Sunday, January 23, 2011

January 23 2011: Only 47% of working age Americans have full time jobs

Russell Lee Last Chance Texaco October 1937
"Abandoned garage on Highway No. 2. Western North Dakota"

Ilargi: VK, roving reporter for The Automatic Earth, has been playing with the numbers from the January 7 employment report issued by the U.S. Bureau of Labor Statistics. It seems valuable to look at unemployment from this, a different, angle. Some of it may even surprise you.

The total non institutional civilian labor force (Americans 16 years and older who are not in a institution -criminal, mental, or other types of facilities- or an active military duty) is reported as 238.889 million. Of these, we see:
  • Employed: 139.206 million people (58.3% of labor force)

  • Unemployed: 14.485 million people (6.1% of labor force)

Obviously, that can't be the total picture, we're only at 64.4%. This is why:
  • Part time employed for economic reasons: 8.931 million people. This concerns people who want a full-time job but can't get one.

  • Part time employed for non-economic reasons: 18.184 million people. Non-economic reasons include school or training, retirement or Social Security limits on earnings, but also childcare problems and family or personal obligations.
But the by far largest category "missing" from both the Employed and Unemployed statistics is the "Not In Labor Force": 85.2 Million people.

The BLS definition states: "Not in the labor force (NILF). A person who did not work last week, was not temporarily absent from a job, did not actively look for work in the previous 4 weeks, or looked but was unavailable for work during the reference week; in other words, a person who was neither employed nor unemployed." (Clearly, this does include lot of unemployed people).

To summarize: 108.616 million people in America are either unemployed, underemployed or "Not in the labor force". This represents 45.5% of working age Americans.

If you count the "Part time employed for non-economic reasons", you get 126.8 million Americans who are unemployed, underemployed, working part time or "Not in the labor force". That represents 53% of working age Americans.

So only 47% of working age Americans have full time jobs. While the official unemployment rate is 9.4%. Something's missing somewhere.

A few more factoids on the topic:
  • Today, the long term unemployed make up 42% of total unemployed. That is to say, of course, those who are actually counted as unemployed instead of "Not in the labor force".
  • 43.2 million Americans receive foodstamps. That's 18.1% of all working age Americans. If they all have on average 1.5 dependents, which is probably a reasonable estimate, a full one third of the US population receives at least part of their food through this system.

Of course, these are not really stamps anymore, or any sort of paper, they’re now "food stamp debit cards". Michael Snyder at Economic Collapse dug up an ABC News article from April 2009, which deals with the fact that JPMorgan Chase is one of the main servicers of the "food stamp debit cards" (in 26 states). JPMorgan also services child support debit cards (in 15 states) and unemployment insurance cards (7 states).

Granted, some things may have changed somewhat since the article was written, but even just the very ideas that are the foundation of schemes like these are worth looking at. Because, naturally, JPMorgan does this to make a profit. Says ABC:
Take Indiana. JP Morgan gets 62 to 64 cents for each food stamp case handled monthly there. With 296,245 cases right now, that means the state is paying JP Morgan $183,672 a month on top of any other fees it collects. Indiana eliminated 100 full-time employees when it hired JP Morgan to make the program cost-neutral [..].

But the greatest statement the article makes, and the reason ABC looked into this in the first place, is that JPMorgan outsourced its call and service centers for the "food stamp debit cards" to India. If that isn't indicative of the level to which ethics and morals have sunk, I don't know what is. You could conceivably create a lot of jobs for Americans in these service centers, which would get them off food stamps! For starters.

Another great example of the loss of morality was noted by Pedro Nicolaci da Costa at Reuters late last week:
Accounting tweak could save Fed from losses
Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely. The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on January 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability. This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible [..]". "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly [..]"

You just have to love this one: at the stroke of a pen, it has become impossible for the Federal Reserve to incur losses. They're all simply written down as "liabilities to the Treasury". Yes, that would be you! And the Fed can keep on buying any and all toxic paper they can lay their hands on. They can accept as collateral "assets" from Wall Street that are not worth the paper they're written on (and there's a lot of that) and stick you with the bill by pressing a key.

It's time to seriously start wondering why the US still holds elections. Given that Congress can be bypassed this way through a sort of accounting that if it isn't yet illegal certainly should be, and which will burden Americans with trillions of dollars in additional debt, we might as well let Simon Cowell and Ryan Seacrest organize Indecision 2012.

One thing, though, for all members of Congress: when you get to debate raising the debt ceiling this spring, make absolutely sure that these newfangled "liabilities to the Treasury" are included in the national debt. It's either that or Mammon rules for real. And I'm not trying to be funny here. This feels sort of like when a collection agency comes to your door to collect on your lost wagers, you proudly show them a piece of paper that states the debt has been transferred to your as-yet unborn grandchild, so they can't legally touch you.

One more thing, Congress: in addition to the new "liabilities to the Treasury", you need to also count liabilities to Fannie Mae and Freddie Mac towards the national debt. It's always been insane that they were not, but it threatens to get much, much crazier still, says Louise Story in the New York Times:
Banks Want Pieces of Fannie-Freddie Pie
As the Obama administration prepares a report on the future of Fannie Mae and Freddie Mac, some of the nation’s largest banks are offering a few suggestions. Wells Fargo and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.

The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department say these banks view the government’s overhaul of the mortgage market as a potential profit opportunity. Treasury officials have met with executives from several institutions, including Wells Fargo, Morgan Stanley, Goldman Sachs and Credit Suisse, according to a public listing of the meetings.

The administration’s report, to be released later this month, is expected to be sweeping and could address basic questions like whether a government guarantee is needed at all for middle-class homeowners. While other arms of the government are dedicated to making loans available to lower-income borrowers, Fannie and Freddie have helped lower rates for the bulk of homeowners. Some Republicans are trying to narrow this broad role, and on Thursday, several conservative researchers released a proposal on how to do so.

But banks, for their part, have told the administration that removing the guarantee would wipe out the widespread availability of the 30-year mortgage, fundamentally reshaping the American housing market. Though some other countries do not promote long mortgages, some analysts warn that such a change would be devastating to the market here. At firms like Goldman, analysts are predicting that a government guarantee on a broad swath of mortgage securities will survive in some form.[..]

Even if large banks are not allowed to give a government guarantee, they might have control over the private companies by investing in them or by placing representatives on their boards

Yes, I know, solving Fannie and Freddie is a Herculean task. Nobody wants to shake the housing market any more than it already has been. That is, of course, nobody except for potential homebuyers. And yes, dissolving Fannie and Freddie will greatly increase the "official" US debt. It will also mean the end of the major Wall Street banks.

But if the only alternative is to give those banks, who would long be broke and live on only as zombies and even that only because of accounting tricks, the ability to hand out loans and invest in securities (and potentially other derivatives) backed by a 100% US government guarantee (how thick can you lay on moral hazard?), you will be directly responsible for destroying your grandchildren's America.

Yes, the demise of Wall Street, and of housing prices, will mean a tough time ahead for everyone. But at least you’ll still have such items as pride and honor and dignity and patriotism and an American Dream left. Giving in to the model of Wall Street as government backed lenders, investors and speculators, while the dangers of doing so are plain for everyone to see, just to a gain a little bit of time, would rob you of all of these items. Your grandchildren would spit on your graves. Is it worth it?

Accounting tweak could save Fed from losses
by Pedro Nicolaci da Costa - Reuters

Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely. The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on January 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability. This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer. "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.

Stale Risk
In response to the worst financial crisis and recession since the Great Depression, the U.S. central bank pulled out all the stops on monetary policy. It not only slashed interest rates effectively to zero, but also committed to buy some $2.3 trillion in Treasury and mortgage securities in order to keep long-term borrowing costs down.

For weeks now, worries had been percolating among investors about the possibility that the central bank might run into trouble when it eventually decides to unwind some of those extraordinary measures. For more, see: In particular, analysts feared the Fed might be forced to sell either its Treasury or mortgage-backed securities at a steep loss in a rising interest rate environment, or end up having to pay a higher interest rate on bank reserves than it receives on the securities it holds.

Fed Chairman Ben Bernanke, asked about the possibility in congressional testimony earlier this month, said even the most extreme circumstances would not have very large implications. "Under a scenario in which short-term interest rates rise very significantly, it's possible that there might come a period where we don't remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario," Bernanke said.

However, the Fed has tended to assume that interest rates would be rising sharply only if the economy were recovering very rapidly. Fed policymakers seem to be ignoring the possibility that the country could face a bout of so-called stagflation -- a period of high inflation with depressed economic activity like that seen during the 1970s. That would be truly damaging to the Fed's holdings because it would almost certainly have to sell assets at a loss.

Lou Crandall, chief economist at research firm Wrightson ICAP, points out that the nearly $1 trillion in dollars circulating through the global financial system represent a form of interest-free borrowing for the Fed, giving it a large cushion against possible losses. Still, if the crisis has taught economists anything, it is that, in highly leveraged financial markets, risks seen as extreme can often materialize more quickly than forecasters can adjust their models.

The Fed's accounting change does help it dodge a scenario that could be highly damaging to its reputation and credibility, even if a "paper insolvency" would have few immediate implications for the central bank's operations. Compared with the prospect of going broke, being accused of accounting shenanigans is a luxury. In that sense, the Fed's decision to alter its own accounting rules appears prudent. If only businesses and households had the same privilege.

Fannie and Freddie white paper delayed
by Tom Braithwaite - Financial Times

The Obama administration is likely to miss a January 31 deadline set by Congress to deliver its long-awaited white paper on the future of housing finance, according to people familiar with its preparation. The paper is also likely to disappoint those who want a detailed proposal for the future of Fannie Mae and Freddie Mac, the government-sponsored enterprises whose $140bn bail-out was the costliest rescue of the financial crisis. Senior executives at the GSEs and most Republicans want a swift and comprehensive plan.

Officials have moved away from an earlier intention to present such a plan, or even full legislative language, for the two GSEs. When the paper is published it is likely to contain a number of options and suggestions for Congress, but no grand sweeping plan. Ultimately officials want to move towards a system where the private sector plays a much greater role in the secondary mortgage market, 90 per cent of which is controlled by Fannie and Freddie because of the dearth of interest from private investors scarred after the 2008 crisis.

Scott Garrett, the Republican chairman of the House financial services subcommittee responsible for the GSEs, demanded an early and detailed plan from the administration. "I’m hoping that they will generate specific recommendations as opposed to a list of options," he said. Preparations for Barack Obama’s State of the Union address on Tuesday have made it difficult to go over final bureaucratic hurdles to publishing the white paper, according to people familiar with the process, who said the week of February 7 was now more likely.

"We’re working every day to plot the future of housing finance while acknowledging continued weakness in the housing market," said the Treasury. There is also a belief within the administration that there is little to be gained by putting out detailed proposals for Republicans to attack. Officials are also wary of damaging the still-fragile housing market and believe that much, perhaps all, of the overhaul can be completed without legislation.

The issue of the government’s role in a future housing market remains controversial. One option being considered is a government-backed securitisation mechanism that would see the industry take a "first loss position" on mortgage-backed securities, bearing the brunt of any housing downturn, but preserving a government back-stop for a collapse. "I don’t know how you go to the taxpayers and say that we achieved what we wanted to achieve and that is that you the taxpayers, our constituents, are no longer on the hook for bailing out Wall Street if we set up a system with a guarantee," said Mr Garrett.

Banks Want Pieces of Fannie-Freddie Pie
by Louise Story - New York Times

As the Obama administration prepares a report on the future of Fannie Mae and Freddie Mac, some of the nation’s largest banks are offering a few suggestions. Wells Fargo and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.

The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department say these banks view the government’s overhaul of the mortgage market as a potential profit opportunity. Treasury officials have met with executives from several institutions, including Wells Fargo, Morgan Stanley, Goldman Sachs and Credit Suisse, according to a public listing of the meetings.

The administration’s report, to be released later this month, is expected to be sweeping and could address basic questions like whether a government guarantee is needed at all for middle-class homeowners. While other arms of the government are dedicated to making loans available to lower-income borrowers, Fannie and Freddie have helped lower rates for the bulk of homeowners. Some Republicans are trying to narrow this broad role, and on Thursday, several conservative researchers released a proposal on how to do so.

But banks, for their part, have told the administration that removing the guarantee would wipe out the widespread availability of the 30-year mortgage, fundamentally reshaping the American housing market. Though some other countries do not promote long mortgages, some analysts warn that such a change would be devastating to the market here. At firms like Goldman, analysts are predicting that a government guarantee on a broad swath of mortgage securities will survive in some form.

A spokesman for the Treasury declined to comment on the administration’s plans, but one former Treasury official warned against the banks’ proposal. "I don’t think that private shareholder-owned entities should issue federal government guarantees," said Michael S. Barr, who worked on housing issues at the Treasury Department until the end of last month and then returned to his job as a law professor at the University of Michigan. "I think that creates the same conflict we had in the past."

Mr. Barr said that banks with the largest mortgage businesses had suggested that they be allowed to issue the government’s guarantee, setting themselves up as a second-generation of Fannie and Freddie. As for the two housing giants, Mr. Barr said, "No one argues for Fannie or Freddie to continue in their current form. It’s just not politically plausible."

Fannie and Freddie have been barred from lobbying the administration or Congress about their future since they were placed in government conservatorship more than two years ago. The companies are able to receive unlimited aid from the Treasury Department until the end of 2012. In the meantime, they are administering some of the government’s housing programs and enabling the housing market to sputter along through their guarantee of most new mortgages.

The administration’s paper about the future of housing policy will probably address what should be done with Fannie’s and Freddie’s existing assets, a combined $1.5 trillion portfolio. That is entirely separate from the discussion about the future business model. Lawmakers will eventually decide if Fannie and Freddie will survive and if they can compete in the new model.

One trade association, the Mortgage Bankers Association, has suggested to the Treasury Department that the government might want to auction off Fannie and Freddie’s assets, including their brands and their mortgage data, to private companies. Wells Fargo has been most public in its support of the proposals, but JPMorgan Chase and other large banks helped develop the plans within trade groups.

Michael J. Heid, the co-president of Wells Fargo Home Mortgage, testified before Congress last year that allowing private companies to issue the guarantee would add "innovation and efficiency" to the process. Asked about the proposals from the trade associations, Kristin Lemkau, a JPMorgan spokeswoman, said: "While we are members of these groups, we have not endorsed any specific proposal."

Still, some housing experts critical of the idea warn that giving the large banks a bigger role could lead to an even greater concentration in a market already dominated by a few big players. And they warn that the banks are unlikely to add the affordable housing assistance that Fannie and Freddie provided. Furthermore, they do not see why private entities should profit from the government’s good credit standing.

Several housing consultants pointed out that the banks’ latest proposals resemble ideas that banks circulated in Washington several years before the financial crisis. Back then, companies like General Electric, Wells Fargo, JPMorgan and the American International Group lobbied through a group called FM Watch, warning that Fannie and Freddie had too much power, had taken on too much risk and had unfair advantages in the marketplace. FM Watch disbanded in 2008, when Congress passed legislation requiring more regulation of the two housing giants.

Representatives of the industry say the entities they are now proposing would be less risky because the government would have strict oversight of them as well as the ability to require hefty amounts of capital to back the mortgage bonds. They also say that companies would pay a fee for the government guarantee, which would cover losses above a certain level. That level has not yet been determined.

In at least one version being proposed, the private companies would have to be separate enough from banks that they could not be pulled down by a bank’s collapse. Also, the proposals say the government would guarantee only the mortgage bonds, and not the private companies. However, the government never explicitly guaranteed the survival of Fannie and Freddie or their mortgage bonds; nonetheless it ultimately stepped in to back both.

Still, another trade group, the Housing Policy Council, an arm of the Financial Services Roundtable, expects banks to look for ways to become licensed to help issue government-guaranteed mortgage bonds. "I wouldn’t be surprised if some banks did," said John H. Dalton, president of the council and the former president of Ginnie Mae, an arm of the government that backs mortgages.

John P. Gibbons, an executive vice president of capital markets at Wells Fargo Home Mortgage, said the bank is not eager to own one of the new private companies playing this role, but that it would consider doing so if it thought it was necessary for the market. "In general we still support those positions because we think they are ways of bringing private capital back into mortgage finance," he said.

