; he's responsible for investing $100 billion in the next seven lean years. And like the biblical Joseph, whose life was on the line while interpreting dreams for the Egyptian pharaoh, Grantham can't afford mistakes.

In his recent newsletter, "Seven Lean Years Revisited," Grantham tells us why expecting a summer of recovery was unrealistic, why America must prepare for a long recovery. Grantham details 10 reasons: "The negatives that are likely to hamper the global developed economy." Sorry, but this recovery will take till 2016.

But should you believe Grantham? Yes.

First: Like Joseph, Grantham's earlier forecasts were dead on. About two years before Wall Street's 2008 meltdown Grantham saw: "The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it's bubble time. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before."

Second: The Motley Fools' Matt Argersinger went back to the dot-com crash of 2000: Grantham "looked out 10 years and predicted the Dow Jones Industrial Average would underperform cash." Bull's-eye: The Dow peaked near 14,000 in late 2007; it's now around 10,000. Factor in inflation: Wall Street's lost 20% of your retirement since 2000. Yes, Wall Street's a big loser.

Third: What's ahead for the seven lean years? Wall Street will keep losing. Argersinger: "Grantham predicts below-average economic growth, anemic corporate-profit margins, and other severe obstacles for the stock market. Over the next seven years ... U.S. stocks as a group will deliver annualized real returns between 1.1% and 2.9%. That's less than you might get putting your money in a CD." Warning: You'd be a fool to trust your money with Wall Street during the seven lean years till 2016. Another 20% will vanish.

Fourth: Why will Wall Street kill the recovery, keep driving us deeper into a ditch till 2016? Last year Grantham asked: "Why is it that several dozen people saw this crisis coming for years? It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi, even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben] Bernanke, none of them seemed to see it coming." The Pharaoh listened to Joseph. Our leaders are deaf.

Another Black Swan will lengthen a seven-lean-years recovery
Grantham says today's leaders "running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They're impatient, focused on the present."

However, planning for the future "requires more people with a historical perspective who are more thoughtful and more right-brained, but we end up with an army of left-brained immediate doers. So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it."
Get it? It is guaranteed that our Wall Street and Washington leaders will miss the next Black Swan catastrophe.

No matter how big, how many warnings. Just like they did in 2008. They are guaranteed to fail. That's tragic. Not only will America's recovery take at least seven lean years but when another meltdown does occur our leaders will miss it again. And another massive meltdown on top of a long seven-lean-years recovery will likely drag out the recovery past 2020!

So here's my Reader's Digest version of Grantham's 10 handicaps that will "hamper the global developed economy, drag it out for seven lean years," forcing Americans into a painfully long, game-changing period of austerity and civil unrest. You can read his original at
  1. Too much consumer debt; increased savings, spending drops
    "We've stopped adding consumer debt, but the improvement is minimal. It would take at least seven years of steady reduction to reach a more normal level. Anything more rapid than that would make it nearly impossible for the economy to grow. More stimulus adds government debt, already a problem. But debt reduction in a fragile economy runs the risk of causing a severe economic decline. This dilemma may prove to be the central economic policy choice of our time. Not an easy choice. And no way that this process will be pleasant or quick."

  2. Banks off-loaded trillions of toxic debt, increasing federal debt
    "The most frightening aspect of the seven-lean-year scenario is that dangerously excessive financial system debt was moved across, with additions, to become dangerously excessive government debt, with levels of debt-to-GDP not seen outside wartime. The cure seems more like a stay of execution."

  3. Stimulus failing, housing crashed, no appreciation, confidence lost
    "The artificial lift to consumers' confidence from steadily rising house prices is long gone, unlikely to return soon, reducing our confidence in the nest eggs we thought we could count on for retirement. Further house-prices declines are more than a 50/50 bet. No more shot in the arm from construction. Stock prices are stagnant. These changed attitudes will last for years."

  4. Banks undercapitalized, overleveraged; more trouble ahead
    "Wall Street may have passed its point of maximum stress, but very bad things may lie ahead in Europe. Leverage and the chances of further write-downs leave banks undercapitalized, reluctant to lend. Unhealthy growth in America's GDP caused by previous rapid increases in the size of the financial sector has also disappeared, hopefully will stay gone."

  5. State/local governments squeezed, tax revenues down 30%
    "Runaway costs: average salaries and pensions went far above private sector in 15 years, now run into the brick wall of reduced taxes. Real estate taxes are down over 30%, unlikely to bounce back soon. The legal need to stay balanced means painful cost-cutting, putting pressure on an economy with few stimulus options left. A double dip would make it worse."

  6. High unemployment; few tricks left to stimulate jobs
    "Unemployment is high, suffering from the loss of kickers related to asset bubbles. The economy appears to have an oddly hard time producing enough jobs to get ahead of the natural yearly increases in the work force. Consumer confidence and corporate investing suffer."

  7. America's trade imbalances are killing the dollar, our economy
    "America must stop running large trade imbalances, they destabilize the economy. In a world growing nervous about the quality of sovereign debt, these debt levels have exploded. Adding new foreign debts adds risk and doubts to the system, threatening the dollar. Just as adding surpluses threatens the Chinese. The trick, though, is to reduce these imbalances so that the process does not reduce global growth. Rebalancing will not be quick, easy, or painless."

  8. European governments crashing; incompetent management
    "Europe suffers from incompetent management. Spain, Greece, Portugal, Ireland, and Italy allowed local competitiveness of manufactured goods to become 20% or more uncompetitive with Germany. The banking crisis was not the problem, so it'll never be easy to solve with a fixed currency. Unfortunately, Europe's problems are now part of America's seven lean years, guaranteeing slower than normal GDP growth and a long workout period."

  9. Global loss of confidence in all currencies, including the dollar
    "Rising levels of sovereign debt and problems facing the euro bloc and Japan are creating a loss of confidence in faith-based currencies. The world economy is a fragile system that will increasingly limit governments' choices in dealing with low growth and excessive credit."

  10. Aging populations; rising Medicare, Social Security costs
    "Possibly most important of all, widespread overcommitments to pensions and health benefits is a long-term problem overlapping with the seven-year workout, making the 'seven lean years' even tougher. Developed nations are aging, need more medical attention. Treatment costs are increasing, and are hard to limit or ration. No choice, hunker down, wait for a crisis."

Bottom line: America's facing seven lean years, a long, game-changing, painful recovery till 2016. But let's end on that positive note the Motley Fool's Argersinger promises: In spite of the dark forecast, there's a "silver lining, the saving grace Grantham calls it. The stock market might turn out to be a loser, but that won't be the case for 'high-quality' U.S. stocks. Grantham thinks elite stocks are poised to return as much as 10% a year or better."

Argersinger put it this way: "Grantham doesn't detail what he means, but I think it's safe to assume he's talking about large companies that have strong balance sheets, sustainable competitive advantages, stable or growing profit margins, and opportunities for growth," even in "seven lean years."

He picks seven stocks "that might make Grantham's cut." All are based on "the following criteria: Large-cap stock, at least $20 billion in market size; high profitability, an average operating margin of 15% or higher over the past five years; strong balance sheet, a debt-to-equity ratio of less than 50%; a dividend, not necessarily for yield but as a measure of financial strength." Solid picking criteria.

The seven are: Carnival, Johnson & Johnson, Microsoft, Southern Copper, Thomson Reuters, Travelers and Walt Disney. The seven are a "nice start on a Grantham-style portfolio, one that should, if you believe Grantham, outperform big time" during the next "seven lean years," America's painful "New Age of Austerity and Civil Unrest," which will last till 2016, maybe longer.

V-Shaped Dreams Evaporate
by Nouriel Roubini, Christian Menegatti and Prajakta Bhide - Forbes

The U.S. must brace itself for a long period of below-potential growth

The curtain has opened on Act II of our "Year of Two Halves"--RGE's theme since the end of 2009--with the slowdown forecast for H2 2010 getting here a bit earlier than expected. Growth in Q2 2010 registered a very weak 1.6%, revised down from an original estimate of 2.4%—a sharp slowdown from the 3.7% of Q1. This implies much weaker growth in H1 than even bearish forecasters had expected. Moreover, most of the growth was driven by a temporary inventory adjustment; final sales grew a mediocre 1.1% in Q1 and 1% in Q2.

All the tailwinds of H1 will become headwinds in H2. As state and local governments keep retrenching and even the federal stimulus diminishes, the fiscal stimulus will turn into a fiscal drag that will be much more pronounced in 2011 and after some of the 2001–03 tax cuts expire. The base effects from the lousy economic activity figures of 2009 are gone, temporary census hiring finished and tax incentives--cash for clunkers, the investment tax credit, the first-time home buyer tax credit and cash for green appliances--all expired after "stealing" demand and growth from the future.

A succession of data releases has induced a race to the bottom as other forecasters revise their estimates down to figures closer to ours. Personal consumption--70% of aggregate demand--seems off to a rocky start this quarter: Core retail sales for July showed the third decline in the last four months. In the week ending on Aug. 21 same-store sales data released by ICSC-Goldman Sachs showed a fourth straight decline. With inventory restocking over, the investment outlook is equally bleak.

Corporate-sector capital expenditure, the only component of aggregate demand that grew robustly in H1, appears set to slow: The shipments and new orders indicators of the July durable goods report showed a decline across categories. Meanwhile, despite the return to marginally positive growth in Q2, investment in nonresidential structures will remain anemic at best through H2, given the record-high vacancy rates in commercial real estate.

As we expected, the housing sector is already in a double dip: Single-family starts fell by 4.2% m/m in July, the third consecutive month of decline, and both existing and new home sales touched their all-time lows. In summary, every component of aggregate demand--with the exception of net exports, which weighed on growth in Q2--appears set to offer a worse contribution to growth in Q3 than the previous quarter.

The truth is that we have not had much of a recovery in the first place, which might prevent the economy from falling enough to display what many would label a double dip—although we are now assigning a 40% probability to such an outcome. Weak economic growth and labor market conditions imply that the U.S. output gap keeps widening and the employment-to-population ratio will continue to fall.

The anemic recovery and downward trend of inflation and inflation expectations are raising concerns that the economy could not only surprise to the downside but eventually stall. A growth rate of 1% or lower (now likely for H2 2010) is a severe growth recession, as potential growth is closer to 3%.

With growth nearly stalled, an unstable disequilibrium arises that is likely to tip the economy into a double-dip recession. The unemployment rate climbs, the budget deficit widens because of automatic stabilizers, home prices keep falling, bank losses are much larger and protectionist pressures come to a boil. Stock markets could sharply correct, and credit and interbank spreads could widen as risk aversion increases.

A negative feedback loop between the real economy and the financial system could easily tip the economy into a formal double dip: The real economy reaches a near-stall speed and risky asset prices correct downward, leading to a negative wealth effect, a higher cost of capital and reduced business, consumer and investor confidence.

Given political and fiscal constraints and banks' unwillingness to lend, we remain doubtful of the potential for policy to prevent a double dip. Even a new round of monetary and quantitative easing can provide limited stimulus. The real issue facing the U.S. is the need for balance sheet deleveraging and repair, and that will be a multiyear process. The U.S. must brace itself for a long period of below-potential growth.

World money meltdown can start in surprising places, physicists say
by World-Science.Net

A small group of countries—including not just the mighty United States but also tiny Luxembourg—have the dubious honor of being able to spread an economic crisis globally once it sprouts on their soil, five physicists say. The researchers say they arrived at the finding using concepts from "statistical physics" and available data that quantifies trade and business ownership ties among almost all nations. The scientists, from Greek, Swiss and Israeli universities, also used special formulas meant to estimate the probability of an effect, such as a disease, spreading between links in a network.

Their method indicated that 10 nations are so tightly linked into the global business network that they can trigger a worldwide crisis, regardless of whether the calculation considers trade ties alone or ownership ties alone. The countries are: Japan, Spain, the U.K., the Netherlands, Italy, Germany, Belgium, Luxembourg, the United States, and France. Moreover, if only ownership ties but not trade ties are considered, Sweden and Switzerland join the list. If only trade but not ownership ties are considered, then China and Russia march onto the roster.

"For both networks we are able to locate a nucleus of countries that are the most likely to start a global crisis, and to sort the remaining countries’ crisis spreading potential according to their ‘centrality,’ the researchers wrote in reporting their findings.  "Initially, a crisis is triggered in a country and propagates from this country to others. The propagation probability depends on the strength of the economic ties between the countries involved and on the strength of the economy of the target country."

The researchers, including Antonios Garas of the University of Thessaloniki, Greece posted a report on their findings on the website, a database of physics research papers. The work may be particularly relevant as the world lurches from a recent recession to what some analysts predict could be an all-out depression in the months and years ahead. The scientists ran computer simulations of fictitious economic crises based on their equations. In these simulations, a crisis would unfold in a series of individual steps. In each step, each nation was characterized as either "susceptible" to crisis, "infected" by crisis, or "recovered."

A similar system "has been used successfully to model spreading of epidemics in various networks," the team wrote. The group reported that in their simulations of a crisis originating in the United States, the overall results were similar to what actually occurred in the 2008-2009 recession, in terms of the numbers and identities of the countries infected.

A country’s "spreading power" depends not so much on its size as on the strength and the targets of its business links, the group wrote. That explains, they added, why "even smaller countries have the potential to start a significant crisis outbreak. Some smaller countries "are a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc. and a problem in such investments can easily lead to a chain reaction in other countries," Garas and colleagues wrote.

Countries such as Luxembourg (population about 489,000) and Switzerland "are headquarters for some of the world’s largest companies and subsidiaries [and] interact very strongly with a very large number of countries," they added. "For example, about 95 percent of all pharmaceutical products of the Swiss industry are not intended for local consumption, but for exporting."

The Stock Market Rally Versus the World’s Economic Fundamentals
by Robert Reich

What passes for business reporting in the United States is too often a series of breathless reports about the stock market. When the Dow rises precipitously, as it did today (Wednesday), the business press predicts an end to the Great Recession. When the stock market plummets, as it did last week, the Great Recession is said to be worsening.

Pay no attention. The stock market has as much to do with the real economy as the weather has to do with geology. Day by day there’s no relationship at all. Over time, weather and geology interact but the results aren’t evident for many years. The biggest impact of the weather is on peoples’ moods, as are the daily ups and downs of the market. The real economy is jobs and paychecks, what people buy and what they sell. And the real economy — even viewed from a worldwide perspective — is as precarious as ever, perhaps more so.

Today’s rally was triggered by news that one of China’s official measures of its growth – its Purchasing Managers Index – rose. The index had been in decline for three straight months. Why should an obscure measurement on the other side of the world cause stock markets in New York, London, and Frankfurt to rally? Because China is so large and its needs seemingly limitless that its growth has been about the only reliable source of global demand.

Many big American companies have been showing profits because they’re doing ever more business in China while cutting payrolls at home. American consumers aren’t buying much of anything because they’ve lost their jobs or are worried about losing them, and are still trying to get out from under a huge debt load (the latest figures show more consumer debt delinquent now than last year and a surge in personal bankruptcies). The U.S. housing market is growing worse, auto and retail sales are dropping, and the ranks of the jobless continue to swell.

Europe is in almost as much a mess. The problem there isn’t just or even mainly that Greece and other nations on the "periphery" have too much public debt. A bigger problem is European consumers aren’t buying nearly enough to generate more jobs. Unemployment remains high, and the trend is bad. Manufacturing growth there has slowed to its weakest pace in six months. Yet bizarrely, Europe’s large economies – Britain, Germany, and France – are paring back their public budgets. It’s exactly the wrong time, and a recipe for disaster.

Germany’s so-called "job miracle" (as Chancellor Angela Merkel calls it) is more mirage than miracle. Most of the gains in employment there have come from part-time jobs, often at low pay. Average annual net income per German employee continues to drop. This explains why domestic demand there is so sluggish and why Germany is desperately dependent on its exports of machinery and manufacturing components to Asia, especially China.

Meanwhile, Japan, now the world’s third-largest economy, is a basket case. Japanese consumers aren’t buying much of anything, and why would they? The country is still in the grip of a deflationary cycle that shows no end. Japanese consumers reason if they can buy it cheaper next week there’s no reason to buy now. Basically the only thing keeping Japan’s economy going are its exports of cars and electronic components to China.

Australia is booming, but look closely and you see the same buyer. Australia is making a boatload of money selling its minerals and raw materials to China (Australia is fast becoming one big Chinese mine shaft). The Brazilian economy is soaring. Why? Exports of wheat and cattle to China. Middle East oil producers are getting richer. Why? China’s insatiable thirst for oil.

Elsewhere around the globe the picture is as uncertain. Much of Pakistan is under water. Much of the rest of the Middle East is under tyrannical or corrupt regimes. Russia has suffered such a dry spell it’s hoarding wheat. Despite its wealthy few, India’s masses are still terribly poor.

The stock market could plunge tomorrow or the next day because the world’s economic fundamentals are so precarious. The global economy cannot be sustained by one big, voracious nation – especially one that’s suffering bouts of civil unrest, actively repressing dissent, suffocating under a blanket of pollution and coping with other environmental hazards, and whose biggest companies are run by the state.

Can A Family Of Four Survive On A Middle Class Income In America Today?
by Michael Snyder - Economic Collapse

When I was growing up, $50,000 sounded like a gigantic mountain of money to me.  And it was actually a very significant amount of money in those days.  But in 2010 it just does not go that far.  Today, the median household income in the United States for a year is approximately $50,000.  About half of all American households make more than that, and about half of all American households make less than that.  So if your family brings in $50,000 this year that would put you about right in the middle.  So can a family of four survive on $50,000 in America today?  The answer might surprise you.  Twenty years ago a middle class American family of four would have been doing quite well on $50,000 per year.  But things have changed.

You see, despite government efforts to manipulate the official inflation numbers, the price of everything just keeps going up.  The price of food slowly but surely keeps moving up each year.  The price of gas is far higher than it was 10 or 20 years ago.  Taxes just keep going up.  Utility bills just keep going up.  Each year middle class American families have found themselves increasingly squeezed as their expenses have risen much more rapidly than their incomes.  

So just how far will $50,000 go for a middle class American family of four today?  Well, $50,000 breaks down to about $4,000 a month.  So how far will $4,000 a month stretch for a family of four in today's economy?....

First of all, the family of four needs some place to live.  Even though house prices have come down a bit recently, they are still quite expensive compared to a decade ago.  Let's assume that our family of four has found a great deal and is only spending $1000 a month on rent or on a mortgage payment.  In many of the larger U.S. cities this is a completely unrealistic number, but let's go with it for now.

Next, our family of four has to pay for power and water for their home.  This amount can vary dramatically depending on the climate, but let's assume that the average utility bill is somewhere around $300 a month.

Our family is also going to need phone and Internet service.  Cell phone bills for a family of four can balloon to ridiculous proportions, but let's assume that our family of four is extremely budget conscious and has found a package where they can get basic phone service, Internet and cable for $100 a month.  Most middle class American families spend far more than that.

Both parents are also going to need cars to get to work.  Let's assume that both cars were purchased used, so the car payments will only total about $400 a month.  If the vehicles were purchased new this number could potentially be much higher.

If our family has two cars that means that they will also be paying for automobile insurance.  Let's assume that they both have exemplary driving records and so they are only spending about $100 a month on car insurance.

Our hypothetical family of four is also going to need health insurance.  In the past, families could choose to go without health insurance (at least for a while), but now thanks to Barack Obama all American families will essentially be forced to purchase health insurance.  Health insurance premiums are absolutely skyrocketing, but let's assume that our family has somehow been able to find an amazing deal where they only pay $500 a month for health insurance.

Our hypothetical family is also going to have to eat.  Let's assume that our family clips coupons and cuts corners any way that it can and only spends about $50 for each member of the family on food and toiletries each week.  That works out to a total of $800 a month for the entire family.

Lastly, the parents are also going to need to buy gas to get to and from work each week.  Let's assume that they don't live too far from work and only need to fill up both cars about once per week.  That would give them a gasoline bill of about $50 a week or $200 a month.  Of course if either of them lived a good distance from work or if a lot of extra driving was required for other reasons this expense could be far, far higher.

So far our family has spent $3400 out of a total of $4000 for the month.  Not bad, eh?


We haven't taken federal, state and local taxes out of the paycheck yet.  Depending on where our family lives, this will be at least $1000 a month. 

So now we are $400 in the hole.

But to this point we have assumed that our family does not have any credit card debt or student loan debt at all.  If they do, those payments will have to be made as well.

In addition, the budget above includes no money for clothing, no money for dining out, no money for additional entertainment, no money for medications, no money for pets, no money for hobbies, no money for life insurance, no money for vacations, no money for car repairs and maintenance, no money for child care, no money for birthday or holiday gifts and no money for retirement.

On top of all that, if our family of four has a catastrophic health expense that their health insurance won't pay for (and health insurance companies try to weasel out of as many claims as they can), then our family of four is not just broke - they are totally bankrupt.

Are you starting to get the picture?

It is getting really, really hard out there for middle class American families these days.

And unfortunately, many American families now have at least one parent that is not working.  In some areas of the nation it just seems like there are virtually no jobs available.  For example, at 14.3%, the state of Nevada now has the highest unemployment rate in the nation.  Michigan (which had been number one) is not very far behind.

But even those Americans who are able to find work are finding themselves increasingly squeezed.  For many Americans, a new job means much lower pay.  Millions of highly educated people who once worked in professional positions now find themselves working in retail positions or in the food service industry.  Many are hoping that the economy will "turn around" soon and that they will be able to go back to higher paying jobs, but the truth is that the U.S. economy is simply not producing enough good jobs for everyone any longer.

So where did all the good jobs go?  Well, millions of them have been shipped off to China, India and dozens of other nations around the globe.  Today the United States spends approximately $3.90 on Chinese goods for every $1 that China spends on goods from the United States.  A Chinese factory worker makes about a tenth of what an American factory worker makes.  And China continues to keep their currency artificially low so that jobs will continue to flow into China and so that we will continue to run a massive trade imbalance with them.

In a previous article, "Winners And Losers", I went into much greater detail about how globalism is destroying middle class jobs.  We are rapidly moving toward an America where there will be a small group of "haves" and a very large group of "have nots". 

The middle class in America is going to continue to shrink and shrink and shrink in the years ahead.  Not only are both parents going to have to work to pay the bills, but both parents in many families will be forced to take two or three jobs each just to make it each month.

US federal spending rises record 16% in 2009
by Michael A. Fletcher and Carol Morello - Washington Post

Federal domestic spending increased a record 16 percent to $3.2 trillion in 2009, the Census Bureau reported Tuesday, largely because of a boost in aid to the unemployed and the huge economic stimulus package enacted to rescue the sinking economy. The rise in spending was the largest since the Census Bureau began compiling the data in 1983. The Washington region was among the biggest beneficiaries of the government's spending.

With congressional elections looming this fall, the spike in federal spending has emerged as one of the nation's most contentious political issues. Many Republicans accuse President Obama and his Democratic allies of being reckless spenders who are harming the nation's long-term economic prospects by inflating the deficit. "The stimulus put the nation a trillion dollars further into debt, which was bad enough, but an additional concern is that there will be efforts to extend and make permanent many of the stimulus programs," said Chris Edwards, an economist at the Cato Institute, a right-leaning think tank.

Obama and many Democrats argue that the spending rescued an imploding economy while repositioning it for the future by dramatically expanding funding for education, green energy technology and job training. They also say that much of the increase in federal outlays went to struggling families through emergency health-care assistance, extended unemployment benefits and food stamp enhancements. "This is not anything that should be viewed as a problem," said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities. "It is a good thing that we have these programs when people are in need."

Overall, the largest chunk of federal spending - about 46 percent of the $3.2 trillion - went to Medicare, Medicaid and Social Security, entitlement programs that are projected to swell as the population ages. Pay for federal employees accounted for nearly $300 billion of the spending and nearly half of that went to the Defense Department payroll. The spending was a boon to the Washington area, the seat of government and home to many of its contractors.

Among the states, per capita spending averaged more than $10,000. But Virginia got almost $20,000 per resident, second only to Alaska. Maryland was the fourth highest at more than $16,000 for each resident, behind Hawaii. The District was in a class by itself. The Census Bureau calculated the per capita spending at more than $83,000. But that figure was greatly skewed by the concentration of federal agencies in the city.

Virginia was pushed to the forefront of federal spending by the high number of defense contractors and service members living in the state. It saw $67 billion in military spending, a large chunk of the $155 billion the federal government spent in the state in 2009. Only California, New York and Florida got more money overall. Much of the federal money went to private contractors. In Fairfax County, for instance, almost $40 billion of the $46 billion the federal government spent in the county went to contractors.

In Maryland, federal spending in fiscal 2009 rose 15 percent, to $92 billion. Maryland's ranking reflects in part a large number of residents who are federal employees. Montgomery County, for example, got $28 billion in federal funds, including $4.6 billion in salaries, almost $3 billion in retirement checks and $17.5 billion in government contracts for various vendors. Like many other jurisdictions around the country, state workforces in Maryland, Virginia and the District are all showing the effects of budget cuts.

According to the census, Virginia, with about 125,000 full- and part-time employees in 2009, added part-time workers last year but they worked fewer hours. Maryland stayed stable with about 89,000 workers, the census said, but many state employees last year took furloughs of five to 10 days. The District trimmed its full- and part-time workforce of about 44,500 by more than 3,000 people last year, according to the census. The three jurisdictions reported different figures because their employment rolls change weekly while the census captured a single point in time.

Other than the enactment of the $787 billion stimulus package last year, much of the increase in federal spending could be traced directly to the recession. Total obligations for two major welfare programs - Temporary Assistance for Needy Families and food stamps - reached $68 billion in 2009, a 32 percent increase over 2008. The federal government also spent $86 billion on unemployment compensation in 2009; persistently high joblessness has prompted a federal extension of benefits up to 73 weeks, on top of the 26 weeks in unemployment benefits offered by the states. That figure was more than double what the federal government spent on unemployment benefits the previous year.

Federal grants to states, local governments, nonprofit groups and other organizations accounted for nearly one-quarter - $744 billion - of federal outlays. The majority of that amount was funneled through the Department of Health and Human Services. HHS along with the departments of Education and Transportation accounted for nearly 80 percent of federal grant spending in 2009. The $3.2 trillion figure reported by the Census Bureau did not include interest paid on foreign debt. Nor does it include foreign aid, which traditionally accounts for about 1 percent of the federal budget. The bureau also released a companion report, Federal Aid to States: 2009, detailing the federal grants to state and local governments.

Daily foreign-exchange turnover hits $4 trillion
by William L. Watts - MarketWatch

Percentage share of the U.S. dollar has continued its slow decline

Daily turnover in the world's foreign-exchange markets has soared to $4 trillion, the Bank for International Settlements said Wednesday. In its survey, conducted every three years, the Basel, Switzerland-based BIS found that global turnover in April 2010 was up 20% from $3.3 trillion in April 2007. Spot transactions led the rise, increasing to $1.5 trillion a day in 2010 from $1 trillion in 2007. Other forex instruments saw turnover rise 7%, for an average daily turnover of $2.5 trillion.