It is unclear just how profitable the new business may be. Mr. Heid, the Wells Fargo executive, told Congress that private investors in the companies should receive a "reasonable" return, but he did not say how much. Jay Brinkmann, chief economist of the Mortgage Bankers Association, which has a similar proposal to the Housing Policy Council’s plan, said his group is "not trying to protect profits for a handful of banks." "I don’t think anybody is going to be making the kind of profit that Fannie and Freddie were making in their heyday," he said.

Even if large banks are not allowed to give a government guarantee, they might have control over the private companies by investing in them or by placing representatives on their boards. There is a risk that small banks would be shut out of the market and consumers would face higher costs on their mortgages, said Mark Willis, resident research fellow at New York University’s Furman Center for Real Estate and Urban Policy.

"Some fear that a market ruled by a few large banks will limit access to the secondary market by smaller, local institutions," said Mr. Willis, who visited Treasury officials in November to discuss the issues. Mr. Willis pointed out that the mortgage market has become more concentrated since the financial crisis, as several prominent originators — like Wachovia and Washington Mutual — hit trouble and were sold to larger banks.

If the government decides to continue offering a guarantee for a broad swath of securities backed by mortgages to middle-class homeowners, it does not have to use a private company. A government agency could issue that guarantee, much the way the Federal Housing Administration does now for borrowers with lower incomes or other factors that disqualify them from conventional loans.

The banks’ proposals also throw out Fannie and Freddie’s longtime role in affordable housing. Part of the reason the housing giants enjoyed such broad support from lawmakers was because they aided low-income borrowers. Banking associations say that distorted and endangered the two companies and that any new companies should not be saddled with those responsibilities. Instead, the banks say, the private companies could pay a fee to the government to support such lending.

2010 Was The Weakest Year For Home Sales Since 1997
by Martin Crutsinger - AP

The number of people who bought previously owned homes last year fell to the lowest level in 13 years. But home sales in December jumped to fastest pace in seven months. The National Association of Realtors says sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly lower than 2008, which had been the weakest level since 1997. Home prices have been depressed by a record number of foreclosures and high unemployment. Many potential buyers held off on purchases last year, fearful that prices hadn't bottomed out yet.

The poor year for sales ended strong in December. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units, an increase of 12.8 percent from November and the strongest sales pace since last May. Still, many economists believe it will take years for sales to rise to a normal level of around 6 million units a year. And some say 2011 will be even weaker than last year because more foreclosures are expected and home prices are likely to keep falling through the first six months of the year.

The foreclosure crisis has left a glut of unsold houses on the market. That has played a major role in lowering home prices. For December, the inventory of unsold homes stood at an 8.1 months supply, down from 9.5 months supply in November. That represents the amount of time it would take to sell the remaining supply of homes on the market at the December sales pace. A normal inventory supply is six months.

Even historically low mortgage rates have done little to boost the sales. The average rate on a 30-year fixed mortgage rose to 4.74 percent this week from 4.71 percent the previous week, Freddie Mac said Thursday. The average rate on the 15-year loan, a popular refinance option, slipped to 4.05 percent from 4.08 percent. The 30-year loan rate reached a 40-year low of 4.17 percent in November, and the 15-year mortgage rate fell to 3.57 percent, the lowest level on records dating back to 1991.

For December, sales were up in all parts of the country with the strongest gain a 16.7 percent increase in the West. Sales rose 13 percent in the Northeast, 10.1 percent in the South and 11 percent in the Midwest. The median price for a home sold in December was $168,800, down 1 percent from a year ago.

Car Dealers Roll Out Cheap Financing
by AnnaMaria Andriotis - Smart Money

It sounds like a bad commercial for a local car dealership: "These rates are so low, we're barely making money!" But more than three years after the recession threw car sales into a tailspin, many dealers have started offering loans at interest rates so low they don't make much of a profit -- and that's turning conventional car-buying wisdom on its head.

Not long ago, car dealerships were the last place you'd want to get a car loan. You could get a better deal at a bank. But today, with bank lending still tight, dealers' lending arms are stepping in with more of their own loans at much more attractive rates. The current average interest rate on a car loan is 5.9%, but the rates offered through dealers are much lower, at 4.2% on average, according to interest-rate trackers HSH Associates and Some dealers are offering loans at or near 0%. And unlike past low-interest financing offers, these rates are increasingly available on longer loans for a wider variety of cars, including luxury vehicles and across popular brands like Toyota and Honda.

For consumers, this means a dealership is suddenly a viable place to get a loan. "Nothing beats 0%," says Paul Taylor, chief economist at the National Automobile Dealers Association. Indeed, the savings for consumers could be considerable. On the 2011 Toyota Camry sedan, with a base model price of about $20,000, consumers can get 0% financing for up to 60 months at some dealers. Put $2,000 down on a five-year loan (the average length of most auto loans) at 5.9% and you'll shell out $840 more in interest over the duration of the loan than a dealer-financed borrower who locks in 4.2% and around $2,820 more than a buyer who scores a 0% interest rate.

Typically when dealers offer a loan, they do so at a rate several percentage points higher than what a bank or credit union might offer. The dealer isn't lending his own money, he's just a middleman -- the money for the loan comes from the lending arm of the dealer's associated automaker. And everybody makes money. But now dealers are offering interest rates that are 0% or close to it -- for less than what it costs a financing arm to raise capital to lend. In this case, the dealer is not making money, and, because the automakers subsidize the loans to help dealers move cars that aren't selling, the automakers are losing money. On average, automakers lost $2,139 for each car they helped finance in 2010, slightly less than the $2,229 they lost per car in 2009, according to

Bank of America posts big loss
by David S. Hilzenrath - Washington Post

The toll from the housing crisis could continue to weigh on Bank of America, draining billions of dollars from the company for years to come, the nation's largest bank said Friday.

The bank said it lost $1.2 billion in the fourth quarter of last year, more than six times its loss from the same period in 2009. Perhaps more troubling were the bank's warnings about what might be coming: The company could be forced to pay out as much as $10 billion to resolve some disputes over the toxic mortgages it sold to investors around the globe. "We would expect resolution of these matters to be a protracted process which could take years to conclude," Chief Financial Officer Charles Noski said in a conference call with analysts and investors.

The company struck a different tone from just two months ago, when chief executive Brian T. Moynihan said the bank was meeting those disputes with "hand-to-hand combat." On Friday, such language was absent. Instead, the bank explained that it was setting far more money aside for the troubles it could be facing ahead. The bank's earnings included some signs that Bank of America is recovering along with the nation's economy. The soured loans it had issued to businesses and homeowners, for instance, declined by 5 percent from the fall and 9 percent from a year earlier.

Still, the earnings report overall left investors with a deepening concern, said Shannon Stemm, an analyst with the brokerage Edward Jones. They knocked down the company's share price Friday by 2 percent. Stemm said investors wonder: Is Bank of America "emerging as the bank that's continuing to struggle as opposed to peers who basically seem to be progressing back to normal faster?" Bank of America was the last of the U.S. banking giants to issue its year-end financial results. These companies continue to contend with fallout from the financial crisis.

Borrowers continue to default on loans. Allegations of robo-signing and other irregularities in foreclosure practices have made it harder for the banks to evict delinquent homeowners, sell the houses and cut their losses. Government investigations loom. Despite these problems, Wells Fargo and J.P. Morgan Chase showed sharply improved profits, while Bank of America stumbled again into the red.

Bank of America dug itself into an especially deep hole by taking over Countrywide Financial, one of the most prolific issuers of problem loans, in 2008. It faces expensive lawsuits from mortgage investors who say the bank misrepresented the quality of the loans when it sold them. Now those investors are trying to get their money back. In the quarterly financial report it released Friday, Bank of America gave new indications of these potential costs.

It put $1.5 billion in reserve to cover potential judgments or settlements from litigation. That was more than triple the amount the bank set aside for litigation during the third quarter of 2010. It also set aside more than $4 billion to buy back bad mortgages, more than four times the amount it reserved in the third quarter. In addition, the bank said in the future it could have to pay $7 billion to $10 billion to private claimants - beyond what it has already put in reserve. Those numbers are the high end of the bank's possible liability, not the probable outcome, Noski said in the conference call.

Some analysts and investors have worried that the bill could be much bigger. The bank did not say how it came up with its estimate, making it hard for investors to make independent assessments. Analyst David Hilder of Susquehanna Financial Group estimated that the bank is likely to pay less than $5 billion in such future claims. Though it would bite into Bank of America's earnings, the bank could handily absorb even the upper end of its estimate, Hilder said. "I would view it as, at most, a minor financial impact - somewhere between a parking ticket and a speeding ticket," Hilder said.

Bank of America announced this month that it took a significant step toward containing the damage, agreeing to pay $2.8 billion to Fannie Mae and Freddie Mac. Those investors are operating as wards of the government, and the payment contributed to the bank's fourth-quarter loss.

Bank of America: Probably Still Screwed
by John Carney -

Brian Moynihan looked and sounded confident this morning as he closed out his first year as President and CEO of Bank of America. This is quite a feat considering that Bank of America posted a fourth-quarter net loss of $1.24 billion, or 16 cents a share. Analysts had expected the bank to earn 14 cents a share.

Revenue, which analysts had predicted would come in at $25 billion, was down 11% to just $22.7 billion. The $3 billion mortgage repurchase provision Bank of America announced just 3 weeks ago has grown to $4.1 billion. The bank took an additional $2 billion charge on the declining value of Countrywide. Bank of America is trying to sell the market on the idea that last quarter—in fact all of 2010—saw a close to its troubles.

"Last year was a necessary repair and rebuilding year," Moynihan said. "Our results reflect the progress we are making at putting legacy—primarily mortgage-related-issues behind us." On CNBC’s Squawk Box, Moynihan said that the mortgage-related charges "won’t be recurring." He even said that the bank would like to start raise its dividend in the second half of 2011.

The bank put an upward number of $10 billion on mortgage repurchase liability, but noted that theoretically the number could be as low as zero. The "we put that behind us" line seems to be working. DealBook said the losses underscore "the still lingering effects of the mortgage mess." Any number of other stories relate the losses to the acquisition of Countrywide and those "legacy" loans from 2005-2008, the worst years of the housing bubble.

I’m not so sure the problems at Bank of America are all in the past. Let’s focus on Bank of America’s mortgage lending. Now everyone knows the old story line about mortgages that goes like this: following the credit crunch of 2008, mortgage lending was much tighter, underwriting standards much better, and mortgage quality much higher. The problem is that there is very little evidence to support this. In fact, we have lots of anecdotal evidence that the mortgage pool of 2009 might be nearly as toxic as those from the worst years of the housing bubble.

Let’s run through some data points on 2009:
  • The mortgage volume was GIGANTIC. Around $2 trillion of home loans were made in 2009, the majority of them by the largest banks. That’s not really that far behind 2007’s volume of $2.4 trillion.
  • Bank of America was the second largest mortgage lender in 2009, behind Wells Fargo. Its volume was up 116% over the previous year. Meanwhile, Citigroup and JP Morgan were pulling back, allowing the size of their mortgage business to shrink.
  • Freddie Mac recently conducted a review of a sampling mortgages sold to it by Citigroup, and discovered that mortgages in the sample from 2009 had a 32% defect rate. It’s highly likely that other banks, including Bank of America, had similarly flawed mortgage processes in 2009.
  • The recent robo-signing scandal has demonstrated that banks had pitiful internal controls over the foreclosure process as late as October of 2010. There’s good reason to suspect that the mortgage origination and purchase process is still broken too.
  • The government intervened heavily in the housing market by putting in place a home buyer tax credit that allowed some buyers to pay for their downpayments with the tax credit. Essentially, some of these people put no money into their houses. We have no good estimate about how large this problem might be.
  • The growth of the balance sheets of the FHA, Fannie, and Freddie took a lot of the immediate risk out of lending—risk that could return if the government mortgage companies start demanding that banks repurchase loans or cancelling insurance.

So far, the mortgages from 2009 have been performing well. But they are only one year old—and during much of that year home prices were appreciating. If home prices dip again, many of these borrowers will find themselves with declining equity and increasing reasons to default. Legal backlash against foreclosures has made it possible for many homeowners to stay in their homes for a very, very long time after they stop paying.

In short, we may soon discover that the home loans made in 2009 were far worse than is currently appreciated. And Bank of America was the second biggest lender in that market. The "lingering" mortgage mess may wind up lingering a lot longer than anyone thinks.

Americans Dipping Into Savings
by Mark Whitehouse - Wall Street Journal

Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve. That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year.

To some extent, people are acting exactly as policy makers want, at least in the short term. By holding interest rates near zero, the Fed is creating an incentive to spend rather than save — or to “save” in a different way by paying down expensive debt. With three-month certificates of deposit offering annualized interest of less than 0.3%, using available cash to pay off a credit card that charges 30% or a mortgage that costs 5% makes a lot of sense. Over the two years ending September 2010, U.S. consumers — largely through defaults, but also through pay-downs — shaved nearly a billion dollars off their mortgage and other debts, a shift that could make them less sensitive to credit freezes like the one we just suffered.

In the longer term, though, Americans need to do more old-fashioned saving as well. One recent poll found that only 35% of Americans had enough emergency savings to cover three months of living expenses. The less money they have for a rainy day, the more vulnerable they will be to job losses and other income shocks. As we have learned in the most recent crisis, credit is far from a perfect substitute for a healthy bank account.

State Bankruptcy Option is Sought, Quietly
by Mary Williams Walsh - New York Times

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign. But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides. Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout.

Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors. "All of a sudden, there’s a whole new risk factor," said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words "state bankruptcy" has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975. Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers. "They are readying a massive assault on us," said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. "We’re taking this very seriously."

Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits. "States have adequate tools and means to meet their obligations," the report stated.

No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market. Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

Mr. Maco said the mere introduction of a state bankruptcy bill could lead to "some kind of market penalty," even if it never passed. That "penalty" might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold. But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.

"The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed," said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government. Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.

He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008. "Now Congress is much more conservative," he said. "A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about."

Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market. "We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy," he said.

A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, "Give States a Way to Go Bankrupt," in The Weekly Standard. It said thorny constitutional questions were "easily addressed" by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers. "I have never had anything I’ve written get as much attention as that piece," said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.

Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.

Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago. The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.

Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services. "I’ve talked to some people from Congress, and I’m going to talk to some more," he said. "This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog."

The metastasizing state-bankruptcy meme
by Felix Salmon - Reuters

Talk of introducing legislation allowing states to declare bankruptcy began in earnest in November. A speech by Newt Gingrich was followed up by a big Weekly Standard piece on the subject by David Skeel, and soon the meme filtered into the blogosphere. Unlike most political chatter, this kind of talk isn’t cheap at all: it’s very expensive. As the subject has refused to go away—which means, as House Republicans have continued to work on drafting some kind of bill—the municipal debt market has plunged.

Now, with a massive front-page story in the NYT, the stakes have got even higher. Mary Williams Walsh is well aware of what she’s doing: she talks explicitly about "the fear of destabilizing the municipal bond market with the words ’state bankruptcy’"; while at the same time splashing those very words across the most influential public real estate in the world. She frets that the mere introduction of a state bankruptcy bill could lead to some kind of market penalty, even if it never passed—but the fact is that her own article, in and of itself, is almost certain to drive up borrowing costs and uncertainty.

Walsh’s piece comes on the heels of an important report from the Center on Budget and Policy Priorities, which makes a compelling case that state bankruptcy is neither necessary nor desirable:
It would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations. The potential for bankruptcy would just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions. In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in infrastructure.

But the message isn’t sinking in. James Pethokoukis is a reliable guide to what the GOP is thinking:
The NYT article raises the specter that states would be shut out of credit markets if allowed to declare bankruptcy, or if one should actually take that step if federal law is changed. That seems unlikely, although some may have to pay higher interest rates. Municipalities and even countries repudiate debt and yet continue to borrow. And even investor apprehension would be balanced by states getting their finances in order, which should appeal to potential lenders.

This is completely bonkers. If states are allowed to file for bankruptcy, then Illinois, for one, would be shut out of credit markets. And if Illinois or any other state were to actually go ahead and file, then many other states, including New York, would be shut out of credit markets. That’s not "unlikely," it’s certain.

As for Jim’s idea that "municipalities and even countries repudiate debt and yet continue to borrow," he’s just plain wrong about that. A country which repudiates debt has no access to private credit markets: the only borrowing ever available to such a state is from official-sector institutions. I defy Jim to name a single municipality or country which has repudiated its debt and yet continued to borrow money in the private markets.

That said, it’s pretty unthinkable, even if a state were to declare bankruptcy, that it would go so far as to repudiate its debts. Indeed, bankruptcy is a formal recognition that a borrower is sinking under the weight of far too many legitimate debts; it seeks to restructure some of those debts to make them manageable, rather than repudiating them outright.

On the other hand, Jim’s utterly wrong that somehow bankruptcy is costless to the states, and that the downside of forcing a haircut on lenders would be fully counteracted by the upside of putting the states on a solid fiscal footing. Lenders really don’t much care about fiscal sustainability: all they care about is that they get their money back, as contracted, in full and on time.

It’s worth remembering here that most municipal bondholders are individuals, rather than sophisticated institutional investors. If your aunt Sally put her savings into state bonds, she is not going to be happy if she can’t get her money back, and she is certainly not going to be mollified by talk of lower deficits in future. The deficits are what allowed her to buy the bonds in the first place; she doesn’t particularly want them to go away. But there’s no way she’ll stand for a haircut. And, of course, she votes.

The fact is that states are not going to declare bankruptcy, and they’re not even going to be allowed to declare bankruptcy. So the worst thing that can happen, for the municipal bond market, is that people continue to talk about municipal bankruptcy for the next couple of years. Let’s take the option off the table, once and for all, rather than taking it seriously and thereby only making it harder for states to borrow the money they need.

California governor declares fiscal emergency
by Jim Christie - Reuters

California Governor Jerry Brown declared a state of fiscal emergency on Thursday for the government of the most populous U.S. state to press lawmakers to tackle its $25.4 billion budget gap.
Democrat Brown's declaration follows a similar one made last month by his predecessor, former Republican Governor Arnold Schwarzenegger.

Democrats who control the legislature declined to act on Schwarzenegger's declaration, saying they would instead wait to work on budget matters with Brown, who served two terms as California's governor in the 1970s and 1980s. Brown was sworn in to his third term early this month and has presented lawmakers with a plan to balance the state's books with $12.5 billion in spending cuts and revenue from tax extensions that voters must first approve.

Brown has said he wants lawmakers to act on his plan by March. His fiscal emergency declaration is meant to underscore that target, a spokeswoman said. Brown's declaration, which is largely procedural, says it affirms Schwarzenegger's December declaration, giving lawmakers 45 days to address the state's fiscal troubles. The 72-year-old governor also wants the legislature to back a ballot measure for a special election in June that would ask voters to extend tax increases expiring this year to help fill the state budget's shortfall.

Brown needs a handful of Republican votes to put the measure to voters. Republican leaders in the legislature have said they doubt those votes will come. By contrast, the state senate president pro tem, Darrell Steinberg, told Reuters on Thursday he is backing Brown's budget plan and that he would press other lawmakers to do so as well: "I think the Brown framework is the right framework ... We intend to meet the March deadline." (Reporting by;

Vallejo Plan Would Give Unsecured Creditors 5 to 20 Cents on the Dollar
by Randall Jensen - Bond Buyer

Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court. The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

"The city regrets that it cannot pay a higher percentage," Vallejo officials said in the court filings. "The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets." The city has also settled with NPFG over fees that backed insured certificates of participation, according to court documents.

The formal legal plan is based on a five-year road map City Council members approved at the end of November, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund. Union Bank, the largest creditor, is owed $50 million after holding letters of credit on four series of defaulted COPs. The filing indicates Union Bank will get a new "lease-leaseback" obligation in exchange for canceling the COP series. It will also get $6 million of unspent proceeds from the COPs held under trust agreements. Union Bank is slated to get 40% less than what it would have received from the original COP scheduled payments, according to the Vallejo filing.

NPFG had sued for access to state vehicle license fees that backed $4.8 million of defaulted 1999 COPs. Under the plan, the insurer will get reduced and restructured payments through fiscal 2024-2025 as part of an agreement with the city outlined by the court documents. Vallejo’s exit strategy includes restructuring the debt owed to unsecured creditors, many of which are employees and retirees, by creating a $6 million pool of cash that will be paid out over two years. They will still be able to pursue one of the city’s insurance pools to settle the liabilities, according to the documents.

The city received 1,013 proofs of claims. They are comprised of 969 general unsecured claims, 12 unsecured priority claims, and 32 secured claims, according to court documents. The claims totaled $479 million, with $262 million of general unsecured claims, $45 million of unsecured priority claims, and $172 million of secured claims. Eventually, creditors will vote on the plan and the court will evaluate the voting before any approval is given.

Bondholders, Unions In High-Stakes Battle Over State Bankruptcy
by Daniel Fisher - Forbes

The oddly passive headline on the New York Times Page One story today ("A Path Is Sought For States To Escape Their Debt Burdens") obscures a very active behind-the-scenes battle in Washington. On one side are representatives of the municipal bond community, who fret about being second in line behind unionized employees when states have to choose between paying debt interest or their ballooning retirement-benefit bills.

On the other side are union reps, who have fought hard to win legislation in all 50 states granting them special protection from raids on their retirement funds. According to this GAO report, nine states including Illinois and New York, even provide constitutional guarantees of vested benefits. Congress could monkey with that scheme through bankruptcy law, however, something it has done repeatedly to protect the interest of other special creditors including student lenders and landlords.

Hence the backroom struggle over potential federal legislation to allow states to modify those benefits. It came to widespread public attention after University of Pennsylvania expert David Skeel broached it in this Slate article in November. A source in the bankruptcy world tells me the Times article today mostly reflects the dreams of muni-bond types, who have been chatting with Congress about a law that would protect them from state defaults. AFSCME, the 1.6 million-member public employee union, doesn’t think that’s such a good idea. "They are readying a massive assault on us," says Charles M. Loveless, AFSCME’s legislative director, in the Times article.

It wouldn’t be unusual for Congress to step in and decide which creditors take priority when an entity can’t pay its bills. They’ve done that already with the bankruptcy code. My guide to the world of court-overseen reorganizations ticks off the special beneficiaries so far:
  • Student lenders. "A student loan is a life sentence," this person says, almost impossible to discharge absent a tough-to-prove hardship.
  • Utilities. They get paid before, during, and after a company goes into reorganization, unlike other unsecured creditors and even lawyers.
  • Lawyers. They can be paid a lump sum up front, but in big, complex bankruptcies they’re often working "for free" at the end. OK, maybe not for free, but the court isn’t authorizing their bills.
  • Derivatives dealers. To protect the integrity of the markets or some such logic, they get to grab their collateral when a counterparty gets in trouble. Think Goldman vs. AIG.
  • Retirees. Companies can break most agreements to provide retiree health benefits at will — until they go into bankruptcy. Then they have to honor them until they get out.
  • Landlords. Bankruptcy law requires debtors to keep up with their lease payments (but the landlord also is prohibited from evicting them).
    With all these exceptions riddling the bankruptcy code, it’s no wonder lawyers and lobbyists are suiting up for the mother of all exceptions. The undeclared civil war between taxpayers and bondholders on one side, and municipal employees on the other, is entering a new phase.

Texas budget woes becoming a national discussion
by Matt Johnson - KXXV News

Texas budget cuts have been a hot topic for months and now they are gaining national attention.  When a first draft of the new budget was made public yesterday, the nation found out the truth. The 82nd Texas Legislature announced proposed cuts to its budget that were so drastic it became a nationwide discussion. Health advocates have focused on a proposed 10 percent cut to Medicaid. The New York Times opinion page has criticized Governor Perry for promising "billions of dollars in surplus" that weren't there.

One health advocate in Austin says dramatic cuts are weakening the state. "Cuts to Medicaid in Texas have gotten national attention because Texas already is already so disproportionately uninsured, and so much of the insurance that people do have is provided by Medicaid," said Bee Moorehead with the Austin policy group Texas Impact.

However, a tax expert in California believes Texas is handling the crisis better than his own state. "I don't think any state is recession-proof, but the way Texas has grown and their more effective tax policy will bring them out of their recession a lot quicker than some other states," said David Wolfe with the Howard Jarvis Taxpayers Association in California.

Lawmakers in Austin and California have had to make record cuts to medicaid to save costs. Governor Perry has said he reached out to California on how they can work together to solve their deficits. Texas is likely to see even more attention when the U.S. Supreme Court eventually decides if states have the power to cut even more from Medicaid.

Europe risks getting it wrong again on rate rises
by Hugh Hendry

The euro project has not gone according to plan. It reminds me of the story of the James Bond character Q, based on the British intelligence officer Charles Fraser-Smith. It was he who invented a compass for spies hidden in a button that unscrewed clockwise. The contraption was based on the simple yet brilliant theory that the unswerving logic of the German mind would never guess that something might unscrew the wrong way. This is really what happened with the euro. New member states were supposed to take lower German interest rates and invest their resources wisely to improve and deepen their productive capacity. Instead, they used the advantage to finance speculative asset bubbles. The peripheral nations of Europe turned the wrong way. The Germans are unhappy.

But, desperate to cling to monetary union, the other European sovereigns have opted to default on their spending promises to voters rather than impose a haircut on their financial creditors. In the 1920s the pay-off structure had been very different. The first world war took an intolerable toll on the typical household both in terms of the loss of life and financial well-being; everyone had become poorer. Accordingly, there was little willingness on the part of the ruling political class to force austerity measures to redress the fiscal imbalances. The people had suffered long enough. Consequently, there was much procrastination and fiscal deficits persisted way beyond the end of the war, making capital markets reluctant to accept the waning security of government paper and forcing the sovereign to rely on the central bank’s printing press.

This time around, however, the political class has concluded that the Greeks (especially the Greeks!) and the other peripheral states have done so well off the back of the euro project that it is their turn to shoulder the burden. They calculate that the social pain would be less severe than the financial costs of a debt default and/or a euro exit. Of course, this is to neglect the financial consequences of bailing out the financial sector in 2008 and its ensuing impact on the ordinary household. Can an analogy be drawn between the first world war and the banking bail-out? Certainly both events had a disastrous impact on the sovereign fiscal balance. Consequently the social mood has darkened considerably. Emotions run high and the term speculator has even become pejorative. Today’s non-financial media are clearly of the opinion that the people have suffered enough.

Ireland is indicative of the social pain. Nominal incomes have already fallen substantially and the working population has endured severe job losses and wage cuts. Their reward is a second austerity package. The average household is now being asked to pay additional taxes, minimum wages are to be cut further and more job losses are a virtual certainty. The country itself is only held together by the premise that the economy will grow by 2.75 per cent a year for the next four years. Dream on.

I believe the European bureaucrats have badly misjudged the public mood. Perhaps they are too closely aligned with the plutocracy of the financial and banking sector. Contrast the mood of the ordinary household with that of my rich hedge fund friends. Today the average European long/short fund is running its most bullish risk exposure in many years and is feeling ebullient regarding the rising tide of corporate profitability as businesses pare back employment levels. My grumble is that I suspect the omnipotent powers of my peers’ central bankers might be found wanting just when they are needed most.

For the shadow of policy error lurks once more. The European Central Bank’s president even proclaimed his satisfaction with his bank’s decision to raise rates back in the cauldron month of July 2008. I salute him for his willingness to subject the bank’s decisions to open scrutiny. But tightening monetary policy amid the deepest economic crisis of the past 50 years was perhaps not his institution’s finest hour. And with headline inflation rates being boosted by relative price rises in the commodity sector, as Chinese policymakers continue to plug 10 per cent into their GDP calculators, another poorly-timed rise in European rates cannot be so easily dismissed.

The markets are already pricing in the near certainty of a quarter-point rise from the Bank of England by May with another increase expected before October. But perhaps not wanting to be left out, the zealous guardians of Europe’s monetary system, who measure inflation rates across the 17-country bloc to the second decimal point, have recently raised their rhetoric to such an extent that investors are openly speculating that in spite of the continent’s tight fiscal policy European rates are now likely to rise before the end of summer. As they say in the land of macro investing, the cycle isn’t over until the Europeans lift rates. Just don’t bet on money staying tight for long.

Ilargi: Who are the people who claim we need $100 trillion in extra credit in the next ten years? Oh, only just about anyone who counts:

World Economic Forum in Davos 2011: who's on the guestlist
by Philip Aldrick - Telegraph

The Duke of York captured the mood at last year’s Davos gathering of the rich and influential as well as anybody.

Where the tone at the 2009 meeting had been a year of "pessimism", in 2010 it had been one of "pragmatism". For "optimism", he told the 250 guests at his evening reception, you would need to come back in 2011. Within two weeks, the 2,000 delegates at the World Economic Forum’s flagship event in the Swiss Alpine resort will find out if the UK’s Special Representative for International Trade and Investment was right.

Once again, Davos will be peopled by business celebrities, feature workshops and think-ins, press conferences and private seminars, and of course, parties and plenty of opportunity for deal-making in hotel bars. The slopes will be empty and the streets full of suits. The Duke of York will be back, and he will not be the only royal. Abdullah bin Abdulaziz Al Saud, a member of the Saudi royal family, is also making an appearance.

They will be rubbing shoulders with politicians and business leaders from across the world as everyone hopes to enjoy a little "spirit of Davos", the informal rule that delegates should share their time and thoughts freely. George Osborne and David Cameron are flying in, briefly, and the Chancellor is guest of honour at the British Business Leaders Lunch, one of the key events of the week.

The bankers will be back, too. In purdah last year, the financial titans turned up in fewer numbers. All the discussion was about bonuses, which must be the expectation this year too, though other issues are likely to find space. Bob Diamond, Barclays CEO, Jamie Dimon, JP Morgan Chase’s CEO, Josef Ackermann, Deutsche Bank’s CEO, John Mack and Walid Chammah of Morgan Stanley, Goldman Sachs’s Gary Cohn and Richard Gnodde, Vikram Pandit of Citi, Eric Daniels, the outgoing boss of Lloyds Banking Group, Credit Suisse boss Brady Dougan and HSBC chief, Stuart Gulliver, will all be trudging through the snow.

Billionaires will mingle with the mere millionaires, too. Bill Gates and his wife Melinda are representing their Foundation, Google co-founder Larry Page is showing up, as is Lakshmi Mittal, the steel magnate. George Soros is leading the hedge fund contingent, which is represented also by Chris Cooper Hohn of TCI and Bill Browder of Hermitage Capital Management. Private equity also has a strong showing. Henry Kravis of Kohlberg Kravis Roberts, and Stephen Schwarzmann of Blackstone to name a couple.

Industrialists and retailers will also be there in force. Terry Leahy of Tesco, Marc Bolland of M&S, Indra Nooyi of PepsiCo, pictured, Wal-Mart’s Doug McMillon and Nike’s Mark Parker among them. BP’s Carl-Henric Svanberg and Shell’s Peter Voser will be there too. Let’s hope the annual brainstorming and networking session fills them with the optimism the Duke predicted.

Strong China growth boosted by $1.5 trillion in loans
by Malcolm Moore - Telegraph

For the second year running, Chinese banks loaned out more money than the UK’s entire public debt. Their extraordinary largesse helped the Chinese economy maintain the 10pc growth level it has recorded each year, on average, for the last two decades.

Despite a global economic malaise, the National Bureau of Statistics said China’s gross domestic product (GDP) had expanded by 10.3pc compared with the 9.2pc it grew in 2009. "It is not difficult to grow at double digits if you are pumping money into the economy like there is no tomorrow," said Alistair Thornton, an economist at IHS Global Insight in Beijing. "The banks are lending more than twice as much as they were before the financial crisis and they are also printing new money - money supply is up 50pc from a couple of years ago."

Officially, Chinese banks loaned 7.95 trillion yuan (£757bn) last year. However, the banks also made at least 3 trillion yuan of loans off the balance sheet, according to Fitch, the credit-rating agency. That near 11 trillion yuan (£1 trillion) total far exceeds the UK’s entire public debt of £863bn as of November 2010. However, Chinese banks must bring all of their hidden liabilities back on to their books this year, the regulator warned on Thursday as Beijing tried to exert some control.