Britain retained its title as the top player in the forex market, with British-based banks accounting for 36.7% of daily turnover, up from 34.6% in 2007. The United States followed with 18%, while Japan accounted for 6%. Rounding out the top players, Switzerland, Singapore and Hong Kong accounted for 5% each, while Australia-based banks accounted for 4%.

The percentage share of the U.S. dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging-market currencies increased, with the biggest gains for the Turkish lira and the Korean won.

The U.S. dollar had a share in 85% of all transactions, continuing a "slow retreat" from its 90% peak in 2001 just after the introduction of the euro, the BIS said. The euro gained two percentage points since the 2007 survey to account for 39% of all transactions. The Japanese yen also increased its market share by two percentage points to 19%, but remained below its 2001 peak of 23.5%.

The British pound accounted for around 13% of transactions, while the Swiss franc's share fell to 6.4% from 6.8% in 2007. The Australian dollar's share rose a percentage point to 7.6%, while the Canadian dollar's share also rose a percentage point to 5.3%. The biggest increase was seen by the Turkish lira, which saw its share rise to 0.7% from 0.2%, followed by the Korean won, which rose to 1.5% from 1.2%, the BIS said.

Turnover by currency pair was little changed from three years ago, with euro/U.S. dollar dominating transactions with a 28% share, while U.S. dollar/Japanese yen trade increased slightly to account for 14% of turnover, the survey found.

US initial jobless claims drop 6,000 to 472,000
by Jeffry Bartash - MarketWatch

The number of people applying for unemployment benefits fell by 6,000 to 472,000 in the week ended Aug. 28, but first-time claims remain at an elevated level, government data showed Thursday. After a brief surge earlier this year, numerous signs indicate the U.S. economy appears to have cooled off over the summer, stoking concerns about whether what's been a fragile recovery can be sustained. Jobless claims, for example, have risen 10% since early July.

Economists surveyed by MarketWatch had expected initial claims to total about 473,000 -- the same as the week before. Yet claims in the prior week were revised up by 5,000 to a total of 478,000, basically canceling out the latest decline. The four-week average of initial claims -- a better gauge of employment trends than the volatile week-to-week number -- declined 2,500 to 485,500, according to data released by the Labor Department.

Investors and lawmakers hope to get a finer-grained view of the labor market Friday when the government reports on employment and joblessness for August. The U.S. likely lost 105,000 nonfarm jobs -- mainly because temporary Census workers were let go -- with private employers probably adding a scant 30,000 workers, a MarketWatch survey shows. Absent a stronger jobs report, the unemployment rate is expected to remain near a 27-year high. It stood at 9.5% at the end of July. The U.S. needs to add nearly 150,000 jobs a month to reduce the jobless rate.

With so many people still out of work, the prospect of Democrats retaining control of both branches of Congress appears in doubt. The party in power typically gets blamed when the economy is weak. In a separate report Thursday, the Labor Department said the productivity of American businesses, excluding farms, fell a revised 1.8% in the second quarter, twice as much as originally reported.

More details
The number of jobless workers who continue to receive unemployment checks fell 23,000 to stand at 4.46 million in the week ended Aug. 21, the latest data available. The four-week moving average of continuing claims also dropped, down 28,500 to stand at 4.51 million -- the lowest level since December 2008. The federal government also offers extended benefits to workers in states hurt most by the recession. In the week ended Aug. 14, the number of people getting extended benefits sank by nearly 320,000 to about 5.44 million. The figures are not seasonally adjusted.

Extended benefits of up to 99 weeks are offered to workers after they use up eligibility for state unemployment compensation. In most states, benefits last for six months. Altogether, 9.7 million people were collecting some type of unemployment benefits in the week ended Aug. 7, compared with 10.1 million in the last week of July.

Toyota, GM, Ford U.S. Sales Drop 21% To Worst August In 28 Years
by Keith Naughton and Tim Higgins

Toyota Motor Corp., General Motors Co. and Ford Motor Co., the three largest sellers of autos in the U.S., reported bigger sales declines than analysts projected as the industry posted its worst August in 28 years. GM said deliveries fell 25 percent to 185,176 from 246,479 last August, when the U.S. government’s "cash for clunkers" incentive program boosted sales. The biggest U.S. automaker was expected to report a 19 percent decrease, including an adjustment for the number of selling days in August, the average estimate of four analysts surveyed by Bloomberg.

On that basis, sales fell 22 percent, Detroit-based GM said in a statement. U.S. auto sales last month were the slowest for an August in 28 years as model-year closeout deals failed to entice consumers concerned about the economy and their jobs. Deliveries industrywide ran at an annual rate of 11.5 million vehicles last month, according to researcher Autodata Corp., based in Woodcliff Lake, New Jersey. That was below the 11.6 million average of eight analysts’ estimates compiled by Bloomberg and last year’s 14.2 million pace.

"Consumers are being very cautious about where they spend their money,"Emily Kolinski Morris, Ford senior economist, said on a conference call. "On big-ticket items, they’re undertaking those very carefully." Toyota, the world’s largest automaker, reported a 34 percent drop in its sales of Toyota, Lexus and Scion brand autos. The company sold 148,388 vehicles last month, down from 225,088 a year ago. Adjusted to match analysts’ estimates, sales fell 31 percent, exceeding the 29 percent decline predicted by the average of four analysts’ estimates.

Ford Decline
Ford sales fell 11 percent to 157,503 from 176,323 a year earlier for the Dearborn, Michigan-based automaker’s three main brands. On a daily selling rate basis, sales declined 7.1 percent, more than the expected 5.2 percent decline, the average of six analysts’ estimates. Including August 2009 sales by Volvo, which Ford sold for $1.5 billion last month to Zhejiang Geely Holding Co., sales fell 13 percent. Ford rose 33 cents, or 2.9 percent, to $11.61 at 4:15 p.m. in New York Stock Exchange composite trading.

The shares have gained 16 percent this year. Ford said its car sales fell 14 percent and deliveries of sport-utility vehicles declined 26 percent, while sales of other trucks and vans rose 5 percent in August. Sales of the Focus small car fell 40 percent, while the Escape small SUV dropped 29 percent. Those two models were strong sellers in last year’s "cash for clunkers" program, Ford said. Ford said it plans to build 570,000 cars and trucks in the fourth quarter, down from 574,000 it built in the final three months of 2009.

Chrysler Gained
One exception was Chrysler Group LLC, which saw sales rise more than expected. Chrysler sales rose 7 percent to 99,611 compared to last August, the company said. It’s the Auburn Hills, Michigan-based automaker’s fifth-straight month of year-over-year sales increases. "We have beaten or matched the average industry sales increase for the fifth consecutive month," Fred Diaz, Chrysler’s lead executive for U.S. sales, said in a statement. "We are accomplishing our goals." 

On an adjusted basis, Chrysler sales rose 11 percent, exceeding the 3 percent average of six analysts’ estimates. Sales of the Jeep, Dodge and Ram vehicles increased last month, while Chrysler brand sales slipped 4 percent. Chrysler’s results are distorted by sales to rental-car companies, businesses and governments, also known as fleet sales, said Paul Ballew, chief economist for Nationwide Mutual Insurance Co. in Columbus, Ohio, in a telephone interview.

‘Propped Up’
"They have been propped up by fleet for a long time and certainly this year they’ve been really, really propped by fleet," he said. "You can make money on fleet. Chrysler’s problem is that they are overly dependent on fleet." Sales of GM’s volume brand, Chevrolet, sales fell 22 percent, as Camaro sports-car deliveries tumbled 27 percent and Traverse sport-utility vehicle sales plunged 32 percent. Its other three U.S. brands showed better results than they did last year.

Cadillac gained 83 percent, Buick increased 66 percent and GMC gained 12 percent. The automaker closed or sold four brands since its bankruptcy last year. GM executives expect a slow recovery in the economy and in auto sales, saidDon Johnson, GM vice president of U.S. sales operations. He said sales rates will pick up only modestly through the end of the year. He said that GM will not respond to the slow recovery with incentive deals.

‘Bumpy’ Road
"We know it’s going to continue to be bumpy," Johnson said on a conference call today. "We’re not panicking. We don’t want to get back to putting incentives into the marketplace to keep plants going." GM had 16.5 percent of the U.S. retail market in August, Johnson said. This compares with the company’s total share of 18.6 percent for the month, reflecting gains from fleet sales.

Johnson said he expects GM’s retail share to rise in the second half as the company begins selling new models like the compact Chevrolet Cruze, Buick Regal sedan and redesigned heavy-duty versions of its large pickups. "We definitely are forecasting our share of the retail market to rise," Johnson said. Dan Akerson replaced Ed Whitacre as the company’s chief executive officer today. Akerson, who will become chairman by year-end, is GM’s fourth CEO in 18 months.

Retail Decline
While automakers increased discounts by 1 percent from July to an average $2,864 per vehicle, sales to individuals probably fell 7 percent in August from the previous month, according to researcher, based in Santa Monica, California. Consumers are avoiding showrooms as fear of a double-dip recession grows following the 27 percent plunge in existing home sales in July, said Jesse Toprak, vice president of industry trends at The U.S.unemployment rate in July held at 9.5 percent, near a 26-year high of 10.1 percent.

The Conference Board reported yesterday that consumer sentimentrose to 53.5 last month from a five-month low of 51 in July. Fewer Americans said jobs were plentiful in August. "Home sales are way down, the stock market is way down, the unemployment report is very disappointing and consumer confidence is sputtering," Toprak said. "People just don’t want to make big-ticket purchases because they’re uncertain about their jobs and the value of their homes."

Fleet Boost
Fleets may have accounted for 20 percent of the industry’s August deliveries, up from 15 percent in July, Credit Suisse Group AG auto analyst Chris Cerasowrote in an Aug. 26 report. Such sales, especially to rental-car companies, have helped prop up the market as individual customers stay away, said Sophia Koropeckyj, managing director of Moody’s Analytics. "Consumers are still under a considerable amount of strain and they do not have much appetite or ability to purchase new vehicles," said Koropeckyj, who is based in West Chester, Pennsylvania. 

Compared with a year earlier, GM reduced its incentives and sold vehicles for an average of $5,600 more, Johnson said. That doesn’t match with TrueCar’s analysis, which found that GM increased sales discounts 18 percent to $3,763 per vehicle in August, and Ford boosted discounts by 25 percent to $3,008 per vehicle. Sales by Japanese automakers, which benefited most from the "cash for clunkers" program, were expected to fall more than the overall market, analysts said.

Honda Sales
Honda Motor Co., the second-biggest Japanese automaker, sold 108,729 Honda and Acura brand vehicles, down 33 percent from a year ago, according to an e-mailed release from the company. Adjusting for one less sales day in the month, Honda’s sales fell 30 percent, compared with a decline of 27 percent, predicted by the average of four analysts’ estimates. Nissan Motor Co.’s sales of Nissan and Infiniti vehicles fell 27 percent in August. Adjusting to match analysts’ estimates, sales tumbled 24 percent, matching the average of four estimates. Hyundai Motor Co., South Korea’s largest automaker, reported an 11 percent drop in its U.S. sales in August.

Banks Playing 'Foreclosure Roulette' With Delinquent Homeowners
by Arthur Delaney - Huffington Post

Bea Garwood has been bracing for foreclosure since May, but she says she's been told three times to expect a sheriff's sale in the next month and it still hasn't happened. "We really at this point do not know where we are in the process," said Garwood, who lives in Pinckney, Mich. with her husband. "We have no clue. We haven't even heard from Chase bank in three weeks." The Garwoods may have had a lucky spin in the game that industry analyst Sean O'Toole calls "Foreclosure Roulette."

Banks don't want to recognize losses by having to put homes on the market at foreclosure-sale prices, but they don't want to encourage borrowers to quit making payments either, so, O'Toole believes, they randomly foreclose on some people to prevent widespread "moral hazard." The rest are left hanging with the help of the government's "extend and pretend" approach to the collapse of the housing bubble. "We just don't have the political appetite to bail homeowners out," said O'Toole, CEO of "On the other hand, we don't have the political appetite to kick them out."

Last year the Garwoods tried to modify the mortgage on their Pinckney, Mich. home under the Obama administration's Home Affordable Modification Program, which is supposed to put eligible borrowers into a three-month trial period before making the modification "permanent" for five years. The Garwoods' trial period dragged on for nine months before they received a letter of rejection in March. They've been waiting anxiously since then for the day they will finally lose their house. It may be a while. The average foreclosure now takes 469 days, according to Lender Processing Services, whereas it took 319 days at the beginning of 2009. Many industry analysts say that is due to the Troubled Asset Relief Program, HAMP, and federal accounting-rule changes.

"We weakened accounting standards to allow banks to keep non-paying mortgages in their books at full value," wrote economist Dean Baker, co-director of the progressive Center for Economic and Policy Research. "Banks also know that they are looking at glutted markets right now, so they have little incentive to take possession of a home and then try to sell it. And, the HAMP and other programs mostly delay foreclosures and hand money to banks, instead of keeping people in their homes."

American Banker reported last week that the procrastination on foreclosures could backfire: "With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults."

Of the 1.5 million trial offers made by servicers participating in HAMP, 616,839 have resulted in cancellations, while only 434,716 have resulted in permanent modifications, according to government data released in August. But Treasury officials have said even if a person isn't able to stay in his or her home, HAMP is a success if assists that person in "transitioning with dignity to more suitable housing."