China turned on the flow of easy credit in the wake of the financial crisis, when banks were ordered by the Communist party to lend as much money as possible. The banks were keen to do so - for many of them, their business model depends on the growth of their loanbook. The Chinese central bank has set interest rates on deposits at 2.75pc and on loans at 5.81pc, giving the banks the difference between the two in profit. "They are making automatic profits," said Mr Thornton. "But at some stage, you have to pay for all of this."

Most economists are predicting that China’s economic growth will eventually slow down, but that this year will be again buoyed by new loans: the government has set a target of 7.5 trillion yuan of new lending for 2011. "What I am afraid of is not that China has a hard landing in 2011, but that it does not have a landing at all," said Wang Tao, chief China economist at UBS, at a conference in Shanghai.

The rapid growth in liquidity has raised the spectre of inflation, which hit a 28-month high of 5.1pc in November before moderating to 4.6pc in December. Overall, consumer price inflation grew by 3.3pc in 2010, but is expected to rise this year. Reacting to the possibility that Thursday's strong GDP figures would push Chinese policy makers to raise interest rates more quickly, markets across Asia fell. Shanghai's stock market dropped 2.9pc, Hong Kong fell 1.7pc, Tokyo closed down 1.13pc and Sydney lost 1pc.

China May Be Masking Its Purchase of US Securities
by Floyd Norris - New York Times

For eight years after the United States resumed running large budget deficits in 2002, China was the largest lender, buying a fifth of the new Treasury securities sold during that span — an expenditure of more than $900 billion. During 2006, China financed more than half the American deficit. When the financial crisis struck hardest, China spent more than $100 billion on Treasuries over the two-month period of September and October 2008.

But over the last year, China has been a net seller of Treasury securities, according to figures released this week by the American government. If that is true, it would be extraordinary, considering the size of the bilateral trade deficit, and there has been speculation that China has been purchasing Treasuries through accounts in other countries.

The Treasury Department estimated that China reduced its holdings of Treasuries by nearly $11 billion in November alone. For the 12 months through November, as the accompanying charts indicate, China reduced its holdings of Treasuries by more than $36 billion. The Treasury issues separate estimates for China and Hong Kong, but they are combined for purposes of the charts and this article.

The Treasury figures indicate that over the eight years from the beginning of 2002 through the end of 2009, the total amount of United States government debt outstanding — not counting securities owned by other agencies of the American government, like the Federal Reserve and the Social Security Administration — rose by $4.4 trillion, to $9.3 trillion. Of that, China provided about a fifth and other foreign countries provided two-fifths. The remaining 40 percent was purchased by Americans, although for a time in the middle of the decade, Americans were selling Treasuries even though the government was stepping up its borrowing.

For the first 11 months of 2010, American banks, institutions and individuals bought about three-fifths of the $1.5 trillion of additional Treasury debt, while China sold some and other foreign jurisdictions bought the rest. The figures are estimates, and include both private and government transactions. The charts show the cumulative 12-month changes in holdings of Treasuries for three classes of investors — China, the rest of the world and Americans. The American figures exclude purchases by the Fed and other government agencies.

It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers. If so, such purchases would show up as British purchases. As it turns out, Britain is estimated to have been the largest purchaser of Treasuries over the 12-month period, adding $356 billion to its holdings. That made it by far the largest buyer, followed by Japan. The only other major seller during the period was Russia, according to the government estimates.

If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from.

SocGen crafts strategy for China hard-landing
by Ambrose Evans-Pritchard - Telegraph

Société Générale fears China has lost control over its red-hot economy and risks lurching from boom to bust over the next year, with major ramifications for the rest of the world. The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes.

In a report entitled The Dragon which played with fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years. It has waited too long to drain excess stimulus. "Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said. Under the bank's "risk scenario" - a 30pc probability - inflation will hit 10pc by the summer. "This would cause tremendous pain and fuel widespread social discontent," and risks a "pernicious wage-price spiral".

The bank said overheating may reach "peak frenzy" in mid-2011. Markets will then start to anticipate a hard-landing, which would see non-perfoming loans rise to 20pc (as in early 1990s) and a fall in bank shares of 50pc to 75pc over the following 12 months. "We think growth could slow to 5pc by early 2012, which would be a drama for China. It would be the first hard-landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it," said Mr Bokobza, head of global asset allocation.

However, it may bring down bond yields and lead to better growth in Europe and the US, a mirror image of the recent outperformance by the BRICs (Brazil, Russia, India and China). Diana Choyleva from Lombard Street Research said the drop in headline inflation from 5.1pc to 4.6pc in December is meaningless because the regime has resorted to price controls on energy, water, food and other essentials. The regulators pick off those goods rising fastest. The index itself is rejigged, without disclosure.

She said inflation is running at 7.6pc on a six-month annualised basis, and the sheer force of money creation will push it higher. "Until China engineers a more substantial tightening, core inflation is set to accelerate. The longer growth stays above trend, the worse the necessary downswing. China's violent cycle could be highly destabilising for the world." Charles Dumas, Lombard's global strategist, said the Chinese and emerging market boom may end the same way as the bubble in the 1990s. "The basic strategy of the go-go funds is wrong: they risk losing half their money like last time."

Société Générale said runaway inflation in China will push gold higher yet, but "take profits before year end". The picture is more nuanced for food and industrial commodities. China accounts for 35pc of global use of base metals, 21pc of grains, and 10pc of crude oil. Prices will keep climbing under a soft-landing, a 70pc probability. A hard-landing will set off a "substantial reversal". Copper is "particularly exposed", and might slump from $9,600 a tonne to its average production cost near $4,000.

Chinese real estate and energy equities will prosper under a soft-landing, The bank likes regional exposure through the Tokyo bourse, which is undervalued but poised to recover as Japan comes out of its deflation trap. If you fear a hard landing, avoid the whole gamut of Chinese equities. It will be clear enough by June which of these two outcomes is baked in the pie.

Japan hits ‘critical point’ on state debt
by Mure Dickie - Financial Times

Japan has hit a "critical point" where it risks losing investor confidence if politicians fail to reach agreement on how to rein in the ballooning national debt, a cabinet minister has warned.
"We face a dreadful dream that one day the long-term interest rate might rise," Kaoru Yosano, the new minister for economic and fiscal policy, told the Financial Times. "So we have to be very careful [to] ensure the credibility of our economy and the credibility of our government."

His stark comments highlight government determination to introduce a sweeping reform of the tax system that would include a hike in the 5 per cent consumption tax. Naoto Kan, prime minister, drafted Mr Yosano, a veteran opposition politician, into the cabinet last week to help build cross-party agreement on fiscal reform. Worries about Japan’s fiscal future have been fuelled over the past year by the sovereign debt crises suffered by eurozone countries, with Mr Kan warning last June that Japan could end up like Greece unless it tackled its rising debt.

Japan has no difficulties financing its deficit and there is no sign that it could face a sovereign debt crisis in the near future. The benchmark 10-year Japanese government bond trades at a yield of less than 1.25 per cent. But Mr Yosano warned it be would wrong to assume such a benign environment would continue indefinitely. "Our fiscal status is at a critical point . . . the circumstances surrounding Japan may change overnight," he said. The deep recession into which Japan plunged in 2008 has dramatically worsened its already chronic government deficits, with new bond issuance set to outstrip tax revenues for the third year in a row in fiscal 2012.

The surprise appointment of Mr Yosano, a fiscal conservative who previously served as economic policy minister under the former ruling Liberal Democratic party, has underscored the determination of Mr Kan to address the yawning state deficit. Japan’s gross national state debt will soon rise above 200 per cent of gross domestic product. Mr Yosano said he aimed to draw up a plan for funding fast-rising social security costs that could be the basis for cross-party discussion by June.

Many politicians, both in the ruling Democratic party and opposition groups, share Mr Yosano’s conviction that a substantial increase in the consumption tax will be an essential part of returning to fiscal sustainability. However, opposition groups have shown little interest in joining cross-party discussions, preferring instead to put pressure on Mr Kan to call an early general election. Mr Yosano suggested future consumption tax rises could be introduced over a period of years.

UK's biggest banks could be broken up
by James Quinn Telegraph

Sir John Vickers, the head of the Government-appointed Independent Commission on Banking, has admitted for the first time that an enforced separation of retail and investment banking activities is being considered. In a major speech on Saturday, Sir John said that the Commission is examining a number of scenarios on how retail banking could be protected, such as by having a separate capital base, while investment banking divisions could "fail safely". He said, though, that the ICB is unlikely to favour "radical reforms" which would create "narrow banks".

Although stressing that no final decisions have been taken – the five-man Commission is not due to publish its findings until September – Sir John said the ICB is examining "ring-fencing" retail bank activities from riskier investment banking businesses. Such a move, he suggested, would allow investment banks to fail without hurting retail customers or their deposits. He went on to explain that separating bank activities and their capital requirements could in part reduce the potential for banks to fail.

In a much-anticipated speech, Sir John said that during the financial crisis "rather than suffering a 'perfect storm,’ we had severe weather that exposed a damagingly rickety structure." He continued: "If the probability and/or impact of bank failure, particularly of retail service provision, can be reduced by forms of separation between banking activities, then so too might capital requirements."

Following the speech, given at the London Business School to a grouping of academics, businessmen and politicians, he said during a question and answer session: "We’re considering a range of potential separation possibilities and it could be that the outcome is not to pursue [any of them.]" "It’s not a question of all or nothing," he continued, suggesting that there could be a number of half-way options which might work.

The contents of the speech will be pored over by bankers, analysts and investors alike, attempting to glean some inkling as to what the ICB may recommend when it produces its final report. George Osborne, the Chancellor, said: "I am glad John Vickers is today asking the tough, searching questions about how we protect taxpayers from banks that fail. That’s exactly what Vince Cable and I wanted him to do when we asked him to chair the coalition government’s independent banking commission." The British Bankers Association, the bank’s lobby group, welcomed Sir John’s push away from narrow banking models, and his desire to make "the system safer."

In the wide-ranging 45-minute speech, one of his key tenets was to find a way to ensure that although "financial risks have to be borne…they should not be borne by the taxpayer providing a generous safety net." However he said the inherent government guarantee apparent following the 2008 financial crisis has created a number of distortions in the way that banks take risks, meaning that "systemically-important institutions now have an implicit state guarantee for risk-taking activities".

His detailed analysis based on findings to date of the Commission also touched on the traditional equity-debt structure of banks, and whether in future retail deposits should be placed senior to, or on par with, other senior debt holders. At one point in the speech he questioned whether retail customers are more vulnerable than corporate customers. "One response to this concern could be somehow to ring-fence the retail banking activities of systemically-important institutions and require them to be capitalised on a stand-alone basis."

Meanwhile The Sunday Telegraph understands that Britain’s largest banks could bring in instant account switching within two years as part of a series of major concessions offered to the ICB. The suggestion by banks is expected to be published next week as the Commission releases the evidence provided to it by the banking industry as part of its study into how to make bank safer and more competitive.

Major banks, including Barclays, Lloyds Banking Group and Royal Bank of Scotland have each made detailed submissions to the Commission as they have attempted to argue their case. According to one source, the banks have made clear that they believe the UK retail banking market is as competitive as those in the US and Germany, which have often been cited as examples of countries with more competitive systems.

In a concession to concerns over the length of time it takes customers to move their account from one bank to another, at least one bank is understood to have indicated that making instant switching possible could be done within two years if the Government were to call for it. The banks are also understood to be arguing that a new resolution regime, whereby a major financial institution could be allowed to fail, must be at the heart of the recommendations made by the Commission when it reports back to the Chancellor in September.

UK deputy prime minister Nick Clegg signals support for banks breakup
by Polly Curtis - Guardian

Nick Clegg today indicated the government would back a breakup of banks to "make them safe" and protect the British economy from having to bail them out again. The deputy prime minister said there was a "very strong case" for separating high-risk "casino" banking from low-risk high-street banking to ensure banks were no longer "too big to fail". His comments come after the head of the independent review into banking, Sir John Vickers, indicated he would recommend an overhaul of the banks.

Clegg insisted the issue was more important than the so-called Merlin project – the current round of talks with the banks over bonuses, disclosing executive pay, contributing to a "Big Society" bank and lending more to firms, The talks are reported to have foundered, and an announcement expected as soon as tomorrow has now been postponed. Labour claimed Clegg was attempting to deflect attention from the stalled talks, while Treasury sources insisted they were still considering options to "get the best deal for the taxpayer".

Clegg said on the BBC's Andrew Marr Show: "I think the banking system needs to be made safe. It can never again become such an oversized liability for the British economy. That's why I think there is a strong case to look at the way in which you can hive off or insulate very high-risk, over-leverage banking activities from low-risk, high street retail banking."

He turned fire on the new shadow chancellor, Ed Balls, blaming him for failing to crack down on banking regulation when he was City minister. "If you ask yourself who was in charge of the City when they were gorging themselves on bonuses and lending irresponsibly; who allowed the housing market to let rip, to become a casino, pitching thousands and thousands of British families into debt; who was whispering into Gordon Brown's ear budget after budget, creating this huge fiscal deficit – the answer to all of those questions is Ed Balls," he said.

Senior Labour figures – including the deputy leader, Harriet Harman, and the new shadow foreign secretary, Douglas Alexander – publicly acknowledged that Labour had failed to rein in the banks in the run-up to the financial crisis, but insisted the shadow cabinet now spoke as one on the economy. It follows claims that the appointment of Balls – who has previously advocated a slower deficit reduction than Labour's plan to halve it over the course of this parliament – marked a new split in the shadow cabinet. Yesterday, Balls made his first significant intervention as shadow chancellor, arguing for a repeat of last year's one-off tax on bankers' bonuses to raise £3.5bn to aid the economic recovery.

The Conservative party deputy chairman, Michael Fallon, said: "Their one-off bonus tax would raise far less than the bank levy which we've put in place permanently – something they refused to do when they were in government. Ed Miliband and Douglas Alexander can complain all they like about Labour's terrible record on banks, but Ed Balls, the man responsible for 13 years of regulatory failure, is now back in charge of their economic policy." Alexander told the Andrew Marr Show: "We are determined to pull together, leave behind some of the problems of the past."

UK retailers suffer worst December on record
by Telegraph

British retail sales suffered their worst December on record as retailers battled with Arctic weather conditions and shoppers shunned higher prices. Retail sales volumes declined 0.8pc month-on-month - the lowest reading since records began in 1988, the Office for National Statistics (ONS) said. Food stores saw a 3.4pc drop in year-on-year sales volumes - another record plunge - as prices soared 5pc.

Today's official figures offer a definitive view on the impact the adverse weather and economic climate had on Christmas sales, as varied trading reports from retailers such as Marks & Spencer, Next and HMV have muddied the overall picture in the sector. High Street giant M&S and British department store favourite John Lewis reported strong sales growth earlier this month, while fashion chain Next and entertainment group HMV blamed the severe weather for a slump in sales. In the supermarket industry, Sainsbury's led the way, with 3.6pc like-for-like sales growth in the 14 weeks to January 8, while UK number one Tesco disappointed with 0.6pc same-store sales growth.

But the biggest drop within overall retail sales volumes came from food, which declined 0.9pc month-on-month, the ONS said. Soaring food prices, reflected within the rising rate of Consumer Price Index inflation which stands at 3.7pc, were "not helping" food retailers, the ONS said. But companies noted a change in shoppers' behaviour during the severe weather spell - consumers were turning to local stores to buy small volumes, rather than heading to out-of-town behemoths for weekly or monthly shops.

The ONS said internet sales continued to strengthen - now constituting a record 10.6pc of all retail sales - as £770m was spent online in December. But even internet food sales were hit by the weather, the ONS added, as retailers noted a tailing-off of sales after December 13, when reports of delayed and failed deliveries started to surface. Household goods stores also performed badly, matching the 0.9pc month-on-month decline seen in food. The ONS said there was no evidence to suggest consumers were snapping up big-ticket items, such as televisions or fridges, ahead of January's VAT hike, as electrical appliances declined in December.

Department stores did weather the storm, and were up 0.3pc month on month, with the new Xbox Kinect selling well across the sector. The ONS noted a rise in sales volumes at sport equipment stores, which were helped by the weather as outdoor wear sold particularly well. The volume of retail sales was also flat year-on-year, once again a record low, the ONS said. The value of retail sales rose 2pc year-on-year, but declined 0.6pc month-on-month.