Borrowers rejected from HAMP are sometimes confused, as the Garwoods are, about the reason for their rejection. (Chase has declined to comment on the Garwoods' situation.) "There's still a lot of uncertainty about why certain homeowners are receiving help in HAMP and others are not," said Diane Standaert, legislative counsel with the Center for Responsible Lending. Standaert said policymakers should consider allowing bankruptcy judges to write down mortgage principal (a process sometimes known as "cramdown"). "I think this new game of casino that lenders and servicers are playing with not going to cut it."

Fears for British house prices as mortgage lending hits new low
by Philip Aldrick - Telegraph

Mortgage lending fell to a four-month low in July, according to the Bank of England, fuelling fears that tight credit conditions may hamper future growth. Despite a small rise in the number of mortgages approved and an unexpected rise in consumer confidence, economists said it was not enough to stop continued housing market weakness, with knock-on effects for consumer spending. Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: "This morning's figures provide further confirmation that the housing market is heading for a double dip, with net mortgage lending pretty much flat and the number of mortgage approvals remaining very low."

Net mortgage lending fell to £86m in July from £518m in June – well below the £700m economists had expected. There was an unexpected rise in the number of mortgages approved, a leading indicator for housing market activity, of 160 to 48,722. But it remains less than half boom-time levels and nearly 20pc below a 21-month peak reached in November. A relative bright spot was unsecured lending to consumers, which rose by £173m against forecasts of it remaining unchanged, which followed a surprise strengthening in the monthly GfK/NOP consumer confidence data.

The increase was not enough to offset the larger-than-expected decline in net mortgage lending and pushed total net lending for July down to £258m from £460m, its lowest since March. Separate figures showed the BoE's preferred money supply gauge was unchanged on the month. While aggregate monthly M4 growth was up 0.4 percent, its strongest reading since October last year, annual M4 growth slowed further to 2.3pc, its weakest since the data series started in July 1983.

The Deteriorating Macro Picture
by The Pragmatic Capitalist

Over the course of the last 18 months I’ve been adhering to a macro view that can best be summed up as follows:

1) The explosion in private sector debt (excessive housing borrowing, excessive corporate debt, etc) levels would reveal the private sector as unable to sustain positive economic growth, de-leveraging and deflation would ensue.

2) Government intervention would help moderately boost aggregate demand, improve bank balance sheets, improve sentiment, boost asset prices but fail to result in sustained economic recovery as private sector balance sheet recession persists.

3)  Extremely depressed estimates and corporate cost cutting would improve margins and generate a moderate earnings rebound, but would come under pressure in 2010 as margin expansion failed to continue at the 2009 rate.

4)  The end of government intervention in H2 2010 will reveal severe strains in housing and will reveal the private sector as still very weak and unable to sustain economic growth on its own.

The rebound in assets was surprisingly strong and the ability of corporations to sustain bottom line growth has been truly impressive – far better than I expected.  However, I am growing increasingly concerned that the market has priced in overly optimistic earnings sustainability – in other words, estimates and expectations have overshot to the upside.

What we’ve seen over the last few years is not terribly complex in my opinion.  The housing boom created what was in essence a massively leveraged household sector.  The problems were compounded by the leveraging in the financial sector, however, this was merely a symptom of the real underlying problem and not the cause of the financial crisis (despite what Mr. Bernanke continues to say and do to fix the economy).

As the consumer balance sheet imploded the economy imploded with it.  This shocked aggregate demand like we haven’t seen in nearly a century. This resulted in collapsing corporate revenues.  The decrease in corporate revenues, due to this decline in aggregate demand, resulted in massive cost cutting and defensive posturing by corporations.  This exacerbated the problems as job losses further weakened the consumer balance sheet position.  Consumers, like, corporations, got defensive and began cutting expenses and paying down liabilities.  Sentiment collapsed and we all know what unfolded in 2008.

The government responded by largely targeting the banking sector based on the belief that fixing the banks would fix Main Street.  Accounting rules were altered, bank balance sheets were altered and the banking recovery ensued.  The government stimulus package bolstered the economy in several ways.  Most importantly, it brought some confidence to the economy.  In addition, the Recovery Act helped bolster aggregate demand as government spending helped offset some of the reduced spending power of the private sector.  The Fed’s actions helped bolster bank balance sheets, but has done almost nothing to help Main Street.  Most notably, government intervention has failed to target the actual cause of the crisis – the crisis in the Main Street balance sheet.

That’s the 30,000 foot view of what we’ve been through up until now.  What’s disconcerting about the current environment is that the tide is going out and as I expected the private sector is swimming nude.  In other words, the private sector remains mired in a balance sheet recession that has resulted in abnormally low levels of aggregate demand and therefore weak corporate revenues.  Sustainable corporate expansion is the missing piece of the recovery puzzle.  The government has largely papered over this weakness by crediting private sector bank accounts and foolishly propping up the wrong sectors of the economy (auto sales via cash for clunkers, housing via homebuyers tax credits and banks via bank bailouts).  As the stimulus ends the private sector is being revealed for what it has been this entire time – abnormally sluggish.

The outlook going forward remains increasingly fragile in my opinion.  As I mentioned in March and last week the private sector is in no condition to sustain recovery.  The debt levels simply remain too high.  There remains a substantial gap between income and liabilities and the household financial obligation ratio therefore remains higher than at any point in the last 25 years:



What makes the current environment particularly alarming is the increasing divergence between the macro outlook and the earnings picture.  The market has remained relatively robust in recent months despite an onslaught of negative news, however, any signs of weakness in corporate earnings will likely change that.  The corporate earnings picture is looking increasingly precarious.

Over the last 18 months we have seen a moderate recovery in corporate revenues as government spending picked up the slack and confidence surged from the lows.   As the government stimulus ends the modest revenue recovery is at risk of running into a wall.  More alarming is the likelihood of a stall in corporate profit margins.


Unit labor costs have fallen dramatically in the last 18 months as companies have reduced their largest expenditure.  This has resulted in stronger than expected earnings.  As the government based recovery unfolded corporations have slowly begun to hire or at least stop firing workers.  Unit labor costs have begun to rise modestly as a result.


This leaves the equity markets in a precarious situation.  The macro outlook appears to be deteriorating in recent months, however, the private sector is in no place to maintain the necessary level of aggregate demand that can sustain the recovery in corporate revenues.  With revenues likely to slow and margin expansion likely peaking there is increasing risk of further defensive posturing from corporations.  If the macro outlook deteriorates further (none of this even considers the very serious exogenous risks from China and Europe)  the private sector balance sheet will further deteriorate as layoffs ensue.   Assuming no further government intervention the balance sheet recession is likely to persist well into 2011.  If the divergence in earnings materializes equity markets will remain under pressure.  If an exogenous event shocks the markets (Eurozone sovereign debt concerns for example) the equity markets could deteriorate substantially.

Bank Profits Soar, Lending Falls As Banks Pay Next To Nothing For Funds
by Shahien Nasiripour - Huffington Post

Bank profits jumped 21 percent last quarter to nearly $22 billion, the highest level in three years, as banks put away less money to cover future losses, fewer borrowers fell behind on payments and lenders paid the least for their funds in perhaps 50 years, a government report released Tuesday shows. Lending also dropped by about $96 billion, or 1.3 percent, as borrowers continue to remain skittish about the "slow recovery," Federal Deposit Insurance Corporation Chairman Sheila Bair told reporters Tuesday in Washington. "Consumers and businesses need to have confidence in the recovery before they will start making decisions on credit," Bair said, according to a transcript of her remarks.

Meanwhile, despite the sector's high profits, challenges remain: home prices are forecast to decline into next year while lenders continue to repossess homes at record rates; the commercial real estate market has yet to hit its nadir; community banks continue to fail; and the number of lenders on the FDIC's confidential "Problem List" continues to grow. Nearly 830 banks are on the list, up from 775 at the end of March, the FDIC's quarterly report shows.

"Without question, the industry still faces challenges," Bair said in a statement. "Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength... most asset quality indicators are moving in the right direction." It also helps that banks' cost of funds -- the money they pay to garner deposits and other funds that are then used to lend, invest or trade -- dropped to the lowest rate in 26 years of FDIC quarterly records. Banks paid 0.97 percent in interest for their funds, the first time they've paid less than one percent during a quarter since at least 1984, FDIC documents show.

Historical records on commercial banks' cost of funds going back to the inception of the agency in 1934 show that the last time banks paid less than one percent for the year was 1960. With the main interest rate effectively at 0.19 percent, savers suffer in a low interest-rate environment as banks pay less to attract deposits. The Federal Reserve's policy-making body, the Federal Open Market Committee, has kept the rate at which banks lend to each other for overnight funds between 0 and 0.25 percent since December 2008.

Elsewhere in the FDIC report, the agency noted that two of every three banks reported higher profits compared to last year as firms put away the least amount of money to cover losses since the January-March period of 2008. Money socked away for a rainy day would otherwise be recorded as profit. Though nearly two of every three banks increased their reserves for potential future losses, large banks cut theirs. Banks put away $40 billion, 40 percent less than during the same period last year, to cover future losses. Those with more than $10 billion in assets recorded $19.9 billion of the industry's $21.6 billion of profit, or more than 92 percent.

Also, lenders wrote off $49 billion in uncollectible loans, a small decline from a year earlier and the first year-over-year decline since 2006. Loan losses are stabilizing, the agency said. Commercial real estate loan charge-offs, though, saw an increase. Loans delinquent for at least 90 days but not yet written off also declined for the first time in four years, though they increased for banks with less than $1 billion in assets, the agency said.

Loan balances continued their decline, led by real estate construction and development lending which dropped more than eight percent from last quarter, according to the FDIC. Loans to small businesses and farms dropped almost two percent, or more than $13 billion. Loans to large businesses, meanwhile, dropped just 0.4 percent. Bair noted that community banks "slightly" increased their lending -- "to their credit," she added.

U.S. mortgage rates hit record low
by Julie Haviv - Reuters

U.S. mortgage rates fell in the past week to the latest in a series of record lows as yields on government debt dropped, according to a survey released on Thursday by Freddie Mac, the second-largest U.S. mortgage finance company. Rock-bottom rates offer a glimmer of hope for a housing market that has failed to find footing in the aftermath of the expiration of popular home buyer tax credits.

Interest rates on U.S. 30-year fixed-rate mortgages, the most widely used loan, averaged 4.32 percent for the week ended Sept. 2, down from the previous week's 4.36 percent and its year-ago level of 5.08 percent, according to the survey. Thirty-year mortgage rates have fallen to fresh lows for 10 out of the past 11 weeks. Freddie Mac started the survey in April 1971.

Meanwhile, 15-year fixed-rate mortgages averaged 3.83 percent, down from 3.86 percent last week, the lowest since Freddie Mac began surveying this loan type in 1991. Fifteen-year mortgage rates have fallen to fresh lows for eight out of the past 11 weeks. "The 12-month price growth of core personal expenditures remained at 1.4 percent in July, which kept overall inflation expectations well at bay," Amy Crews Cutts, Freddie Mac deputy chief economist, said in a statement.

Federal Reserve Chairman Ben Bernanke reiterated this in an Aug. 27 speech in Jackson Hole, Wyoming, saying that with inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly, she said. "As a result, mortgage rates eased further this week to new historic lows," she said. Mortgage rates are linked to yields on Treasuries and yields on mortgage-backed securities.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months. Home sales have tumbled in recent months and home prices are expected to trek downward again due to a glut of homes for sale and mounting foreclosures.

The lowest mortgage rates in decades, however, may finally be making an impact on home sales. The National Association of Realtors said on Thursday its Pending Home Sales Index for July rose 5.2 percent. Diane Saatchi, senior vice president at Saunders & Associates in Bridgehampton, New York, said home purchase demand nevertheless remains muted.

"Low interest rates, large inventory and many eager sellers should create a positive climate for sales, yet there is still buyer resistance," she said. Potential home buyers may be waiting for even lower real estate prices, she said. "As we do not know it is the bottom until we move up from it, my guess is we will not see activity until sale prices and interest rates begin to rise," she said.

Rock-bottom rates should also continue to spur demand for home loan refinancing, putting extra cash into consumers' hands that they can save, use to pay off existing debt or funnel into the economy through extra spending. By lowering monthly mortgage payments, lower rates may also help some homeowners avoid default and foreclosure if their credit is good enough. The Mortgage Bankers Association said on Wednesday U.S. mortgage applications for home purchasing and refinancing increased last week.

Freddie Mac said rates on 5/1 ARMs, set at a fixed rate for five years and adjustable in each following year, was 3.54 percent, down from 3.56 percent last week, reaching the lowest level since Freddie Mac began tracking this loan type in 2005. One-year adjustable-rate mortgages (ARMs) were 3.50 percent, down from 3.52 percent last week. A year ago, 15-year mortgages averaged 4.54 percent, the one-year ARM was 4.62 percent and the 5/1 ARM 4.59 percent.

Looking for home sales to increase? Don't hold your breath
by E. Scott Reckard - LA Times

Last week's news that July home sales were in the tank sent the Dow Jones industrial average below the 10,000 benchmark over worries the economy is heading toward the second plunge of a double-dip recession. Don't expect the sales numbers to improve for August and September, a mortgage trade group said Wednesday.

In its weekly report on home-loan demand, the Mortgage Bankers Assn. said it tallied 37% fewer applications last week for loans to purchase housing than it had a year earlier. The purchase applications were down 0.4% from the previous week, although the MBA said that after adjusting for seasonal factors they were up by 1.8%.  No matter how finely you slice the data, demand for home-purchase loans is sluggish, especially since interest rates continue to set record lows.

The MBA said the average contract rate for 30-year fixed mortgages with 20% down payments fell to 4.43% from 4.55% last week. (Borrowers may have been spending more to "buy down" their rates; upfront payments to lenders, including origination fees, increased from an average 0.89% of the loan amount to 1.34%.)

Michael Fratantoni, MBA's vice president of research and economics, said the housing market remains "exceptionally weak." His quote from the news release Wednesday: "The sharp decline in MBA's Purchase Application index in May had provided a clear leading indicator of the drops in new and existing home sales that were reported for June and July.  Despite the slight increase in purchase activity in the past week, the continued low level of purchase applications indicates we are unlikely to see an increase in new home sales reported for August or existing home sales reported for September."

The bright spot in the picture continues to be refinancings as homeowners seek to lower their rates and payments. An MBA refinance index increased 2.8% from the previous week, reaching its highest level since May 1, 2009.

Youth Unemployment Hit A Record High This Summer
by Nathaniel Cahners Hindman - Huffington Post

Experienced professionals aren't the only workers struggling to find jobs. In July, 51.1 percent of Americans between the ages of 16 and 24 years old were unemployed, according to new data from the U.S. Bureau of Labor Statistics (BLS). This marks the first time since 1948, when the government first started collecting this data, that less than half of all U.S. youth were employed in July.

Each year from April to July, the youth labor force grows sharply as high school and college students -- and recent graduates -- search for summer jobs. This summer, the youth labor force grew by 2.4 million to a total of 22.9 million in July, which is typically the summertime peak for youth employment, while the number of youths employed grew 1.8 million to 18.6 million, according to the BLS.

Though the increase in youth employment was slightly larger than last year's increase of 1.6 million, the percentage of the total youth population that was employed in July dropped 2.5 percentage points to 48.9 percent. This percentage has dropped by about 20 percentage points since its peak in July 1989. And, as the Wall Street Journal notes, rampant youth unemployment is not just an American problem.

Among major demographic groups in the U.S., the jobless rates for young men (20.5 percent), young African-Americans (33.4 percent), and young Asian-Americans (21.6 percent) continued to rise from a year earlier. The unemployment rates for young women (17.5 percent), young whites (16.2 percent), and young Hispanics (22.1 percent) hardly changed, the BLS reports.

Why a Civil Society Extends Unemployment Benefits
by Robert Reich

I have the questionable distinction of appearing on Larry Kudlow's CNBC program several times a week, arguing with people whose positions under normal circumstances would get no serious attention, and defending policies I would have thought so clearly and obviously defensible they should need no justification. But we are living through strange times. The economy is so bad that the social fabric is coming undone, and what used to be merely weird economic theories have become debatable public policies.

Tonight it was Harvard Professor Robert Barro, who opined in today's Wall Street Journal that America's high rate of long-term unemployment is the consequence rather than the cause of today's extended unemployment insurance benefits. In theory, Barro is correct. If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing. But that's hardly a reason to jettison unemployment benefits or turn our backs on millions of Americans who through no fault of their own remain jobless in the worst economy since the Great Depression.

Yet moral hazard lurks in every conservative brain. It's also true that if we got rid of lifeguards and let more swimmers drown, fewer people would venture into the water. And if we got rid of fire departments and more houses burnt to the ground, fewer people would use stoves. A civil society is not based on the principle of tough love. In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared.

Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in full-time jobs for at least three to five years. This often rules out a majority of those who are jobless -- because they've moved from job to job, or have held a number of part-time jobs. So it's hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.

Anyone who bothered to step into the real world would see the absurdity of Barro's position. Right now, there are roughly five applicants for every job opening in America. If the job requires relatively few skills, hundreds of applicants line up for it. The Bureau of Labor Statistics says 15 percent of people without college degrees are jobless today; that's not counting large numbers too discouraged even to look for work.

Barro argues the rate of unemployment in this Great Jobs Recession is comparable to what it was in the 1981-82 recession, but the rate of long-term unemployed then was nowhere as high as it is now. He concludes this is because unemployment benefits didn't last nearly as long in 1981 and 82 as it they do now.

He fails to see -- or disclose -- that the '81-'82 recession was far more benign than this one, and over far sooner. It was caused by Paul Volcker and the Fed yanking up interest rates to break the back of inflation -- and overshooting. When they pulled interest rates down again, the economy shot back to life.

The Great Jobs Recession is far more severe. It's continuing far longer. It was caused by the bursting of a giant housing bubble, abetted by the excesses of Wall Street. Home values are still 20 to 30 percent below where they were in 1997. The Fed is powerless because consumers cannot and will not buy enough to bring the economy back to life.

A record number of Americans is unemployed for a record length of time. This is a national tragedy. It is to the nation's credit that many are receiving unemployment benefits. This is good not only for them and their families but also for the economy as a whole, because it allows them to spend and thereby keep others in jobs. That a noted professor would argue against this is obscene.

Illegal Immigration to U.S. Slows Sharply
by Miriam Jordan - WSJ

Illegal immigration to the U.S. has slowed sharply since 2007, with the bleak U.S. job market apparently discouraging people from heading north. The influx of illegal immigrants plunged to an estimated 300,000 annually between March 2007 and 2009, from 850,000 a year between March 2000 and March 2005, according to new study released Wednesday by the Pew Hispanic Center, a nonpartisan research group. The decline contributed to a contraction in the overall size of the undocumented population to 11 million people in March 2009 from a peak of 12 million two years earlier, according to the Pew analysis, which is based on data from the Census Bureau.

All told, illegal immigrants in 2009 represented 28% of the foreign-born population in the U.S. Nearly half of them arrived since 2000, according to Pew. The latest findings come as the first of hundreds of National Guardsmen began arriving in Arizona this week following authorization from the Obama administration. And Homeland Security Secretary Janet Napolitano announced Monday that the number of drones flying surveillance on the southern border would double by Jan. 1. The increased security has driven up the cost of border crossings, contributing to the drop in illegal entries. 

The Pew study found that the flow of Mexicans, who represent 60% of all illegal immigrants in the U.S., plummeted to 150,000 annually during the 2007-2009 period, compared with the annual average of 500,000 during the first half of the decade. "Not only do we see flows down; it's a steady downward trend in the last four years," said the lead study author, said Pew demographer Jeffrey Passel. Mr. Passel, who previously worked at the Census Bureau, said the methodology he developed for calculating the illegal immigrant population is now used by the Department of Homeland Security.

He arrived at his estimates using data on the foreign-born population in the Census's Current Population Survey and statistics from DHS on the number of legal immigrants admitted to the country. The mortgage crisis and ensuing economic slump have slashed jobs in construction, tourism and other sectors that are the mainstay for low-skilled Latin Americans. Immigrants already in the U.S. are struggling, and word of their hardship is dissuading those back home from flocking to the U.S.

"People don't want to come now; they know the economy is bad," said Braulio Gonzalez from Guatemala, who has been scraping by as a day laborer outside Los Angeles.

The decrease in the flow of illegal immigrants reported by Pew is supported by new studies from Wayne Cornelius, co-director of the migration research center at the University of California, San Diego. In 2009, the center found that potential migrants in Mexico were "two times less likely" to plan a move to the U.S. than in the pre-recession year of 2006. Among those already in the U.S., more than half said they had experienced a cut in work hours, according to the field research. Ms. Napolitano noted earlier this week that Washington has dedicated unprecedented manpower and technology to combat illegal immigration. As a result, she said, the influx of undocumented immigrants was falling. 

Mr. Cornelius and others experts say the business cycle, not tighter border security, has played the biggest role in the drop in illegal entrants.  "The intensity of U.S. border enforcement has continued to increase during the recession, but only gradually," said Mr. Cornelius. "What has changed drastically is the demand for Mexican labor in the U.S. economy." Mr. Cornelius's research team found no evidence that border fortifications were keeping illegal migrants out of the U.S.: More than nine out of 10 succeed at sneaking into the country eventually, he said. 

However, border enforcement has created greater demand for "coyotes," people who smuggle illegal immigrants across the border and transport them to a U.S. destination. Coyote fees have increased in tandem with bolstered enforcement. Mexicans currently pay about $3,000 to cross the U.S.-Mexico border, compared with $700 in the early 1990s. The cost for immigrants from Central and South America can top $10,000, which they usually pay in installments after getting jobs in the U.S.

"Because the return on their investment to gain access to the U.S. labor market now looks much less certain, many potential migrants are postponing journeys until the economy grows again," said Mr. Cornelius. Illegal immigrants represented 5% of the U.S. labor force last year, according to Pew. States where the housing market has been hardest hit saw the steepest decreases in their undocumented population. The South Atlantic region, stretching from Delaware to Florida, showed significant drops. These states have been deemed new magnets for illegal immigrants, who began to bypass traditional gateway states in the 1990s, such as California and Texas, in search of opportunity further East. 

In 2009, California, Texas, Florida, New York, Illinois and New Jersey were home to 59% of the undocumented immigrants in the country, compared with 66% in 2000. There has been no net growth in the undocumented population in California for five years, according to Pew. President Barack Obama has asked Congress to send him legislation to create a pathway to citizenship for many illegal immigrants, as well as to further secure borders. Congressional Democrats had talked about moving forward earlier this year, but there has been no movement and the matter is widely considered dead for now.

SEC Probes Role of Canceled Trades in Flash Crash
by Tom Lauricella And Jenny Strasburg - Wall Street Journal

Regulators Looking Into Role 'Quote Stuffing' Played

Regulators are scrutinizing what some in the stock market are calling "quote stuffing," trading in which unusually large numbers of orders to buy or sell stocks are placed in a fraction of a second, only to be canceled almost immediately.

The Securities and Exchange Commission has begun looking into whether the practice is putting some investors at a disadvantage by distorting stock prices, according to people familiar with the matter. The SEC is looking at what role, if any, quote stuffing played in the May 6 "flash crash," when the Dow Jones Industrial Average collapsed 700 points in minutes, the people say.

Traders say the phenomenon of huge bursts of orders flooding stocks and then getting canceled has risen with the growth of high-speed computerized trading in recent years.

In addition, the SEC is looking into another practice in which large numbers of orders are placed. In these cases, what's unusual is that the orders are priced in increments as small as one-tenth of a cent and far away from the actual price at which a stock is trading, says a person familiar with the line of inquiry.

The SEC is seeking to learn whether such orders, known as "sub-penny pricing," are used to manipulate the market, this person says, which would be illegal. At issue is whether the practice could artificially torpedo stocks' prices or help make it appear that there is more trading volume in a stock than there really is, allowing sellers to profit when demand for the stock appears elevated. The agency has identified about half a dozen investment firms to question regarding "sub-penny" orders, this person says, and the inquiry is expected to take months to complete. The firms identified aren't necessarily suspected of wrongdoing, and it is unclear whether there will be a formal investigation. An SEC spokesman declined to comment on the inquiry.

These issues are among the latest to have emerged as stock trading has become dominated by super-fast computer systems used by hedge funds. At the same time, the once-clubby world of a handful of stock exchanges has evolved into many more decentralized, loosely connected, high-speed electronic trading networks.

The transformation of the stock market has some benefits for investors, of course, including some lower costs. And some say greater volume of canceled orders is a natural consequence of high-speed markets, where traders constantly troll across exchanges for the best price.


But the risks of high-speed crashes became clear during the so-called flash crash. And as the questions being asked about quote-stuffing suggest, the combination of powerful computers and fragmented stock markets may have opened the door to new trading tactics that regulators are finding hard to track and police.

Issues surrounding canceled orders have gained exposure in recent weeks since Nanex LLC, a stock-data provider, published data showing large swaths of canceled orders on May 6 and also identified other examples taking place before and since.

For example, on Aug. 17, from the start of stock trading at 9:30 a.m. until just after 9:51, there were, on average, 38 orders every second to buy or sell shares of Abbott Labs through the New York Stock Exchange, according to Nanex.

Then, in the span of one second, 10,704 orders hit Abbott and in the next second, another 5,483. And all but 14 of those combined orders were canceled within one second, according to data from Nanex.

On Wednesday, "quote stuffing" appeared to have played a role in bogging down trading of one of the most widely traded stocks, the SPDR S&P 500 exchange traded fund, according to Nanex.

"There are dozens, sometimes hundreds of these occurring every day," says Eric Hunsader, one of the founders of Nanex, who theorizes that distortions caused by "quote stuffing" were so large on May 6 that they helped destabilize the market.

Nanex has shared data with regulators. SEC officials have held conference calls to discuss Nanex data and theories, say people familiar with the matter. Issues related to high-volume cancellations could be part of the agency's report on causes of the flash crash, say people close to the matter. The report is expected to be released within the next month.

Nasdaq OMX executives have discussed cancellation volumes as part of overall transaction-monitoring, in part because canceled orders take up computer power and therefore cost money, say people familiar with the matter.

During the past year, Nasdaq officials have examined whether the exchange should charge customers for "excessive cancellations," one person says. But in an electronic trading world, it's difficult to draw the line between orders canceled in the normal course of business and excessive cancellations, let alone orders placed and canceled for potentially improper reasons, the person says.

Some in the market suspect the flood of orders is the result of high-frequency traders attempting to profit from tiny discrepancies in stock prices. They say waves of orders slow down electronic stock-trading networks or otherwise distort stock prices, creating profit opportunity to buy or sell at artificially high or low prices.

Others say the canceled orders are above board, reflecting either legitimate behavior by traders in search of profitable trades, basic market-making, where broker-dealers constantly provide quotes for potential trades and then cancel, or computer programs gone awry.