Howard Archer, chief economist at IHS Global Insight, said the update increased the chances that GDP figures on Tuesday would undershoot his initial estimate of 0.4pc growth in the fourth quarter of 2010. The UK expanded by 0.7pc in the previous quarter. "December's weakness meant that retail sales volumes rose by just 0.2pc quarter-on-quarter in the fourth quarter, which was down substantially from growth of 0.9% in the third quarter and suggests that overall consumer spending growth was muted in the fourth quarter," he said.

European Governments Weigh Bond Buybacks
by Marcus Walker, Costas Paris and Alkman Granitsas - Wall Street Journal

European governments are considering ways to reduce the debt burdens of struggling euro-zone countries such as Greece through bond buybacks, as part of broader measures aimed at ending the crisis of confidence in Europe's common currency. The buyback ideas being discussed would allow Greece or other indebted countries to borrow money from Europe's bailout fund, and use it to buy up their own bonds at depressed prices from investors or from the European Central Bank, said senior European officials.

Such buybacks would allow countries to reduce their total debt burdens by paying less than the face value of their bonds. Officials say the trades' voluntary nature would avoid unsettling investors with debt defaults or a forced restructuring of bonds. Debt buybacks could be an "elegant" way to help the euro's weakest members repair their finances, European officials said. But agreement on the idea, and on other proposals to boost the bailout fund's firepower and increase its flexibility, depends on indebted countries offering something to Germany and other financially strong countries in return, these officials said. If the bond-buying idea is agreed upon, it may not come into effect immediately, they said.

Germany, which would have to increase its financial support for the bailout fund to facilitate an expansion in its activities, is linking its consent to other countries' willingness to adopt tough economic overhauls, said officials in Chancellor Angela Merkel's government. Berlin wants euro-zone members, as well as European Union countries that don't use the euro, to sign up to a program to increase economic competitiveness. Among other ideas, Germany is pushing for countries to raise retirement ages, to scrap policies that link wages and pensions to inflation, to adopt laws or constitutional amendments requiring balanced budgets, and to harmonize aspects of their tax systems.

Such changes would mimic German policy overhauls in the past decade, which have helped turn the country from a stagnant economy with mass unemployment into the Continent's economic powerhouse again. Similar changes in other countries would boost economic growth and bring public debts in the euro zone back under control, German officials argue. A program of German-inspired overhauls would also make it easier for Ms. Merkel to persuade German voters, and her own coalition's lawmakers, to swallow a bigger German commitment to Europe's bailout mechanism.

Ms. Merkel faces a struggle to sell more-generous euro-zone aid to her coalition. Her junior partners, the Free Democrats, are opposed to putting more German taxpayer money on the table, and many lawmakers in the chancellor's own Christian Democratic Union are also wary of angering voters. The coalition is already struggling in opinion polls ahead of a string of regional elections in coming months. Despite opposition from the Free Democrats, Ms. Merkel's finance minister, Wolfgang Schäuble, said last week that he supports strengthening the main bailout fund, the European Financial Stability Facility, so it can lend as much as €440 billion ($592 billion) to struggling countries as originally intended when the entity was created last summer. The EFSF's true lending capacity is currently far lower.

The discussions about bond buybacks show Germany is also responding to calls from ECB President Jean-Claude Trichet, among other European leaders, to make the EFSF more flexible. At present, the fund can offer only last-ditch loans to countries facing insolvency. The ECB stands to benefit from letting the EFSF finance bond buybacks, since governments on the euro zone's troubled fringe could then take their own bonds off of the central bank's balance sheet. The ECB's purchases of government bonds, which totaled €76 billion through last week, have saved Portugal, among others, from a worse battering in financial markets. But they have prompted fears inside the ECB—and criticism from Germany—that the bank could lose its cherished independence from national governments.

While many EU policy makers are pushing for a quick consensus to expand the EFSF, Germany has made it clear that it doesn't expect any decisions until March—and that it will agree to boost the bailout fund only in return for other countries' commitment to economic overhauls. Berlin also wants the package of changes to include a detailed agreement on how the euro zone's permanent bailout arrangement, the European Stability Mechanism, will work when it replaces the temporary EFSF in 2013.

Spain to Ramp Up Bailout of Banks
by Sara Schaefer Muñoz and Jonathan House - Wall Street Journal

Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout.

In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less. The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, "boxes"), which have been a thorn in Spain's side as it seeks to convince investors that the country's finances are stable.

The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can't raise funds on their own and will need a government bailout was one reason ratings agency Moody's put Spain's rating on review for a downgrade last month. Another step the government is taking to boost investor confidence in the cajas is simplifying their complex structures, making them more like traditional banks. The cajas have long had confusing ownership and governance structures and disclosed far less financial information than other banks. Their boards consisted of local politicians, union members, clients and, in some cases, Catholic priests, many of whom were reluctant to relinquish their influence over lending decisions.

The Spanish government last year forced a wave of mergers among the cajas—reducing their number from 45 to 17—but confusing, unwieldy structures persisted, scaring off investors. Another part of last year's rescue attempt was an injection of €11 billion via the newly formed Fund for Orderly Bank Restructuring. At the time, Spain said it could put up to €99 billion into the fund, but until recently had said further injections wouldn't be necessary. Now, it's reversing course.

Going forward, people close to the matter say, the idea is to force the cajas to transform themselves into centralized, transparent entities that more closely resemble traditional banks by placing all of their assets into a central holding company and streamlining management. The changes would be made either through legislation or by making it a condition of accessing government funds. "We think that the restructuring and recapitalization of the savings bank sector is probably the most important issue for the government at this juncture," said Antonio Garcia Pascual, an economist at Barclays Capital.

Raising any new capital for the cajas carries risks, as it comes on top of Spain's existing financing needs. Economists estimate that the country needs to borrow €125 billion this year just to finance its deficit and roll over maturing debt. Many of the cajas, which account for €1.3 trillion in assets—or 42% of total bank assets in Spain—used liberal lending practices to fuel a decade-long housing boom that went bust and left many of the institutions holding billions in bad loans and facing heavy losses.

The new moves reflect the fact that last year's fixes didn't stick. The shotgun weddings forced by the government proved difficult to execute in practice, with the governing boards of merged cajas bickering over issues like labor, salaries and operating hours. In most cases, the new banks only partially merged their assets. Some investors were skeptical. Private equity firm J.C. Flowers, which in July committed to buying €450 million in debt from the newly formed Banca Civica, put its investment on hold until it sees what the bank's final merger looks like, said a person close to the fund. Banca Civica couldn't immediately be reached for comment.

By the end of November, with Spain's borrowing costs soaring, the Bank of Spain publicly urged the cajas to move faster in combining businesses and cutting costs. In recent days, the government has been more aggressive. Last week, Spanish Prime Minister Jose Luis Rodriguez Zapatero said recapitalization of the banks was an "urgent objective." "In Spain, the government has a clear interest in sending a message to the markets and investors that they are taking this very seriously," said David Franco, a corporate partner at Freshfields Bruckhaus Deringer LLP in Madrid.

Already, some of the savings banks, urged on by government officials, have decided to abandon the decentralized model, and transform themselves into entities resembling regular banks. Cajastur, for example, in its merger with three other lenders, announced at the end of last month it would be pooling 100% of its assets. The government will wait to give any ultimatum to the cajas until it sees the results of detailed disclosures about the type and quality of loans that savings banks have made to the real-estate sector, said people close to the matter. Those will be made public for the first time later this month and in February.

The Spanish government is also studying changes to allow the Fund for Orderly Bank Restructuring to inject capital in the banks through direct stake purchases, considered the safest kind of investment and one that would give the government more control over the entities, in contrast to the nonvoting preferred shares it bought in the past. Government officials are also weighing the possibility of setting up a government-administered "bad bank" for the toxic assets of some of the cajas, according to one of the people familiar with the matter, although it is unclear how that would be funded and structured.

Spain's government debt isn't that high compared to other troubled countries in the euro zone, such as Greece and Ireland. But borrowing costs for Spain soared at the end of last year after Ireland received a €67.5 billion bailout from the European Union and the International Monetary Fund. After a successful bond issuance by Spain earlier this week costs have ebbed some. Nonetheless, investors worry that the authorities haven't come clean on the problems of the savings banks, which will leave the government with a big bill down the road. Analyst estimates of the amount of capital needed are less conservative then that of the government's. UBS AG estimates banks could need anywhere from €20 billion to €120 billion.

Crackdown on Tax Evasion Yields Results in Spain
by Raphael Minder - New York Times

Spain’s efforts to clamp down on fiscal fraud yielded a record 10 billion euros last year, underlining the determination of some of Europe’s financially crippled governments to chase tax evaders to help balance their budgets. The unexpected haul, equivalent to about $13.4 billion, was 23 percent higher than in 2009 and equaled about 1 percent of Spain’s annual gross domestic product, according to preliminary figures released this month by the government. The Spanish tax agency had anticipated that tax fraud receipts would remain flat.

In the last year, Spain has been among a handful of European economies that have been in investors’ line of fire because of a ballooning budget deficit. In response, the government of José Luis Rodríguez Zapatero has pushed through austerity measures intended to cut Spain’s deficit to 6 percent of G.D.P. this year, from 11.1 percent in 2009. "This kind of improvement should certainly be welcomed given the kind of commitments that Spain has now made towards its European partners and financial markets," said Juan Manuel López Carbajo, head of the Spanish tax agency.

Jeffrey Owens, director of the center for tax policy and administration at the Organization for Economic Cooperation and Development in Paris, noted that Spain was not alone in cracking down on tax evasion as a step toward closing its budget deficit. "It’s clear that there are significant amounts at stake here," he said. Mr. Owens cited the examples of stronger euro economies like France and Germany, which last year collected 1 billion and 4 billion euros respectively from offshore accounts alone. Among the weakest economies in the region, "Greece is trying to raise billions of euros from extra tax collection and showing some signs of progress," he added.

Mr. López Carbajo said that 2010 "wasn’t a miracle year but the result of several years of better strategic planning and better use of technology and information sharing." For instance, he cited the creation in 2006 of a special department to monitor whether large taxpayers were trying to keep money offshore, in particular companies with over 100 million euros in annual revenues that operate across borders.

Another area of progress has been in the fight against fraud in Spain’s huge real estate sector, the recent downturn of which has been at the heart of the country’s economic difficulties. For example, Mr. López Carbajo said his agency had shifted its focus onto land transactions to identify possible fraud at an earlier stage in the construction process. Spain is also benefiting from international efforts to force Switzerland and other banking centers to loosen their secrecy laws, as well as tapping into account information provided by disgruntled bank employees.

In fact, Spain’s tax fraud revenues last year included about 300 million euros recouped becuse of a list of undeclared HSBC accounts initially handed over to France by one of the bank’s former information technology specialists. In Italy, meanwhile, authorities are investigating about 700 names that also appeared on the HSBC list. Significantly for Madrid, Andorra, which is wedged between France and Spain, was among offshore centers to get removed in 2009 from the O.E.C.D.’s list of "uncooperative tax havens." Andorra has agreed to cooperate in  cross-border fraud investigations.

Mr. López Carbajo welcomed such agreements, but also cautioned against expectations that they would yield vast additional revenues for Spain. "These accords were signed under huge international pressure and because the countries wanted to improve their image," he said. "I have no doubt that these countries will continue to resist full cooperation as hard as possible, so we must really ensure that the end result is not that they get a better reputation without actually handing over a lot more information."

In terms of image, meanwhile, Mr. Owens from the O.E.C.D. said that, by fighting fraud more efficiently, governments in Madrid and elsewhere "are also showing citizens that the costs of getting out of the crisis are fairly shared."

Lisbon move points to end of risk-free sovereigns
by Gillian Tett - Financial Times

Another week, another bout of angst about sovereign and municipal risk. But as investors fret about Spain and Belgium – or Illinois and California – they should take a close look at a fascinating little development in Lisbon.

On Wednesday, the Portuguese debt management agency formally announced in an e-mail that it would start posting collateral (such as cash or government bonds) on derivatives trades that it cuts with banks. It is intended to have a "positive effect" on its financing costs, and reduce "credit exposures", it said. To onlookers, this might all sound dull and technical. And this e-mail has garnered little attention (partly because the Portuguese government first floated this idea last year.)

But in reality it carries considerable symbolic and practical significance. This week’s is just one sign of a much bigger paradigm shift about how investors and risk managers are now re-evaluating their assumptions about "safe" public sector debt. And this shift could create some fascinating practical challenges in the coming months, not just in the eurozone, but in America too. The issue at stake revolves round how governments and banks construct derivatives deals in the over-the-counter market. During the past three decades, when banks have cut OTC interest and foreign exchange swaps deals with each other (or other private entities), they have often posted collateral to back those deals. This gives market participants protection against the failure of a counterparty.

However, until now, most governments have generally not provided such collateral, since they were considered "privileged". This was partly due to logistical challenges (it is tough for bureaucrats to raid budgets to find collateral). However, Western public sector entities were deemed to be (almost) risk free. Thus, while banks were expected to provide collateral, public entities (and some AAA insurance groups and banks) were not.

But the financial crisis has forced investors and risk managers to rethink their assumptions about what is "risk free", let alone "privileged". And, unsurprisingly, many banks are now worrying about the swaps deals they previously struck with public entities. That is not because banks are necessarily losing money right now; on the contrary, eurozone swaps deals are typically moving in the banks’ favour due to swings in currency and interest rates. But since swaps are long-term, risk managers are nervous about the future. And though banks have tried to hedge this risk in the credit default swap market, this market is thin – and all this hedging has pushed CDS spreads wider (thus fuelling alarm further).

The net result is that banks are furtively pushing for change. So are some regulators who are worried about wild swings in the CDS market. Lisbon’s announcement clearly shows some public entities are listening. After all, the Portuguese government seems to hope that posting collateral for swaps deals will now reduce the need for banks to hedge, thus potentially reducing CDS spreads and cutting sovereign funding costs. Or so the argument goes. Whether it works remains to be seen.

But investors would do well to watch what happens next. For one thing, this saga highlights something banks have long preferred to conceal: namely the wider level of under-collateralisation in the OTC derivatives market. Last year, Manmohan Singh, an economist at the International Monetary Fund, calculated, for example, that if market participants posted sufficient collateral to cover all OTC deals properly, they would need an extra $2,000bn (or about $100bn per big dealer). The TABB consultancy has reached similar conclusions*. And while banks dispute this data, these numbers are sobering; particularly since OTC business is now moving on to clearing houses – where collateral will be mandatory.

But the second fascinating question is how many other public entities will follow Portugal’s lead? Or try to use clearing houses to lower the banks’ need to hedge. Some are certainly preparing to move in that direction; however, for many public entities there are huge challenges. Many do not have cash to spare; but it is far from clear that they will be allowed to use their own bonds as collateral instead. And in the US, there are also legal constraints to what local government can do.

Nevertheless, the one thing that is clear is that this debate – and trend – is long overdue. After all, one factor behind the recent bond and derivatives bubble was that the financial system has often failed to price properly all the associated credit, processing and execution risks attached to deals, particularly when entities were labelled AAA, or risk-free. If the financial system is now rectifying that for swaps, then that is
a good thing; the only pity is that it has come 10 years too late.

Egypt's frustrated young wait for their lives to begin, and dream of revolution
by Jack Shenker - Observer

News of the latest act of self-immolation in Egypt reached Waleed Shamad while he was sitting in the bourse, a dense warren of outdoor shisha cafes tucked away in the back alleys surrounding Cairo's old stock exchange.

An unemployed man had set himself alight in the middle of a busy street – the 12th such incident last week. According to a TV newsreader, the man, 35, had moved to the capital in the hope of finding work and saving enough to buy a home and get married, but lack of job opportunities had driven him to despair. "That could be a description of any of us," said Waleed, pulling his scarf tighter against the cold. "These human blazes are coming so fast, it's hard to keep track."

Cairo is a city built for sunny days and balmy nights; come winter the wind can lash with a ferocious bite. But that has not stopped Shamad and his friends gathering for their late-evening tea on the pavement to talk through the day's gossip: the Friday sermons devoted to Islam's disapproval of suicide, new government restrictions on buying bottled petrol, and, of course, all the latest from Tunis – where developments have kept the group glued to al-Jazeera TV for days.