One thing is clear, say traders and regulators: An eye-popping number of the stock quotes entered in the U.S. market's exchange system are canceled.

For example, on Feb. 18, trading volume on the Nasdaq exchange totaled about 1.247 billion shares, according to data compiled by T3 Capital Management, a New York hedge fund. However, over the course of the same day traders submitted offers to buy or sell stock for roughly 89.704 billion shares. In other words, only 1% of the orders posted on Nasdaq actually traded.

While a portion of cancellations are part of the natural course of trading, Sean Hendelman, chief executive officer at T3, says he believes most of these canceled stock quotes are from traders loading up a stock's computerized order book with essentially fake bids and offers.

Mr. Hendelman, whose firm employs other high-frequency trading tactics, says the practice creates an inaccurate picture of the true supply and demand for a stock. "People are relying on the [stock quote data] and the data is not real," he says.

Nanex scrutinized trading of Procter & Gamble shares on April 28, a week before the flash crash, and found that a burst of orders were sent to the NYSE shortly before 11:48 and quickly canceled. Soon after, the NYSE quote reporting system temporarily fell several seconds behind that of the Consolidated Quote System, which brings together quote feeds from stock exchanges such as Nasdaq and BATS Global Markets.

That in turn was followed by a flurry of trades where P&G shares were bought at the lower, up-to-date prices published by BATS, and sold at higher NYSE quotes that weren't as recent—a profit opportunity.

Vancouver housing prices threaten growth
by Michael Goldberg - Reuters

'We did it: We are the least affordable city in North America." Those are the words of Sun columnist Don Cayo, who recently wrote a series of articles about housing prices in Metro Vancouver. Much of his discussion focused on growing housing demand from people moving here to enjoy our globally renowned quality of life, resulting in higher prices.

In a normal market, rising prices create new supply to meet demand and prices typically abate. Indeed, in most markets there are periods of undersupply followed by oversupply as developers overreact to prices and overproduce, pushing prices down. In Metro Vancouver this oversupply cycle is damped so we have not seen major price drops. So let's look at supply.

But first, congratulations are in order. Vancouver is now the least affordable city among 272 in Australia, Canada, Ireland, New Zealand, the U.K. and the U.S., according to the 2010 Sixth Annual Demographia International Housing Affordability Survey. This achievement was made possible by a potent mix of dysfunctional local policies, processes, public attitudes and a wanton disregard for the economic realities of present and future residents and of the future ability of the region to attract and retain jobs.

Supply is severely restricted by low densities over most of Vancouver compared with other cities our size. Height, setback and view corridor rules further limit supply. Add to this lengthy and costly approval processes and the result is a significant continuing restriction in supply, which, faced with growing demand, means rising prices. An unintended but predictable result of limiting supply with rising demand is gentrification, killing what little affordable housing is left as people seek out new and affordable neighbourhoods, in the process making them unaffordable to current residents and later to others.

Witness South Main Street (SoMa), Woodward's and Northeast False Creek inexorably gentrifying the Downtown Eastside (not a bad thing necessarily) and the likely gentrification of Fraser Street and the Great Northern Way slopes. The solution is expanding supply and potential supply more rapidly than demand expands. This by no means implies widespread destruction of single-family neighbourhoods. Quite the reverse: It means raising residential and commercial densities in strategic areas. If done properly, this takes pressure off single-family neighbourhoods and helps preserve them and stabilize their prices.

What would such a targeted density-raising strategy look like? First, densities around rapid transit stations will rise significantly. The most under-zoned areas are Broadway-Commercial, Broadway-Cambie and Oakridge, with Cambie and Southwest Marine Drive following closely behind.

The Marine Gateway proposal at Cambie and Southwest Marine Drive is a current and particularly egregious example of planning restrictions destroying large amounts of much-needed potential rental housing. Building rental housing economically requires density. At the Marine Gateway project, the developer originally planned a dense development on the southeast side of Cambie and Marine Drive on underused industrial land. The developer wanted to create more than several hundred rental units.

After density and building-size reductions, 85 per cent of the rental units were cut, a significant loss of badly needed rental units. Similar, if less extreme examples abound in Metro Vancouver with potential housing supply being greatly reduced, it will lead to higher prices as demand continues to grow.

More broadly, density increases should be considered at major bus-route intersections, especially on commercial streets, with much higher densities allowed where buses meet rapid transit stations. This densification strategy would spread density increases widely so that all neighbourhoods add to supply and choice and reduce pressure to rezone interior parts of single-family areas.

To a very modest extent, this has occurred in Kerrisdale and Dunbar along West 41st Avenue. The aggregate potential supply of such widely dispersed strategic upzoning can add many thousands of housing units across Vancouver, draining off price pressures, making us more competitive economically and reducing forces to gentrify and erode affordability in single-family areas.

Vancouver has 25 per cent of Metro's population, so similar strategies are needed across the region, such as those on the Millennium and Expo lines at Metrotown, Brentwood and New Westminster and notably, the exemplary transit-oriented development at Surrey city centre. Failure to pursue major densification policies will result in pricing ourselves out of global markets as newcomers, hoping to fill tomorrow's jobs, cannot to afford to live here.

Michael Goldberg teaches at the Sauder School of Business at the University of British Columbia.

Also pushing up the cost of Vancouver housing are these factors
by Roy Langston - Vancouver Sun

Columnist Don Cayo somehow missed the real reason why Vancouver has the least affordable housing in the world: Forcing house prices up as high as possible has been city council's aim for decades. The current council and earlier ones have forced prices up in three main ways:
  1. By restricting housing construction to less than population growth through arcane zoning and labyrinthine quid pro quos from developers in return for density increases.

  2. By reducing the residential property tax rate to one-fifth of the nonresidential rate, making it the lowest in North America. As property taxes are capitalized in land value, lower residential property tax rates do not make housing more affordable; they just go straight into higher prices.

  3. By encouraging speculation by making no attempt to recover the additional land value that higher density creates. While the community shovels money into their pockets, landowners sit around looking at their watches, waiting for their big win in the rezoning lottery.

Europe's Crisis Coming Back In 3... 2... 1...
by Vincent Fernando and Kamelia Angelova - Business Insider

WHile the financial problems of Europe's periphery 'PIIGS' economies (Portugal, Italy, Ireland, Greece, and Spain), has receded substantially from business headlines, this doesn't mean that their crisis is over, or even getting better.

In fact, the creditworthiness of nations such as Greece, Portugal, and Spain is looking worse than ever, as represented by % spread between the yield demanded by bondholder for ten-year PIIGS government bonds and the ten-year bonds of Germany (Germany is Europe's version of a 'risk-free' yield to compare things against). For all of the PIIGS, it is worse off than before the European Unions's one-trillion-dollar affirmations of support for the PIIGS, or before the much bally-hooed bank stress tests.

The frenzy surrounding the Eurozone crisis may have ebbed, but it'll be back...

chart of the day, spreads of 10-year government, sept 2010(Chart via Deutsche Bank, Global Economic Perspectives, 1 Sep 2010)

Irish Worries For The Global Economy
by Peter Boone and Simon Johnson - Basemine Scenario

Is the global economic recovery still on track? The mainstream view is: yes, without a doubt. But increasingly, there are increasingly reasons to fear another financial disruption – particularly given the latest developments in Ireland.

The consensus among officials and most of the international banking community is that the global economy has stabilized and is now well down the road to recovery. The speed of this recovery is proving disappointing – as seen in the revised second-quarter growth estimate for gross domestic product in the United States, with annualized growth down to 1.6 percent. But, according to this view, easy monetary policy and still-loose fiscal policy around the world will keep sufficient momentum going.

Never mind that Japan, the United States and most of Europe are running unsustainable fiscal policies, while the Federal Reserve chairman Ben Bernanke is fretting over how to prevent deflation with a limited toolbox, and Jean-Claude Trichet, president of the European Central Bank, is calling for more fiscal tightening. To enjoy this rosy global picture, we are also told to ignore the plight of heavily indebted peripheral euro-zone nations still suffering from uncompetitive wages and prices, and concerns over default, that strangle their credit markets and growth.

An essential part of this relatively positive view is that the euro-zone economies have stopped the series of "financial runs" that, earlier this year, took intense market pressure from Greece to Portugal and Ireland and threatened to move on to Spain and potentially almost everywhere else (except, presumably, Germany). A collapse was averted in large part by the euro-zone countries agreeing to rescue each other – meaning that the Germans agreed to support Greece and other weaker countries – with some additional cash resources provided by the International Monetary Fund.

However, let’s be clear: Europe’s headache remains large, and this should concern all of us – just look at Ireland to see how misunderstood and immediate the remaining dangers are. Ireland’s difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today roughly one-third of the loans on the balance sheets of major banks are nonperforming or "under surveillance"; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.

The government responded to this with what are currently regarded as "standard" policies in Europe and America. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe’s next Greece. In the last few weeks the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25 percent risk that Ireland will default within five years.

Until very recently, Ireland was seen as Europe’s poster child of prudent reforms. Mr. Trichet himself highlighted Ireland as an example that Greece and other financially stricken nations should follow. His message was simple: If only Greece, or Portugal or Spain would cut public wages, reduce the budget deficit and make structural reforms as Ireland has done, then growth could occur and default prevented.

However, it is now apparent that Ireland has not done enough to stem its march toward further crisis. The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts. According to the Royal Bank of Scotland, Irish banks have debt worth 26 billion euros, or one-fifth of Ireland’s national income, coming due in the month of September alone.  Ireland’s third largest bank just announced it will likely need 25bn euros in total capital injections from the government (19% of Gross National Product, GNP), while Standard and Poor’s argue this figure is too low.  In total, the debts of Irish banks could easily result in a charge to government debt equal to one-third of G.N.P.

These debts need to be added to the fiscal deficit, which also remains dangerously out of control. This year the government will run a deficit of 15 percent of G.N.P., and with nominal G.N.P. falling, it could well remain that high next year, even if the government cuts spending by the 2 to 3 percent of G.N.P. currently envisaged.

The government is gambling that growth will recover to more than 4 percent a year starting in 2012, in order to make all this spending and debt affordable, and officials insist that growth is already under way. Ireland’s gross domestic product did grow in the first quarter of 2010, but that was not the good news that many press and officials claimed.

This misunderstanding stems from Ireland’s success as a tax haven. Many years ago Ireland cut corporate taxes to attract business. This created one of Europe’s most impressive tax havens – it is possible to set up a corporation in Ireland, channel sales through that head office (with some highly complicated links to offshore tax havens in order not to pay Irish tax) and then pay a minuscule corporate profits tax. Ireland boasts a large industry of foreign "tax minimizers" that do this, but these tax minimizers hardly employ any people. Nearly one-quarter of Irish G.D.P. comes from the profits of these ghost corporations.

The likes of Google, Yahoo, Forest Labs and many others helped Ireland’s exports grow in the first quarter, but the domestic economy when excluding their profits, as measured by G.N.P., actually contracted, and so did Ireland’s tax revenues and employment. Today Irish unemployment is estimated at 13.8 percent, up from 13.1 percent at the start of the year.

Ireland, simply put, appears insolvent under plausible scenarios with current policies. The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving – not surprisingly – wrong. Such policies leave nations burdened with large debt overhangs that effectively tax businesses and borrowers – because interest rates must stay high to reflect risk.

Investors must wonder whether businesses and homeowners can afford these higher interest rates, so banks and investors cut credit lines and reduce lending. This strangles economies, even when the fiscal authorities take tough steps needed to cut deficits.

Ireland had more prudent choices. It could have cut the budget deficit while also acknowledging insolvency and requiring creditors to share some of the burdens. But a strong lobby of real estate developers, the investors who bought banks’ bonds and politicians with links to the failed developments (and their bankers) prefer that taxpayers rather than creditors pay. The European Central Bank, the European Union and the International Monetary Fund share some responsibility; they advocate these unlikely programs in order that European and global banks, which provided the funds to the Irish banks, do not suffer losses from such bad lending decisions.

The Irish government plan is – with good reason – highly unpopular, but the coalition of interests in its favor seems strong enough to ensure that it will proceed, at least until it either succeeds and growth recovers, or ends in complete failure with default of banks or the nation itself.

Under the current program, we estimate each Irish family of four will be liable for 200,000 euros in public debt by 2015. There are only 73,000 children born into the country each year, and these children will be paying off debts for decades to come – as well as needing to accept much greater austerity than has already been implemented. There is no doubt that social welfare systems, health care and education spending will decline sharply.

Watch for renewed emigration from a famously footloose population. If current policies continue, the calamity of the Irish banking system will lead to a much deeper recession and the consequences will be felt for decades. Watch also for further global financial disruption as this kind of deal starts to unravel.

German Military Study Warns of a Potentially Drastic Oil Crisis
by Stefan Schultz - Der Spiegel

A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.

The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges. The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

The study, whose authenticity was confirmed to SPIEGEL ONLINE by sources in government circles, was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies. The lead author, Will, has declined to comment on the study. It remains doubtful that either the Bundeswehr or the German government would have consented to publish the document in its current form. But the study does show how intensively the German government has engaged with the question of peak oil.

Parallels to activities in the UK
The leak has parallels with recent reports from the UK. Only last week the Guardian newspaper reported that the British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is far more concerned about a supply crisis than it cares to admit.

According to the Guardian, the DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply. Inquiries made by Britain's so-called peak oil workshops to energy experts have been seen by SPIEGEL ONLINE. A DECC spokeswoman sought to play down the process, telling the Guardian the enquiries were "routine" and had no political implications. The Bundeswehr study may not have immediate political consequences, either, but it shows that the German government fears shortages could quickly arise.