"We couldn't believe our eyes," grinned Shamad, recalling the sight of Tunisia's ousted despot, Zine al-Abidine Ben Ali, fleeing a land he had ruled for 23 years. "I'm so proud of the Tunisian people. When you see a friend or brother succeeding in some great struggle, it gives you hope, hope for yourself and hope for your country." In common with two-thirds of Egypt's population, Shamad has lived his entire life under the presidency of Hosni Mubarak, a key western ally whose three-decade grip over one of the most pivotal states in the Arab world has looked marginally more shaky following the events in Tunisia.

At 27, Shamad – university-educated, getting by on scraps of informal work and still living at home with his parents – is part of a demographic bulge that accounts for 90% of the country's unemployed, and whose simmering frustration, according to some analysts, could tip Egypt towards its own intifada – and unknown consequences for the rest of the Middle East. "Not having a regular job affects every aspect of your life practically and psychologically; almost everybody I know of my age is still unmarried and dependent on their families – it makes you feel hopeless," he said.

Last year's UN human development report for Egypt said many of the nation's young people were trapped in "waithood", defined as a prolonged period "during which they simply wait for their lives to begin". "It's not as if we want to sit here passively and accept the situation," Shamad said. "But the instinct of our generation is to avoid the state, not confront it. I know that there are big demonstrations planned for next Tuesday, but we're taught from birth to be fearful of the police. They know how to hurt you, and hurt the ones you love."

Tuesday's demonstrations will take the form of a nationwide set of anti-Mubarak protests, dubbed "revolution day" by opposition activists who hope that Tunisia's uprising will embolden the vast number of individuals like Shamad and persuade them that the time is right to make their voices heard. "In every neighbourhood in the country there is a pressure point which the government is afraid of and which will be brought to the surface on Tuesday," said Ahmed al-Gheity, 23, a doctor and one of the regional organisers of "revolution day".

On the event's Facebook page, tens of thousands of supporters have posted comments suggesting Ben Ali's departure could be the precursor for Mubarak's downfall. "If Tunisia can do it, why can't we?" read one. "We will either start living or start dying on 25 January."

Weary of the formal political arena, where even superficial opposition parties now find themselves blocked off from legitimate avenues of dissent (last November's blatantly rigged parliamentary ballot delivered a 93% majority to supporters of the ruling NDP), urban young Egyptians are instead carving out their own spaces in which alternative voices can be heard. If all 75,000 of those who have made an online promise to attend turn up on Tuesday, it will represent an organisational triumph. But such an outcome appears unlikely.

"At the informal level – blogs, social media – there's been an explosion of political activity, entirely disconnected from the official mechanisms of government," said Amr Hamzawy, research director at the Carnegie Middle East Centre in Beirut. Yet this dynamism has largely failed to spill on to the street, where Mubarak's ubiquitous security apparatus still maintains near-total control. The only sector of society that has succeeded in physically occupying areas controlled by the state is Egypt's beleaguered workforce, which has confronted the regime over a range of economic grievances and succeeded in extracting concessions.

"This is where the regime is most fearful," said Gamila Ismail, a dissident politician who unsuccessfully challenged the NDP in the recent elections. "They don't want the young, online activists with their political demands linking up and inspiring the labour force who are campaigning for a better standard of living. If youth in Cairo and Alexandria are connecting with Mahalla, then the government knows it is in trouble."

Sixty miles north of the capital, the textile town of El Mahalla el-Kubra has been the militant spearhead of an unprecedented wave of strikes and sit-ins sweeping Egypt over the last five years. In April 2008 a walkout by factory workers led to three people being shot dead by police.

The road to Mahalla passes through Cairo's urban hinterlands, which bleed messily into the Nile delta and surrounding desert – here the high walls of fast-proliferating gated communities for the rich look down on the redbrick clusters of ashwa'iyat, informal slum areas that are now home to 60% of the city's population. This is a clear window on to the hallmark of Mubarak's reign – a colossal appropriation of land and capital by the political and business elite.

Young residents of the private compounds live in a parallel universe from their slum counterparts, but both share a basic detachment from campaigns for political change of the sort planned for Tuesday. "Of course, we are all excited about Tunisia; the people there threw off their shackles and I pray we could do the same," said Mahmoud Abdel Halim, 29, a construction worker. "But I don't see how we could repeat Tunisia here. I haven't heard about any protests, and even if I had it's not like I can afford to stop work and go and get arrested."

Off Mahalla's main square, however, the picture was different. Last Friday a group of young people from across the delta was carefully preparing a series of Tunisian flags, pinning each to a short wooden pole. Others sketched out placards expressing Egypt's solidarity with Tunisia and condemning government corruption, police torture and poverty. When about 50 of them took to the streets in the late afternoon, handing out pamphlets advertising the protests on Tuesday, they were met with a bemused but generally positive response.

"I've never been on anything like this before, although my brother's friend was attacked by police back in April 2008," said one 26-year-old motorcyclist. "Circumstances have got pretty bad now, and I think changing the big sharks at the top is probably the only way we can make things better. I'll try and make it." Back in their fifth-floor offices afterwards, the activists whooped and high-fived each other. "Yes, it was very small, but it showed that other young people are receptive to our energy," beamed Yasmeen Hamdy El-Fakharany. "I think 25 January will be a great success."

Not everyone agrees. Another 70 miles north-west, in a wood-panelled Alexandrian coffee shop facing the Mediterranean, Hossam al-Wakeel shook his head angrily at the suggestion that his own organisation, the Muslim Brotherhood, was betraying the anti-Mubarak movement by refusing to participate in Tuesday's "revolution day".

"Will those coming out on Tuesday bring down the regime? I think not," said al-Wakeel, 23, a journalist. "The Muslim Brotherhood believes that change must come from below, that we must rebuild society layer by layer as part of a gradual process, not chase revolution and impose new leaders from the top." Earnest, cardigan-clad and sporting a trim black beard, Wakeel explained why he had thrown in his lot with the only opposition movement that has the capacity to bring hundreds of thousands on to the streets – and yet persistently refuses to do so.

His vision of change in Egypt is far removed from that of the Tunisian-flag-waving activists in Mahalla. Yet both share a commitment to direct confrontation with the Mubarak regime, something which Cairo's Shamad – despite his deep anger – still considers too risky. Young inhabitants of the ashwa'iyat and their gated neighbours also feel severed from any process of political reform, although, if a spark were to set off a mass mobilisation in the streets, there can be little doubt many would quickly join in. It seems doubtful that protests on Tuesday will provide that spark,

Shipowners Increase Payments to Get Their Vessels to Atlantic
by Alistair Holloway - Bloomberg

Costs on the C11 journey for shipments to Europe from Asia fell to minus $1,046 a day today from $958 on Jan. 14, according to the Baltic Exchange in London. The rate went negative on Jan. 13, a first for any dry-bulk journey reported by the exchange which publishes daily assessments for more than 50 routes. Contributing to charter costs is more cost-effective for owners than sailing ships empty.

"The Pacific is not the place you want to be at the moment," Nigel Prentis, director of research and consultancy at HSBC Shipping Services Ltd. in London, said today by phone. Paying to rent your own ships is "fairly desperate and undermines everyone else trying to put on a braver face."

Pacific cargo volumes have plunged after the worst floods in 50 years in the Australian state of Queensland. "Substantial damage" has been done to a rail line serving Peabody Energy Corp. and New Hope Corp. coal mines, the state’s Transport Minister Rachel Nolan said today. Repairs may take as long as three months, GrainCorp Ltd. said on its website today. Flooding also affected the states of Victoria and New South Wales. Companies including Rio Tinto Group have invoked a legal clause allowing them to stop contracted sales.

Between 5 million and 7 million metric tons of thermal coal to generate power, or about 1 percent of global exports, may be lost to the Queensland floods, Emmanuel Fages, a Paris-based analyst at Societe Generale SA, said in a report dated today. The region supplies half of all seaborne coking coal that’s used to make steel, according to Bank of America Merrill Lynch.

The Baltic Dry Index, a measure of shipping costs for commodities such as coal, iron ore and grains, was unchanged today at 1,439 points. It’s fallen 56 percent in the past 12 months. Rates to hire panamax vessels that carry coal, iron ore and grains led declines today. They fell 1.9 percent to $15,048 a day. Capesize vessels declined 0.6 percent to $9,638, meaning the biggest ships of the four classes tracked by the index are the cheapest to hire.

Record Food Prices Causing Africa Riots Stoke U.S. Farm Economy
by Alan Bjerga and Tony Dreibus - Bloomberg

The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s.

Global food costs jumped 25 percent last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20 percent more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5 percent last year and will gain as little as 2 percent in 2011, the Department of Agriculture estimates.

Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation. Higher prices will push U.S. agricultural exports up 16 percent to a record $126.5 billion this year, according to a USDA forecast. While U.S. consumers haven’t been squeezed so far, grocers from Winn-Dixie Stores Inc. to SuperValu Inc. have said they plan increases. Commodities will keep rising, according to a Bloomberg survey of more than 100 analysts and traders.

"We are absolutely spoiled," said Jason Britt, president of Central States Commodities Inc., a research and analysis company in Kansas City, Missouri. "We have the luxury that we spend a small percentage on food. But I wouldn’t be surprised to see larger bites of our incomes used."

Raw-Material Costs
About 19 cents of every dollar spent on food covers raw- material costs in the U.S., so retailers can limit increases by cutting spending on labor or marketing, said Ephraim Leibtag, a food economist at the USDA in Washington. The consumer price index rose 4.2 percent since the end of 2007, the smallest three-year increase since 1965, Labor Department data show.

Producer spending for processed foods rose 4.9 percent in the U.S. last year, while consumer prices increased 1.5 percent, Labor Department data show. A record 43.2 million Americans received food stamps in October. The jobless rate is running at 9.4 percent, and Federal Reserve Chairman Ben S. Bernanke said Jan. 7 the labor market may take five years to recover.

Corn advanced 52 percent last year in Chicago, wheat jumped 47 percent and soybeans gained 34 percent. Cattle futures touched a record on Jan. 13 in Chicago, a day after coffee reached a 13-year high in New York. Rice futures jumped as much as 3.6 percent in Chicago today. Wheat may rise as much as another 16 percent this year, with sugar, corn, soybeans, coffee and cocoa also gaining, according to the Bloomberg survey of analysts, traders and investors in December.

Farm Income
The farm boom is aiding Obama’s goal of doubling U.S. exports in five years, with this year’s shipments accounting for 4 percent of the $3.14 trillion needed to meet the target. U.S. farm income last year probably exceeded the 2004 record of $87.3 billion, and cropland values gained as much as 10 percent, according to Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic.

Moline, Illinois-based Deere & Co., the world’s largest farm-equipment maker, will report record profit of $5.47 a share this year, according to the mean of 11 analyst estimates compiled by Bloomberg. Earnings for Plymouth, Minnesota-based Mosaic Co., North America’s second-largest fertilizer producer, will more than double to $4.57 a share in the year ending in May, the mean of seven estimates shows.

Northfield, Illinois-based Kraft Foods Inc., the world’s second-biggest food company, raised prices of Maxwell House and Yuban coffee in the U.S. three times last year. General Mills Inc., the Minneapolis-based maker of Cheerios and Lucky Charms, said in November it would increase some cereal prices. Products for supermarkets rose 1.8 percent in the three months ended Sept. 22, while consumer prices gained 1.6 percent, Winn-Dixie Chief Executive Officer Peter Lynch said on a Nov. 2 conference call. Some will probably keep increasing to cover costs, and the Jacksonville, Florida-based company has a "relatively good" chance of passing that to consumers, he said.

Starbucks Corp., the world’s largest coffee-shop operator, said in September it would raise some prices after the jump in coffee and milk costs. Domino’s Pizza Inc., the biggest U.S. pizza-delivery chain, said in October it would charge customers more after a 29 percent jump in cheese.

Steaks, ‘Baconator’
Morton’s Restaurant Group Inc., a Chicago-based steakhouse chain, is considering its third increase in the past year, Chief Financial Officer Ronald DiNella said at a conference in Dana Point, California, on Jan. 12. Wendy’s/Arby’s Group Inc., the maker of the 1,360-calorie Baconator Triple burger, said in November it was raising prices in some stores. SuperValu, the owner of Save-A-Lot and Cub Foods stores, expects most of its rises to be in the "lower single-digit range," with "double-digit increases" for some commodity items, Chief Executive Officer Craig Herkert said on a conference call Jan. 11.

Some increases may not stick as companies compete for market share. "Low price is the focus in food," said Bill Simon, president and chief executive of U.S. stores at Wal-Mart Stores Inc., the world’s largest retailer. While the deflation of last year will shift in 2011 to a "slightly inflationary environment" in food, Bentonville, Arkansas-based Wal-Mart expects to provide as much as 20 percent savings per shopping trip compared with competitors, Simon said on a conference call Oct. 13. "We’re not going to get beat."

Wholesale Prices Rising
Wholesale costs in the U.S. rose 1.1 percent in December from November, the most in 11 months, led by rising commodities including fuel and food, the Labor Department reported Jan. 13. Food rose 0.8 percent in December from a month earlier, spurred by the biggest gain in soft drinks since January 2007 and the largest surge in fruit in three years. Energy jumped 3.7 percent.

"At the margin, the consumer will swap down from rib eye steak to butt steak and then to chicken, but in reality very little shall happen," said Dennis Gartman, a Suffolk, Virginia- based economist and author of the Gartman Letter LC. "Of far greater concern to the consumer is rising gasoline." The Standard & Poor’s GSCI Agriculture Index of eight futures climbed 52 percent in the last 12 months, led by cotton, corn and wheat, as flooding in Canada, China and Australia and drought in Russia and Europe ruined crops. The UN food index, which tracks wholesale costs of 55 foods, now exceeds levels seen in 2008, when violence erupted from Haiti to Egypt.

Algeria, Tunisia
Unrest is starting again. Three people were killed and 420 injured in protests over milk and flour costs in Algeria this month. Tunisian President Zine El Abidine Ben Ali tried to end a month of protests by promising lower prices for bread, milk and sugar, before handing over power to his prime minister on Jan. 14 and leaving the country. The Serbian government said Jan. 10 it will consider an export duty on wheat to discourage shipments. South Korea said the following day it plans to increase the supply of some food products to help damp prices.

India, home to 1.2 billion people, halted onion exports in December after prices more than doubled in a year. Opposition parties have said they plan nationwide protests. China sold commodities including sugar and corn from strategic reserves last year to contain inflation that reached 5.1 percent in November, the most in 28 months.

No such problems are emerging in the U.S. for now. Consumer prices will rise 1.5 percent this year, compared with 1.6 percent in 2010, according to the median of as many as 61 economists’ estimates compiled by Bloomberg. While the USDA is forecasting gains in retail food prices of 2 percent to 3 percent in 2011, even at the top of that range the gains would still be below the average over the last decade. "We are a food-abundant country and the last place where food inflation is going to rise," said Erick Erickson, an economist at the Washington-based U.S. Grains Council, which promotes crop exports. "We have such a rich and robust food- supply situation compared to other countries."

Food Stamps Create Jobs in India (From April 2009)

Michele Brown has seen Americans' struggles with jobs first hand. She lives in hard-hit Florida, spent 20 years in the real estate business and recently had her days as a nanny cut back after her boss had his own hours reduced. But nothing prepared her for what happened one day when she called a toll-free line to inquire about her food stamps. "The woman who answered the phone -- it's not like she wasn't nice or anything -- but it was kind of evident that she wasn't in the States," Brown said.

It turns out the woman was at a JP Morgan Chase call center in India. "That really put me over the edge," said Brown, 52, of Jupiter, Fla. "It's not right because we need the work here. People are in a bad way here."Americans have never liked the idea of jobs going overseas. But for many, it's more offensive when taxpayer dollars -- including those in the federal stimulus plan -- go to create those jobs. And when those jobs deal with food stamps, unemployment insurance and other public benefits, well forgot irony, to many it's just downright plain insulting.

Unemployment in Florida is now 9.7 percent. "Why is the state of Florida sending these jobs away?" Brown asked. "The thing that really iced it for me, I knew that JP Morgan had gotten bailout funds." So she called her local politicians and then she reached out to her local newspaper, the Palm Beach Post. The paper did a story two weeks ago about the $50 million Florida paid JP Morgan in the last three years to administer the food stamps distribution.

Those services include 24-hour customer-service call centers. Some of those calls were answered in Bangalore and Gurgaon, India. Others were taken at two U.S. call centers.The next day the head of the state's Department of Children and Families said something needed to change. "I don't want any calls going to India," he said. "We need to take care of this." The state now has a commitment from JP Morgan to move all of its calls to the United States, according to Judi Spann, a spokeswoman for the Department of Children and Families.

Florida isn't alone in sending its customer service calls overseas. There are three major companies that provide debit cards to food stamp recipients: JP Morgan Chase; eFunds, which is now part of Fidelity National Information Services; and Affiliated Computer Services or ACS.

JP Morgan Chase Sends Calls to India
JP Morgan is the only one today still operating public-assistance call centers overseas. The company refused to say which states had calls routed to India and which ones had calls stay domestically. That decision, the company said, was often left up to the individual states. ABC News canvassed the country, asking states about their call centers. Often state officials overseeing the programs had no idea, despite past controversies, where their calls were going.

JP Morgan provides food stamp debit cards in 26 states and the District of Columbia. It also provides child support debit cards in 15 states and unemployment insurance cards in seven states. The 130,000 food stamp families in West Virginia have their calls routed to India, according to Jerry Luck, program director for the state. "We have no complaints with the call center. We get very good service," he said. "I was born and raised in Pittsburgh. There's sometimes a communication issue between somebody from Pittsburg and somebody from Harrisburg, Pa." The state's contract with JP Morgan expires on Aug. 31. In requests for a new contract, West Virginia has requested a domestic call center because of political concerns.

The 488,000 households in Tennessee also have their calls sent to JP Morgan call centers in India. The state's contract runs through February 2012 and there are currently no plans to change it, according to Michelle Mowery Johnson, director of communications for state's Department of Human Services. She noted that there are no federal or Tennessee state laws prohibiting the outsourcing call center operations. Unemployment in West Virginia is now 6.9 percent and 9.6 percent in Tennessee.

Other states struggled to answer questions about their call center locations. "Who would have ever thought it would be such a difficult question to answer," said Amy Kempe, spokeswoman for the governor's office in Rhode Island. She eventually learned that JP Morgan was sending the state's food stamps calls to India but now keeps them all domestically. Kempe later told ABC News however that JP Morgan was still routing calls for unemployment benefits to India. Unemployment in Rhode Island now stands at 10.5 percent.

States Save by Outsourcing
Following a congressional mandate in 1996, states started moving toward electronic delivery of food stamp benefits, now called Electronic Benefit Transfer or EBT. States found it cheaper to outsource these services. By switching to debit cards for food stamps and other benefits, states save millions of dollars in processing and administrative fees. Companies, including JP Morgan, filled the niche. For a fee, the bank will provide debit cards to benefit recipients. Each month, they will load money onto the cards and on a daily basis process transactions at stores.

For unemployment insurance, the providers also process ATM cash withdrawals. For instance, in Michigan, JP Morgan allows unemployment recipients two free withdrawals from its network of ATMs. For each addition withdrawal, the bank takes a $1.50 fee. If somebody loses their card, the first replacement is free. The second costs $7.50. The banks also get a fee for each case they handle.

Take Indiana. JP Morgan gets 62 to 64 cents for each food stamp case handled monthly there. With 296,245 cases right now, that means the state is paying JP Morgan $183,672 a month on top of any other fees it collects. Indiana eliminated 100 full-time employees when it hired JP Morgan to make the program cost-neutral, according to Marcus Barlow, spokesman for the state's Family and Social Services Administration. But unlike Florida, Tennessee or West Virginia, Indiana keeps all its calls domestically. In fact, all of its calls go to a call center in Maryville, Ind., Barlow said, because the state required an in-state call center when soliciting bids.

Other states have rebelled against sending jobs overseas. South Carolina used to have its calls go to a JP Morgan call center in India. But in its latest contract, signed a year and a half ago, it stipulated that the calls stay domestically. Indian call-center employees typically earn about $2.50 to $3.50 an hour, roughly 70 percent less than their American counterparts, said Jagdish Dalal, a managing director at the New York-based International Association of Outsourcing Professionals. Overseas call center sites, he said, can vary from small "mom and pop shops" with 15 employees to mass operations with 3,000 seats.

But Dalal added that companies that engage in outsourcing often end up facing higher costs related to infrastructure because the transportation and electrical systems in the developing countries often home to call centers, like India, aren't as reliable as in the United States. Despite these obstacles, he said, the savings from outsourcing persists, with companies saving about 25 percent to 30 percent by locating workers in foreign countries.

The Fight Against Outsourcing
In recent years, lawmakers have attempted to curb federal and state governments' use of outsourcing and met with varying degrees of success. In 2005, New Jersey passed a law essentially requiring all services under state contracts to be performed within the United States.

Since at least 2003, Congress has considered several bills related to outsourcing, including those that would limit the practice as well as one -- the "Call Center Consumer's Right to Know Act" that would require call center operators to disclose their location to callers. The act never became law.Most recently, Rep. Sue Myrick, R-N.C., proposed a bill stopping banks that receive funding under the government's Troubled Asset Relief Program -- which includes JPMorgan Chase -- from sending new call center jobs overseas. The bill was approved by the House, but did not move on from there.

While JP Morgan would not say what percentage of its calls go overseas, the other two major companies said all of their calls are handled in the United States. "While we do not comment on specific client contracts, the support for all of our food stamp programs is handled domestically," Ken Ericson, director of corporate communications for ACS, said in an e-mail.

eFunds used to route calls overseas. It was acquired in 2007 by Fidelity National Information Services and now keeps all public-assistance calls domestic, according to Anthony Ficarra, who oversees the electronic benefit transfer program for the company. Fidelity is the largest food stamp servicer, handling accounts in 31 states. All of the calls go to centers in Wisconsin, Arkansas, Florida and Minnesota. "We have a large operation in India ourselves, but because of the nature of the programs, we do it all in the U.S," Ficarra said. "For us there's a long-term sensitivity to not handling those things outside the borders of the country.

Inflation, Not Here, Not Now
by John Taylor - FX Concepts

Commodity prices are flying higher, interest rates are near zero, base money growth is staggeringly high and inflation expectations are going to the moon. It looks like inflation is back, but it isn't the kind of inflation the Germans worry about or the kind that leads to high interest rates followed by a deep recession. If this is not the inflation of post-WWI or the 1970's, then what is it? Although the current bout of food shortages and price increases have helped topple the government in Tunisia and led to food riots in Algeria, these commodity price increases and the excess money being spread around should not have any impact in the G-10 countries, unless some central bank makes a big mistake and hikes interest rates. Why is it so different this time around?

Because the global economy is suffering from excess manufacturing capacity and a deficit of consumption, history tells us there is little chance that inflation will be a problem. If we just look at the second half of the 1930's, the prime example of a consumption shortfall, when interest rates were exceedingly low and base money was growing sharply (because Roosevelt had changed the price of gold), many were worried about inflation but it never arrived. Fed Chairman Bernanke's QE efforts are only a pale shadow of Roosevelt's powerful inflationary stroke, but prices stayed subdued back then and they will now.

With still climbing excess manufacturing capacity, and so much of it located in low- wage China, there is little or no wage pressure in the developed world. The situation was exactly the opposite in the 1970's when there was not only a shortage of skilled workers but many contracts were inflation adjusted as well. Now these inflationary adjustments are history except in some public pension plans (which are on their way to insolvency). Labor's pricing power has been declining since the 1970's. In the US the number of hours necessary to buy a car bottomed in 1972 and it now takes about twice as long for the average worker to buy the average car.

Although monetary growth is a necessary condition for inflation, without tight labor markets it just cannot find the traction necessary. When the price of oil or food goes up, the weakened worker will drive less or eat less, he/she cannot drive wages up. Final demand stays the same but it is just spread around differently.

If commodity prices climb higher and higher, the American and European worker will tend to spend more for food and fuel, cutting down his purchases of manufactured items and locally produced services. Units of food and fuel purchased will drop as well, as each one is more expensive, cutting final demand and lessening the upward pressure on commodity prices. The raw material producers, generally the emerging markets, should prosper in relation to the manufacturing countries, shifting the balance of global power.

This change in relative economic dominance matches the concept of the Kondratieff cycle and fits very well with MIT's capital investment cycle. The current period seems to fit nicely with 1937, and if we use that as a base date, the commodity producers will prosper for another 13 to 15 years as they did back then. Although the western countries will have a growth problem, not an inflation problem, the commodity producers will have plenty of growth and plenty of inflation.

Although Australia, a perfect example in the early 1950's, with high growth and high inflation, controlled its overheating problems fairly well, this time around there will be many countries that have not tasted "capitalist" freedom before. As many of these newly wealthy countries have managed currencies with exploding reserves and money supplies, the next decade or so should see dramatic inflationary booms and busts, plus plenty of political turmoil. With the G-10 consumers facing a difficult 2011, global commodity prices should peak soon and inflation fears will melt away in the US and Europe.

The Politics of Deflation
by Vijay_Boyapati - Market Oracle

The reason that political establishments have always been biased against monetary deflation[1] can be found in the manner in which wealth transfer occurs under inflationary and deflationary environments.

During an inflationary credit expansion, wealth is transferred from the public in general to the earliest recipients of the newly created credit money. In practice, the earliest recipients are interest groups with the strongest political connections to the state and, in particular, the state institutions that control monetary policy (i.e., the Federal Reserve in the United States). Importantly, the wealth transfer that takes place during an inflation is hidden and largely unrecognized by the majority of the population.

The population is unaware that the supply of money is increasing and the attendant rise in prices, ostensibly beneficial to business, initially produces [a] general state of euphoria, a false sense of wellbeing, in which everybody seems to prosper. Those who without inflation would have made high profits make still higher ones. Those who would have made normal profits make unusually high ones. And not only businesses which were near failure but even some which ought to fail are kept above water by the unexpected boom. There is a general excess of demand over supply — all is saleable and everybody can continue what he had been doing.[2]

In an inflationary environment, wealth transfer proceeds insidiously and is masked by a perceived prosperity. The unmasking finally occurs at the end of the credit boom when the market's tendency to clear prior losses takes hold. Failed businesses are liquidated and their capital is transferred, usually through bankruptcy, to creditors who must acknowledge losses on these misguided investments. Unemployment soars and social unrest replaces the former sense of euphoria attending the credit boom. Professor Hülsmann summarizes the differences between the transfers of wealth occurring under inflation and deflation as such:

In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. …

[Inflation] is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.[3]

And here lies the answer to why the state prefers a policy of controlled inflation. Only in an inflationary environment can state largesse be conferred to the politically well-connected without raising public ire. The widespread and visible transfers of property through bankruptcy that must take place during a deflation are often politically destabilizing and thus highly unappealing to any regime. A sense of injustice grows within the population as banks are saved from the folly of their misguided investments with taxpayer-funded bailouts, while debtors with no political clout have property seized in bankruptcy.

Deflation and Social Unrest
The sense of public outrage sometimes flares in acts of violence and antiestablishment rioting — a fact cited frequently in history as a rationale for preventing deflations from running their full course. In 1931, Lord Keynes took part in writing the Macmillan report for the British government, which warned that a reduction in wages resulting from an unimpeded deflation "might be expected to produce social chaos."[4]

On January 7, 1811, economist Mathew Carey published a series of letters he had sent to Congressman Adam Seybert warning that the failure to renew the charter for the Bank of the United States, and the resulting destruction of credit, would produce "an awful scene of destruction, the consequences or termination of which elude the power of calculation."[5]

The scaremongering and agitation of the past is echoed in warnings that followed the housing bust and global recession of 2008. For instance, the International Monetary Fund's managing director, Dominique Strauss-Kahn, warned that the rise in unemployment following the US housing bust might cause "an explosion of social unrest."[6]

Should We Expect a Helicopter Drop of Money?
The dire sociopolitical consequences attributed to an untrammeled deflation superficially suggest that the Federal Reserve would do everything in its power to force the resumption of a credit expansion. For example, it was a political analysis that led Austrian economist Peter Schiff to conclude that a hyperinflation may be on the horizon:

If the Fed drops enough money from helicopters it will eventually reverse the nominal declines in asset prices. Unfortunately, that road leads to hyper-inflation and disaster. … The big problem politically is that hyper-inflation may superficially appear to be the lesser evil. If asset prices are allowed to collapse, ownership of those assets will pass to our creditors. If instead we repay our debts with debased currency, we retain ownership of our assets and shift the losses to our creditors. Since American debtors can vote in US elections and foreign creditors cannot, the choice seems obvious.

Schiff errs in his analysis by implying that monetary policy in the United States is directed by the democratic voting mechanism; it is not. The Federal Reserve is an independent, quasi-private institution within the state that is nominally overseen by Congress. In practice, however, the Fed directs the passing of legislation pertaining to monetary policy rather than being directed by it.[7]

The Importance of Who Controls Monetary Policy
To elucidate the importance of who controls monetary policy, it will be useful to define two classes that operate within the institution of the state: There is the class of people whose power derives from popular mandate, which we will call the political class. In the United States the political class includes members of Congress, the president, and appointees to the executive branch of the US government. There is also the class of people whose interests are aligned with and whose main constituency is the banking industry, which we will call the banking class. In the United States this is the Federal Reserve.

It has been asserted that it does not matter which class controls monetary policy. In his widely used textbook, Economics, Paul Samuelson declares with almost childish naïveté that "whenever any conflict arises [in the Federal Reserve] between making a profit and promoting the public interest, it acts unswervingly in the public interest."[8] The ludicrous notion that an institution granted a monopoly to counterfeit money could ever act in the public interest does not warrant scrutiny in an Austrian analysis.

However, the more specific question of whether monetary policy controlled by the banking class is indistinguishable from monetary policy controlled by the political class is of critical importance to a settlement of the inflation-versus-deflation debate. In What Has Government Done to Our Money, Murray Rothbard contends,

The American Continentals, the Greenbacks, and Confederate notes of the Civil War period, the French assignats, were all fiat currencies issued by the Treasuries. But whether Treasury or Central Bank, the effect of fiat issue is the same: the monetary standard is now at the mercy of the government.[9]

In other words, Rothbard claims it is of no consequence whether the political class or the banking class controls monetary policy. Yet Rothbard undermines his own argument by recognizing that in all the cited instances of hyperinflation monetary policy was controlled by a treasury — i.e., by the political class.

Furthermore, in tracing the origins of the Federal Reserve Rothbard reveals the difference between the monetary ideologies of the banking class, which agitated for the creation of a central bank, and the populists of the day:

The Morgans were strongly opposed to Bryanism, which was not only populist and inflationist, but also anti–Wall Street bank; the Bryanites, much like populists of the present day, preferred Congressional, greenback inflationism to the more subtle, and more privileged, big bank–controlled variety.[10]

The key difference between the motivation of the banking class and the political class, which is hinted at by Rothbard, is that the former prefers a monetary policy that allows them to profit from the economic activity of the population in a subtle and insidious manner. A policy of open inflation conducted by the political class is the path to hyperinflation, the breakdown of the division of labor, and the destruction of the monetary system itself.

Unlike the political class, the banking class is savvy enough to recognize policies that will lead to mass inflation and the death of the monetary system from which it parasitically profits. A clear illustration of the different motivations of the two classes can be found in the history of the Weimar Republic's hyperinflation.

The Weimar Hyperinflation: The Banking Class versus the Political Class
The Reichsbank of Germany was established in 1876 and from its inception was directly controlled by the chancellor of the nation.[11] The importance of the political class's controlling monetary policy became manifest in 1914, "when Germany dropped the gold standard at the outbreak of the First World War," whereupon the "government demanded from the Reichsbank practically unlimited lender-of-last-resort financing, first of war then of postwar expenditures."[12]

The drain of capital to fund reparations demanded by the Allies in the punitive peace settlement of Versailles made it politically unfeasible for the German state to fund itself through taxation. Instead the state turned to the printing presses to cover the shortfall in revenue,[13] leading to a massive rise in prices and the famous hyperinflation of the Weimar Republic.