A Litany of Market Failures
According to the German report, there was "some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later." The Bundeswehr prediction is consistent with those of well-known scientists who assume global oil production has either already passed its peak or will do so this year.

Market Failures and International Chain Reactions
The political and economic impacts of peak oil on Germany have now been studied for the first time in depth. The crude oil expert Steffen Bukold has evaluated and summarized the findings of the Bundeswehr study. Here is an overview of the central points:

  • Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: "The relative importance of the oil producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading power."
  • Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favour with oil producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, "this could result in a more aggressive assertion of national interests on the part of the oil producing nations."
  • Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. "The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts," the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. "Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the seventies, will once again come to the fore."
  • Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. "Shortages in the supply of vital goods could arise" as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95% of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. "In the medium term the global economic system and every market-oriented national economy would collapse."
  • Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a "partial or complete failure of markets," says the study. "A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis."
  • Global chain reaction: "A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil," says the study. "It is likely that a large number of states will not be in a position to make the necessary investments in time," or with "sufficient magnitude." If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it's so tightly integrated into the global economy
  • Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could comprehend the upheaval trigged by peak oil "as a general systemic crisis." This would create "room for ideological and extremist alternatives to existing forms of government." Fragmentation of the affected population is likely and could "in extreme cases lead to open conflict."

The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive, politically, are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that "states dependent on oil imports" will be forced to "show more pragmatism toward oil-producing states in their foreign policy." Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.

For example: Germany would have to be more flexible in relation toward Russia's foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.

The relationship with Russia, in particular, is of fundamental importance for German access to oil and gas, the study says. "For Germany, this involves a balancing act between stable and privileged relations with Russia and the sensitivities of (Germany's) eastern neighbors." In other words, Germany, if it wants to guarantee its own energy security, should be accommodating in relation to Moscow's foreign policy objectives, even if it means risking damage to its relations with Poland and other Eastern European states.

Peak oil would also have profound consequences for Berlin's posture toward the Middle East, according to the study. "A readjustment of Germany's Middle East policy … in favor of more intensive relations with producer countries such as Iran and Saudi Arabia, which have the largest conventional oil reserves in the region, might put a strain on German-Israeli relations, depending on the intensity of the policy change," the authors write.

Massive solar storm to hit Earth in 2012 with 'force of 100 million hydrogen bombs'
by ANI

Astronomers are predicting that a massive solar storm, much bigger in potential than the one that caused spectacular light shows on Earth earlier this month, is to strike our planet in 2012 with a force of 100 million hydrogen bombs. Several US media outlets have reported that NASA was warning the massive flare this month was just a precursor to a massive solar storm building that had the potential to wipe out the entire planet's power grid.

Despite its rebuttal, NASA's been watching out for this storm since 2006 and reports from the US this week claim the storms could hit on that most Hollywood of disaster dates - 2012. Similar storms back in 1859 and 1921 caused worldwide chaos, wiping out telegraph wires on a massive scale. The 2012 storm has the potential to be even more disruptive.

"The general consensus among general astronomers (and certainly solar astronomers) is that this coming Solar maximum (2012 but possibly later into 2013) will be the most violent in 100 years," quoted astronomy lecturer and columnist Dave Reneke as saying. "A bold statement and one taken seriously by those it will affect most, namely airline companies, communications companies and anyone working with modern GPS systems. "They can even trip circuit breakers and knock out orbiting satellites, as has already been done this year," added Reneke.

No one really knows what effect the 2012-2013 Solar Max will have on today's digital-reliant society. Dr Richard Fisher, director of NASA's Heliophysics division, told Reneke the super storm would hit like "a bolt of lightning", causing catastrophic consequences for the world's health, emergency services and national security unless precautions are taken.
NASA said that a recent report by the National Academy of Sciences found that if a similar storm occurred today, it could cause "1 to 2 trillion dollars in damages to society's high-tech infrastructure and require four to 10 years for complete recovery".

The reason for the concern comes as the sun enters a phase known as Solar Cycle 24. Most experts agree, although those who put the date of Solar Max in 2012 are getting the most press. They claim satellites will be aged by 50 years, rendering GPS even more useless than ever, and the blast will have the equivalent energy of 100 million hydrogen bombs. "We know it is coming but we don't know how bad it is going to be," Fisher told Reneke. "Systems will just not work. The flares change the magnetic field on the Earth and it's rapid, just like a lightning bolt. That's the solar effect," he added. The findings are published in the most recent issue of Australasian Science.


jal said...

Too many good articles to give a comment on each.

Well... just one


“This woman had daily meetings with Larry Summers and Tim Geithner, and often Obama, for like 19 months. That's almost 400 meetings. And now she comes out and says she hasn't got the faintest idea what to do. And if she doesn't, after sitting through all those meetings, there can be no doubt that means neither do the rest of them. Not a single bleeping clue. Not one of them. Theories abound, but not a clue. Infinite taxpayer fortunes to spend, but your pet hamster could do the same job. Not a clue.”

Now. If they did not find a solution for GROWTH, then they should try to find a solution for a RESET after a deflation.

Steve From Virginia said...

Regarding the Bundeswehr report: the German military is far too optimistic. All of the hazards that are suggested for "10 to 15 ysars in the future" are taking place now.

Why does this leave the effects of peak oil theory in the distant future?

A wag could ask, "You mean things are going to get WORSE?"

Phlogiston Água de Beber said...


Thank you so much for bringing that piece by Wendell Berry to my attention. It does me no credit that I have failed all these years to chase down the products of that well-tuned mind.

The road to hell...paved with lack of intention. Yes, I can see a broad truth there.

@ Scholastica

Sorry to learn of your husband's condition. It can be quite dispiriting to feel your body being ripped up by a system meant to keep it safe from invaders. He and I know microcosmically what all human society is starting to experience at a civilizational level. Our immune systems are as uncogizant of what they are doing to us as Christina Romer is, of what she and her cohorts are doing to the world.

I wouldn't be here tonight to tap out this reply to you except for the realization during brief moments of consciousness that I going to leave behind a bigger mess than I felt comfortable with. I rescinded my DNR and they saved me. My first acts out of the hospital have been to reduce the mess and help my loved ones understand, my situation and theirs.

If you and your husband have not already taken such actions, I will simply advise that it has brought me a better grade of peace.

Phlogiston Água de Beber said...

Steve from Virginia,

The German Military has been far too optimistic for as long as there has been a German Military. My recommendation for them would be to start rebuilding the stables and tender orders for lances.

Oil supplied the asphalt for the unintentional paving of the road to hell, as described by WgS. Now with billions of people getting ready to take that road, it will be jammed with vast fleets of out-of-fuel buses. That's hell, I tell ya.

Alexander Ac said...

Yeah, most of the economists is out of touch with reality. One more in touch with reality is Jeffrey Sachs (Earth Columbia Institute), he wrote for SciAm:

"The Deepening Crisis: When Will We Face the Planet's Environmental Problems?"

NZSanctuary said...

Haha! Haven't had a good laugh all week. Thanks for the great quotes, Ilargi.

Ilargi said...

"One more in touch with reality is Jeffrey Sachs"

Jeffrey Sachs is a mobster who should be behind bars. Read the Shock Doctrine.


apscotland said...

An excellent collection of articles.

Re: Jeffrey Sachs and The Shock Doctrine, I watched the documentary of the same name last night, and am still reeling from it.

Not sure if you can get it outside the UK, but here's a link:

It's terrifying that there are so many people who are utterly devoid of humanity and compassion, and seem to take pleasure in inflicting pain, terror and destroying the hopes and dreams of ordinary people in the name of profit.

Alexander Ac said...


I think you mean Naomi Klein: The Shock Doctrine: The Rise of Disaster Capitalism - to be found here:

I will check it, Alex

scandia said...

@ I.M.Nobody and WgS...I, for one, am touched by your grace,by your committment to awareness, to community when you have illness that could take you out of the game.

Ilargi said...

Alex, APS

Don't know the doc or the speech, but I'm pretty sure the book simply needs to be read.


Greenpa said...

Polka Dot Gallows; Low Hanging Fruit Dept:

ogardener said...

Blogger Ilargi said...

"Jeffrey Sachs is a mobster who should be behind bars..."

Don't get me started!

Eric Lilius said...

This summer I watered and weeded in a large garden while listening to an audiobook of The Shock Doctrine. While I was aware of much of the content, Naomi Klein has done a well researched history of Disaster Capitalism,the Chicago Boys and the influence of Milton Friedman. For me it was the last nail in the coffin of American Democracy.

It also helps me understand the drum that our current Canadian Prime Minister marches to. He is a graduate in economics from the University of Calgary which is the northern bastion of the the ideas of Hayek, Strauss and Friedman.

I have bought the book mostly to hand around to those who are ready to read it. I cannot recommend it highly enough.

The Shock Doctrine was published in 2007. In the documentary True Stories:The Shock Doctrine (2009) the viewer is taken through the content of the book plus there is new material from Naomi Klein covering the financial crisis.

This is the Channel 4 documentary but it is unavailable to me in Canada. Copies do exist on the internet.

Alexander Ac said...

Might be of interest for TAE readers: Johan Rockstrom at TED Talk:

"Earth Planetary Boundaries"

Phlogiston Água de Beber said...

All economists are merely propagandists who specialize in drawing charts and graphs and propounding the most truly ridiculous theories. I can only think of two that were ever worth listening to for any reason.

Marx tried to explain our predicament to us and Schumacher tried to tell us how economics could have been worthwhile. One of my Air Force Squadron Mates used to exclaim quite regularly that someone "didn't have half the sense God promised to a left-handed screwdriver." As time has passed, I have come to think he could easily have applied it to much of humankind.

Shamba said...

@T To the Estimable IMNobody, related to the brilliant and really goodlooking VK:

I am truly sorry to hear of your illness, but it was good of you to come back to your family and "clean up the mess" as you say. Always glad to read your comments here.

Ilargi quoted this title of article:

“Economy Avoids Recession Relapse as Data Can't Get Much Worse”
“Band of fools” is a kind thought about them!

Isn’t this one of the most ludicrous--l’ll just pick that word out of tens of many I could use-- headlines you all have ever seen???!!

It’s so bad we won’t slip into another recession. Thank you for that good news?? And so what state are we in NOW? Duh, duh and duh!

I do have a real question in this comment, not just sarcastic ranting.

If I remember correctly, Stoneleigh once wrote that she wouldn’t expect to see the bottom of this current contraction until the middle of the next decade. II thought she wrote it in 2009 and so I took that to mean the “next decade” might be around 2016 or so? Did she really mean the middle of the 2020’s?

If this date were covered in her speeches that have been made into audio or video, I haven’t listened to them as dial up is not conducive to listening to all audio or any video. I’ll be happy for the DVD.

Peace, shamba

Unknown said...

Just a suggestion: I think its time to replace the historical photos at the top of the post with modern day photos depicting the current economic conditions around the country. Have readers submit them. There should be no shortage.

jal said...

I'm going to go with Christina Romer ...
The USA will "spend more and tax less"

If you are a smart middle class businessman then you will find a way to get at the feeding trough without having to pay for your meal.

This path will leave the republicans happy until someone says that the money can only come from reduced military spending.

We are about to see fat porks like never before.


Anonymous said...

I.M. Nobody,

Happy to learn that the awesome Goddess takes good care of you.

Welcome back!

RobertM said...

re money creation: "It has to be issued at an interest rate"

Richard Cook, retired Treasury analyst disagrees and I concur. End debt-backed money and the problem goes away.

Anonymous said...

IM Nobody- There are many immunosuppressant herbs or at least herbs that can be used that way. Send me a note and lets see if we can find you something that will help. No charge, this is not a commercial. I can be contacted at "darby at cgca dot us"

thethirdcoast said...

My deepest sympathies go out to the folks in Christchurch, NZ who were hit by a 7.4 quake around 1:35 PM US EDT. I also hope TAE regular NZSanctuary is unaffected.

For those interested the latest from the NZ Herald is available here:

Fuser said...


Were you the VK arguing Peak Oil over at zerohedge today? If so, you did a great job -reading the exchange made my day.

The posters you were against give further evidence the we are doomed.

ben said...

michael winterbottom might be my second favorite director, next to mike leigh.

i just read that he and naomi klein disagreed enough on his channel 4 adaptation of the shock doctrine that she removed herself from the project.

who does she think she is? now i get to boycott her book and enjoy it in 79mins when it becomes more widely available.

thanks apscotland.

Phlogiston Água de Beber said...

@Shamba also scandia

Thank you for your kind words.

Shamba, without in any way gainsaying anything Stoneleigh has written, I offer a slightly different view of the contractionary situation. One example of economistic charlatanism is the universally professed belief that the "business cycle" will perpetually bump along on an ever upward trend. That we will hit a bottom and bounce toward new heights.

All evidence gleaned from all times and corners of the world, says they are wrong. Civilizations follow ballistic arcs. They go up, with perturbations, until our friend Gravity pulls them down. We've reached the top of the arc.

There will be frequent bottoms and tops of the perturbated flight on the way down. It is conceivable that the final bottom will occur when the next to last human dies.

You speak always of peace. I hope you have found enough of it to enable you to find joy and satisfaction in the smallest of things. I believe that is the path to endurance of that which this way comes.

Anonymous said...


I've spent the better part of this past decade taking care of people who were very sick and dying --providing them comfort, support and oftentimes constant care. These people were friends, immediate family members and others who simply would have been completely alone as they passed away. During the same time, I've raised three wonderful children of whom I am immensely proud.

If I do nothing more in this life, I still consider myself truly blessed. To me, that has been the essence of the word grace.

Still, it's nice to smile every day as I greet the new dawn.

Ilargi said...

"RobertM said...
re money creation: "It has to be issued at an interest rate"

Richard Cook, retired Treasury analyst disagrees and I concur. End debt-backed money and the problem goes away."

Robert, you're confusing the issue. I said fiat, i.e. debt-backed money has to be issued at an interest rate. You can't both disagree with that AND want it abolished, because that means you agree.


ben said...

Oregon Project Independence, a cost-effective program (in pre-collapse terms), that provides in-home assistance to poor seniors, was almost cut in july but received a stay of execution until january because of the level of sympathy amassed during the intense local media coverage it received.

the Friendly House neighborhood center has two OPI case managers and recently produced this ordinary and poignant ten minute video on vulnerability in order to further its plight.

RobertM said...

re:"Robert, you're confusing the issue."

Yes I must be. I didn't know that when you were using the word "fiat" you meant debt-backed money. I was using the word with this meaning- "The term fiat money is used to mean: any money declared by a government to be legal tender...". What I was thinking is that money can be debt-free like Continentals or debt-based like the Federal Reserve system. Both are fiat according to the definition I was using. BTW, I'm in agreement with your article. Sorry for the confusion.

el gallinazo said...

Back to Argentina from a week of travel in Chile. Trying to catch up. No internet in the new house. We are about 2 km past the city limits of DSL and cable. Looking into satellite or a cell USB dongle as the only possibilities. Looking forward to the end of the construction and the end of the most recent antarctic blast. Coldest winter in Argentina's record book. Very stressful. Have to buy all the materials with my limited Spanish.

Anyway, I just wanted to give a heads up for the must startling and interesting interview I have heard in quite a while from Guns and Butter. Can't recommend it highly enough.

Guns and Butter - "Vietnam, Star Wars and 9/11" with Dr. Robert Bowman.
Dr. Bowman discusses his US Air Force experiences in Vietnam in 1968-69; as Director of Advanced Space Programs Development in the Ford and Carter administrations; the 1982 Defense Guidance Document; his public opposition to the Strategic Defense Initiative (SDI) better know as Star Wars during the Ronald Reagan administration; his take on the events of September 11, 2001; and wars of aggression.

VK said...

@ Fuser,

Yeah that was me on the peak oil post on ZH. LOL. I needed a few drinks after that.

bluebird said...

@VK & Fuser -


more interesting comments at the original article

pfh said...

We seem to keep overlooking that it's the use of investment profits to leverage more investment profits at the heart of the financial cycle that drives our ever growing global struggle for profits at the expense of anything anyone thinks is expendable.

So we become so ourselves for letting it operate toward its natural end.

pfh said...


simple, a little crude, would work fine

ric2 said...

VK -

Pour yourself another drink.

I agree with Fuser. You came across calm and rational for most of the time using facts, figures, data, and logic to make your points.

The people arguing against you came across as tools.

Shamba said...

@The Estimable IM Nobody:

Peace to me means acting with more equanimity to life. I found a great deal of it by using the hatha yoga approach to life which I discovered about 20 years ago in an existential crisis. This has been my answer but other people find a spiritual approach to life in all kinds of practices and philosophies.

I have a lot more peace than when I was younger but I do lose it from time to time. I'd say about 2 times a week. :) I tend to throw unbreakble things about when I lose it!

peace to all, Shamba

Anonymous said...

El G,

Thanks for recommending the interview on Guns and Butter. Excellent!

RobertM said...

VK- I saw you on that thread as well. Here's something from a recent study you should remember. The conclusion of the study was "Misinformed people rarely change their minds when provided with the facts". At some point you reach the point of diminishing returns and you realize that absolutely no glimpse of reality is going to change some people's minds. (unless of course, you were just sparring for the fun of it).
Sadly, in the hundred's of comments, only 2 passing mentions of thorium. We could be 5 years away from enough energy to last a thousand years and not a soul cares.

anon10 said...

Sept. 2 (Bloomberg) -- The number of Americans receiving food stamps rose to a record 41.3 million in June as the jobless rate hovered near a 27-year high, the government said.

Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 18 percent from a year earlier and increased 1.2 percent from May, the U.S. Department of Agriculture said today in a statement on its website. Participation has set records for 19 straight months.

About 40.5 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates. The figure is projected to rise to 43.3 million in 2011

Food Stamps Went to Record 41.3 Million in June, USDA Says

scandia said...

@El G...that was a fantastic interview with Dr. Bowman! I hope he is right that the US military will not turn against citizens. Alas our Cdn police and military at the G20 meeting in Toronto seemed quite pumped up for the task.The complete lock down of the core of a free and democratic city was stunning, unforgetable.There was no break in the ranks.
I heard that a young female dissenter from my town may get a 15year sentence.

Phlogiston Água de Beber said...

RobertM said...

We could be 5 years away from enough energy to last a thousand years and not a soul cares.

A millennium ago, someone in Alexandria might easily have imagined that the Ptolemaic Government of Roman Aegyptus could be 5 years away from having a fleet of steam powered warships equipped with high-pressure flame throwers. With which they could have easily stomped the Romans and ruled the entire Mediterranean region. It didn't happen and the same fate may well await thorium reactors.

Glennjeff said...

Thanks for your kindness when my wife and I were going through a rough patch, your thoughts were valuable. All the best.

@ Ahimsa, Shamba
Buddhist's are cool. We recently did a meditation course at the local buddhist temple as part of my wifes recovery from cancer, my recovery from just too much fun living generally, and the lady monk absolutely glowed from within, like almost a halo thingy.

@TAE, board
We've finished work on our urban lifeboat, got our finances very neat and tidy. I now plan to work full time on stuff like Raja Yoga, Meditation and Ceremonial Magic and creating artforms (music and video) that express and elucidate these topics to some degree.

Keeping in touch with world affairs is somewhat detrimental to that work for me at this stage of my life so I won't be reading too often.

Thankyou for your service over the last 4 years both here and at TOD.
I'll send you a tiny gold coin each coz I think it's nice stuff regardless of it's material value.

I have one favour to ask. The board here is a fairly diverse bunch of intelligent, fair minded people. I'm going to drop another post here shortly and would appreciate ANY responses to it's content. This will give me some indication if there is any point to me documenting my thoughts on the above mentioned "metaphysical" topics in a public space.

Glennjeff said...

With carefull observation you might note that certain feelings take place in definite locations in the body. Here are some examples:

1) Have you ever seen someone have a serious accident or injury and felt a rather uncomfortable electrical or prickly sensation at the base of your spine (between the anus and genitals).

2) I am a heterosexual male and when I was young if I saw a pretty lady in a short dress walking down the street I would get a little aroused and that sensation had a definite location in my body, the region of the genitals.

(obviously I don't know what it feels like for females and to be honest I have never discussed it with any females. Same for people of different sexual orientation, feel free to inform me)

3) Have you every been upset, shocked or dissapointed and felt an uncomfortable sort of knot in your "belly" an inch above the navel ("belly button").

4) Have you ever had a geat feeling of sympathy or expressed a caring loving emotion towards someone (or something) and felt a warm movement in the centre of your chest.Alternatively, have you ever had a sinking feeling in your chest when confronted with a human sadness etc.

5) Have you ever felt the urge to say something and felt a lump in your throat, or resisted saying something and felt a lump in your throat.

6) Have you ever been so angry that it feels like a volcano is going to erupt from your forehead, or so determined that it feels like a laser beam is shining out of your forehead.

7) Have you ever had a "religious experience" and felt a weird spinning whilpool sensation on the very top of your head or even found yourself actually outside of your body floating about 50 cm or 20 inches above the top of you head. This may be induced by stress also I believe.

anon10 said...

"Here's the cold, hard reality that Washington won't share with you: The only thing that can fix today's problems is a time machine. Then we could go back to BEFORE the credit and housing bubbles got out of control, and do something to stop them."

zander said...

@ ElG. re Bowman

Sadly we found out in during the miners strike of 1984 that the police and the military (with the aforementioned police acting as their trojan horse)were only too willing to turn against their own citizens, hell, the BBC even famously played a selected sequence of charge and coutercharge events backwards to hoodwink the public that the miners were the protagonists, I kid you not.


message_in_a_bottle said...

One of the problems is the low interest rate policy.
Low interest rates make marginal economic activity feasible -- but barely.

Enormous human capital is devoted to activity that is not very profitable and kept alive by low interest rates and, in the case of banking, unlimited government guarantees.

In the absence of this massive government intervention the activity would fail and innovation would bring new activity.

In the presence of this intervention the innovation cannot take hold (see bailing out General Motors and innovation in automotive transport).

Low interest rates also induce an increase in the level of risk and volatility in the stock market.

Governments do not have absolute control over interest rates, in the end it is the lenders who determine at which rates they can be induced to lend.

There is thus always the danger that rates might rise quickly leading to failure of large volumes of economic activity predicated on low rates.

The austerity programs now in implemented in some places are the first fearful reaction to the possibility of a loss of confidence in sovereign debt.

Speaking only for myself: I would lend to a government only because I am convinced that there is so much fraud in the economy that I simply cannot entrust my money to anyone else.

Needless to say anyone who feels like that will constantly be on the lookout for alternatives.

VK said...

The problem with peak oil and peak credit is that most people aren't willing to accept that there is a problem in the first place! If we can't agree that there is a problem, how do you go about solving it or atleast mitigating it?

message_in_a_bottle said...

@ilargi: "growth meme"

The need for growth is older than the current capitalist system.

According to Carrol Quigley ("The Evolution of Civilizations") a civilization is a society with an "instrument of expansion". The entire civilization is then organized around that expansion.
When the expansion fails the consequences are catastrophic.

This theme runs through all known civilizations. Without growth you have subsistence societies in equilibrium with nature: very little technology exceeding the bow and arrow.

Since obviously exponential growth cannot run indefinitely in a world of finite resources, periodic setbacks to a much lower level of activity are needed (the horsemen of the apocalypse).

This is a well established pattern and I do not think it likely that we will find an escape from it.

NZSanctuary said...

thethirdcoast said...
My deepest sympathies go out to the folks in Christchurch, NZ who were hit by a 7.4 quake around 1:35 PM US EDT. I also hope TAE regular NZSanctuary is unaffected.

All good personally, thanks. A lot of property damage in Christchurch (hundreds of millions at least) but not to lives...

jal said...

A look at the sun

Why The End Of The 'Equity Cult' Means Trillions In Upcoming Outflows From Stocks

Robotic traders pick up on the positive feedback loops to take the market higher one more time as soon everything collapses.
(Cash out time for the chosen.)

Back in 1952, US private sector pension funds held just 17% of their assets in equities compared to 67% in fixed interest. Over the next 50 years, these weightings reversed — at the peak in 2006, the same funds held 69% in equities and 18% in fixed interest.

The long duration of the equity asset class becomes less desirable for pension funds as populations mature and retirement dates approach.

A reduction in equity holdings back to pre-1959 levels (around 20% of total assets) would indicate considerable selling pressure to come. For US private sector pension funds alone, that would imply a further $1900bn reduction in equity weightings. The story looks similar amongst retail investors. Equity inflows into US mutual funds have not recovered from the 2007-09 bear market (Figure 5). European equity inflows never recovered from the 2000-03 bear market (Figure 6).

The evidence suggests that there could still be considerable institutional selling to come.

jal said...

Bonds,(gov), have been the key beneficiaries of equity outlflows.

As the cult of the equity fades, it is being a replaced by a new cult of the bond.

Investors are unlikely to pile back into global equities any time soon. It looks like they are likely to sell weightings down and move further into bonds. This is convenient for government bond issuers given that they have such vast amounts of bonds to sell.

You can't fund a trillion dollar bond bubble, and see equity allocations at the same time.
There is a reason why Albert Edwards sees the S&P in the 400 range: you can't have an increasingly more frugal investors buying both, and you can't have central banks buying everything without risking a completel collapse in the faith of all currencies.

In retrospect, it is really simple. There are those who believe they are immaculate daytraders, and believe they can make money chasing everything dip in stocks. We wish we had their skill. Since we don't we would rather put our bet on where the age old adage of follow the money says stocks willl end up going. And that is much, much lower.

Anonymous said...

Re: Bowman on the military turning guns on Blackwater to protect dissidents and even regular citizens, rather than rounding them up and putting them in "concentration camps."

As a military man, Bowman is overly optimistic. Most likely the military will obey orders of the commander-in-chief and enforce martial law together with Blackwater, as they already do in Iraq and Afghanistan, with Blackwater doing the dirtiest work.

Jim R said...

Those were some good comments on ZH. I had no idea so many of the ZH regulars would not be able to comprehend peak oil.

Dowload 'em here:
Stoneleigh is in the second segment (Sept 4 episode for future reference)

jal said...

Afghan officials resist clean-up of Kabul Bank as scandal engulfs elite

Mahmoud Karzai, a minority stakeholder with 7% of the shares, said he welcomed a full audit of the bank and that he was concerned about three problems that may have occurred under Farnood and Frozi: lending over the bank's limits, lending to shareholders and investing outside the country in "risky businesses".

When asked whether he thought anyone should go to jail if fraud is uncovered he said, "I don't think so because that would create chaos. Maybe there should be fines or something like that."

soundOfSilence said...

Happy and safe Labor Day (even if it isn't the economy it was 40 years ago) to everyone in the US.

Ditto regarding Labour Day for all those in parts north.

Ilargi said...

New post up.

Jim Puplava interviews Stoneleigh