On May 26, 1922, the Reichsbank was nominally granted autonomy as a condition of the Allies for granting a moratorium on reparations. However, the Reichsbank remained under the direction of its president, Rudolph Havenstein, who had been appointed when the central bank was still controlled by the chancellor. A letter from the Reichsbankdirektorium to the minister of finance shows that as late as August 23, 1923, in the last months of the hyperinflation, the Reichsbank was still beholden to the political class within the German state. The letter stated that despite the impending destruction of the German currency the bank could not "be deaf to the conviction that necessities of state were involved and must be satisfied."[14]

It was only the appointment of Hjalmar Schacht, "who enjoyed the full backing of the international financial world," that arrested the Weimar hyperinflation. Schacht, who was a product of the banking class, was able to finally assert the independence of the Reichsbank from the political class. According to German economic historian Carl-Ludwig Holtfrerich, the "Reichsbank under Schacht has even been called a Nebenregierung, a supplementary government, due to its successes in imposing its will on the regular government and its legislators, and thereby creating a state-within-the-state situation."[15]

Japan's Deflation
In light of the historical example of the Weimar hyperinflation and how the actions of the two classes shaped its beginning and denouement, we may turn with new understanding to the case of Japan during the 1990s.

For almost two decades after the collapse of its asset bubble in 1991 Japan has suffered stagnant growth and experienced low or negative growth in aggregate prices. While the Bank of Japan had the theoretical power to create enough money to force the resumption of an inflationary credit expansion, as any central bank does, it did not follow this path. Observing that the Bank of Japan had the same tools at its disposal as the Federal Reserve, Ben Bernanke, then a professor at Princeton, suggested that "Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has."[16]

In fact, the disinclination to monetize enough debt to spur a resumption of a credit expansion can be explained by the banking class maintaining control of monetary policy in Japan. The differing motivations of the banking class and the political class, and the fact that the banking class maintains control of monetary policy, is illustrated by the refusal of the head of the Bank of Japan to accede to the request of the Japanese prime minister to employ a massive monetary stimulus to devalue the Yen:

Mr. Kan [the prime minister] would like to see a repeat of such "shock and awe" action but has failed to convince Mr. Shirakawa [the bank's governor] that the risks are worth it. Bank officials fear that a monetary blast might disturb a fragile equilibrium, bringing unwelcome attention on Japan's debts. Haunted by memories of Japan's hyperinflation, the bank is moving gingerly.[17]

Bernanke, the Deflation Fighter
Much has been made of Chairman Ben Bernanke's criticism of Japan's response to the deflation it suffered in the wake of its own real-estate bubble. Bernanke's academic expatiation on the dangers of deflation has been taken as proof that he will "not allow [the US economy] to go into deflation."[18]

Further, many Austrian economists have taken Bernanke's musing on a theoretical helicopter drop of money to stimulate inflation as an ominous warning that mass inflation will probably be the policy path chosen by the Federal Reserve. Yet it would be misleading to conflate the beliefs and motivations of Ben Bernanke as academic with the actions of Ben Bernanke as Federal Reserve chairman.

For instance, Chairman Bernanke's predecessor, Alan Greenspan, wrote trenchantly on the need for a gold standard, explaining that "[in] the absence of the gold standard, there is no way to protect savings from confiscation through inflation."[19] One might have concluded that from his personal desire for a gold standard Greenspan would have used his influence as Federal Reserve chairman to agitate toward that end. Yet no such thing ever occurred. In Congressional testimony he confessed,

I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.[20]

Greenspan's admission suggests that the Federal Reserve's institutional structure is likely to be more significant in determining monetary policy than the economic doctrine espoused by its chairman. Given that the Federal Reserve was created by and for the benefit of the banking class,[21] it is unlikely to pursue a policy that would be detrimental to that class. It is therefore unlikely that the Federal Reserve will monetize enough debt to completely paper over the losses caused during the housing boom. For, as Ludwig von Mises explained,
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

While the Federal Reserve has the theoretical power to force the resumption in credit expansion by monetizing enough public debt that the losses from the housing bust are wiped away, it is unlikely to do so. The Fed was created for the benefit of the banking class, and while it remains under the control of that class it will not pursue a policy that would lead to a breakdown in the monetary system from which the banking class profits.

However, the Fed is also unlikely to allow an untrammeled deflation to run its full course, given the risk of political unrest that might arise. Therefore, the Federal Reserve's most likely course of action is to keep the mortgage market, in which most of the losses are concentrated, in a sort of stasis where losses are acknowledged slowly over time. Such a policy, which might well be called "controlled deflation," would lead to a prolonged period of high unemployment and slow growth, as capital is only slowly reallocated to satisfy consumer preferences.

Further, the insufficient or barely sufficient creation of new credit to make up for debt paid down — or defaulted on — would cause a low growth in aggregate prices; in fact, these prices might occasionally become negative. Not until the losses of the housing boom are fully cleared — which might take years under a policy of controlled deflation — should we expect an inflationary credit expansion and a significant rise in prices.


Anonymous said...

Hi I&S, i think an excellent article title and topic would be, "how hyperinflation could happen and why it won't."

i don't think it is correct to say that hyperinflation is impossible. i think it is quite possible, but extremely unlikely.

the key is debt backed money. as long as money is debt backed, hyperinflation won't occur.

however, if congress passed a law to regain control of the treasury and started to issue $10s of trillions of non debt backed money and even started sending checks to all citizens, we could see hyperinflation.

possible, but extremely unlikely since i believe the banksters are in charge and the government is essentially shadows on plato's cave.

i'd like to see the article, though. it would show that you can argue both sides and still end up with the same conclusion (as opposed to a one trick pony, which is what we think of all inflationists that don't bother to articulate a deflationary scenario and then explain why think it won't happen.

another excellent article.

sofistek said...

I would assume that quite a few tens of millions, of those 85 million not in the labour force, would be out of the official labour force by choice, for example, to raise a family or retired early. So I think you overstate the position somewhat although it doesn't need to be overstated; it's bad enough as it is.

gylangirl said...


You stated:
"But the by far largest category "missing" from both the Employed and Unemployed statistics is the "Not In Labor Force": 85.2 Million people.

The BLS definition states: "Not in the labor force (NILF). A person who did not work last week, was not temporarily absent from a job, did not actively look for work in the previous 4 weeks, or looked but was unavailable for work during the reference week; in other words, a person who was neither employed nor unemployed." (Clearly, this does include lot of unemployed people)."

To truly understand that figure, one MUST acknowledge the formerly employed people who were financially induced ["for economic reasons" but not officially counted as such] to exit the paid workforce once they married and began to be taxed discriminatorily as "secondary earners" under the married filing jointly category.

Documentation of this intentional discrimination against married employed women is found in the text
Taxing Women by Edward J. McCaffery.
and in the book The Price of Motherhood by Ann Crittenden.

In 1948, Congress passed a law to tax married women's earnings higher than anyone else's in order to force employed married women back into the domestic sphere after World War II.

Republicans still agree with the motive to create single earner, male-headed households in this way. Democrats and feminists haven't bothered to redress this injustice.

All these women should be counted in the unemployment statistics but are ignored. They are explained away as women who CHOSE [SIC]to abandon their careers in order to take care of family obligations. Some women may have eagerly left the paid workforce for domestic life, but for most, it was a family financial decision manipulated intentionally by the tax system and then justified only in hindsight by family obligations.
Many women do not even know that they have been purposely sidelined in this way.

It has been estimated that families with a college educated wife/mother so sidelined by the 1948 tax law have lost approximately one million dollars in potential income, bonus, insurance, savings, pension.

Add in the loss of her social security earnings and being counted as only half a person under the spousal formulae:

As a result the number one predictive factor for future individual poverty in America is... motherhood.

Aaron Wissner said...

Note on "Civilian noninstitutional population" -- This includes pretty much everyone from 16 to 100+ in the USA.

That is a lot of retirees, or people over 65 years of age.

The break down

* 239 million 16+ years old, not institutionalized or in military

Of those...

* 139 million employed
* 14 million unemployed
* 85 million not in labor force (includes all retirees) but 6 million of these do want a job

In 2009, 39.6 million were 65 or older.

In 2008, 15.5% of those were "65 and olders" were "in the labor force", and of that 15.5%, about 37.8% were full time (the rest, presumably, being part time).

So, 39.6 x 15.5% x 37.8% = 2.32 million

2.32 million full time 65+ workers
3.82 million part time 65+ workers
33.46 million fully retired 65+

Go back to the top

* 139 million employed
* 14 million unemployed
* 33 million retired
* 6 million want a job (but not in labor force)
* 46 million, not in labor force

That 46 million included people who can't work due to injury, handicap, etc.; plus those at home people taking care of family members, etc.

Point is that 239 million in the labor force is too high. The number should be 33 or 34 million less to take account of fully retired 65+ people. A number of 205 million is more realistic.

VK said...

From a talk by Dr Bill Rees on Human impact on the planet.

Tokyo Population: 33 Million (approx. 26% of Japanese pop)

Total eco-footprint at 4.9 global ha/capita: 161,700,000 ha

Tokyo’s eco-footprint is about 344 times larger than the metro-region, 4.3 times the area of Japan and represents 2.1 times the nation’s domestic biocapacity.

gylangirl said...

To sofistek I would say that contrary to your assertion, the unemployment statistics are vastly underestimated and always have been due to women who have left the workforce [ostensibly to raise families but actually to avoid secondary earner tax costs].

In my own personal case, a gender neutral tax policy [such as was in the US pre 1948 and such as is the case in Europe] would have allowed me to continue in the paid workforce regardless of my husband's tax bracket. In the event of any layoffs in my career field during an economic downturn, I would be actively seeking employment and be counted as such; rather than not seeking employment due to secondary earner tax discrimination and not being counted.

Ruben said...

The story of how managing food stamp accounts has been privatized and offshored, rather than kept in-country to keep jobs and keep people off food stamps shows how deeply broken the notion of the Invisible Hand is, and how totally inadequate the Cult of Efficiency is.

That, in turn, shows how deeply entrenched belief and ideology are, and how untouched by rational thought they are. A quote I recently saw, by a behavioural psychologist, said the assumption should be that consciousness has no impact on behaviour.

gylangirl said...

an example of the secondary earner tax discrimination effect:

"...McCaffery: The United States tax system is a product of the 1930s and 1940s. At that time the single-earner model was the norm for families—men worked outside the home and women worked inside it. Tax policy decisions favored and rewarded this arrangement and made it difficult to be a two-earner family—made it difficult for married women with children to work. Over time those biases have gotten worse, but we haven't really re-examined them.

Q: What do those biases mean in real terms? How do they affect working women and their families?

McCaffery: The book actually opens with two real-world stories, one of a woman who discovered that her $18,000 a year job was in fact losing money for the family, the other of a woman who discovered that her $35,000 a year job was bringing home very little. As a result, both of them left their jobs. A very large part of the book is to explain what's behind these two stories.

Let me walk though an example. Imagine a family with a husband who makes $60,000 a year and a wife who stays home with the two young children. The wife is offered a job paying $30,000 a year. The question is: how much of a raise would the husband have to get to bring home as much money as the wife would bring home if she took this $30,000 job? The surprising—even shocking—answer is as little as $2,000.

Q: Only $2,000? That's pretty dramatic. How do you arrive at that figure?

McCaffery: The wife would enter the workforce at a 50% bracket, roughly, considering federal income taxes, social security, and state and local taxes. So her $30,000 becomes $15,000, right off the bat. Plus the family will probably need to pay for child care for their two children. Let's say child care costs run $200 a week or $10,000 over a fifty-week year—not an unreasonable figure for an upper-middle-class family. They can claim a child care credit on their tax return, but it's only $1,000—actually a little less—so her $15,000 is now down to $6,000, after subtracting child care costs and adding the credit. Next, there will be other costs—one of the interesting things I learned while researching this book was how many and how much additional expenses two-earner households face—things like commuting, dry-cleaning, more restaurant meals, housekeeping expenses, and so on. If these run the working wife $100 a week, or $5,000 a year, she is down to $1,000, and the tax laws don't help at all with this final category of work-related expenses. So her $30,000, before taxes, has become $1,000, after taxes and work-related expenses.

The husband can bring home that much—I should say that little, really—by earning an additional $2,000 or so. He's actually now in a lower tax bracket than his wife is, once he has passed through the ceiling or maximum amount for which social security taxes are collected.

Q: In Taxing Women you say that this was intentional.

McCaffery: Well, intentions can be hard to pin down when you are talking about large institutional actors, like the U.S. government or the federal tax system, writ large. But, yes, I think that there is ample evidence that major players in the development of the tax laws knew about these biases and were glad for them, and it certainly keeps getting worse.

... social security was revised in 1939 in a way that hurt married working women, and the framers of that law thought it was a good thing. The "joint-filing" provision that was put in place in 1948 was a large chunk of the World War II "peace dividend"—spent to favor and reward traditional single-earner families, and rich ones at that. Once again, the framers of the law knew it would make it harder for married working women, and they thought that was good—a way to get married women back into the homes they had left, briefly, during the war...."

Draft said...

From Kurt Cobb:

Naturally, if one makes an economic prediction without specifying a particular date, one will--like a stopped clock--be right at some point. The tricky part about prediction is always timing. So, we must not only listen to Yogi Berra when making predictions, but also perhaps William Shakespeare...Translation: Timing is everything!


sofistek said...


I never said that the unemployment statistics were not vastly underestimated and I agree with you that they are. My point was that Ilargi's calculation ignores the fact that many people are intentionally not in the workforce, so it is misleading to state that 45.5% of the working age US population is not employed. Though true, it is not (quite) as bad a picture as he's trying to claim with that calculation. I don't know how to find out the figure but if he subtracts those who have chosen to exclude themselves from the workforce (not through disillusionment but through a lifestyle choice), then that percentage will come down, probably by a significant percentage.

I still think the true picture will still be bad but critics will hit on such mistakes as a way to disregard the whole analysis. We shouldn't give critics that ammunition.

Ilargi said...

"I still think the true picture will still be bad but critics will hit on such mistakes as a way to disregard the whole analysis. We shouldn't give critics that ammunition."

There are no mistakes. 47% of Americans 16 and over have full-time jobs. That's all. I've haven't addressed the reasons why the other 53% do not.


sofistek said...


I'm not trying to catch you out, I'm just pointing out that part of your calculation is misleading. You even put it in bold type to try to give that 45.5% figure a significance it doesn't have. It doesn't have the significance you give it because we don't know what proportion of that 45.5% do not have paid employment because of a lifestyle choice.

You then go on to calculate that only 47% of working age US citizens have full time employment. I agree that it seems like a woefully low figure, especially as a large proportion of those still won't earn an income that can support a family. However, that 47% figure, in bold type implies that 53% would have full time jobs if they could get them. That is clearly not true, though we don't know the exact percentage. Some will choose to work part time, some will have chosen to retire early and some will have chosen not to work for lifestyle reasons (e.g. to raise a family).

Note that I'm not saying the situation is not bad. I'm saying it's not quite as bad as you're painting. I think it's worth telling ourselves accurate stories about our situation. We don't need to try to make it look worse - it already is very bad.

Ilargi said...

" sofistek said...
... part of your calculation is misleading. You even put it in bold type to try to give that 45.5% figure a significance it doesn't have.”

Here’s what I said:

"108.616 million people in America are either unemployed, underemployed or "Not in the labor force". This represents 45.5% of working age Americans."

Really, read it again. It's just data, no significance implied anywhere. Just stats straight from the BLS.

”It doesn't have the significance you give it because we don't know what proportion of that 45.5% do not have paid employment because of a lifestyle choice."

I haven't given it any specific significance, that’s just what you apparently see in it. I simply state the numbers. It makes no difference what lifestyle choices are involved, 108.616 million people in America are still either unemployed, underemployed or "Not in the labor force" regardless of lifestyle. Says the BLS.

”You then go on to calculate that only 47% of working age US citizens have full time employment. [..] that 47% figure, in bold type, implies that 53% would have full time jobs if they could get them.”

No it doesn't imply that at all. Where on earth does that come from?

We all understand that there are people who voluntarily don't work, or do so part-time, there’s no need to specify that at every turn. Again, it's simple data, I have given no interpretation. You have.

”I'm saying it's not quite as bad as you're painting.”

And I'm saying I'm not painting what you suggest, you do that. If you can't read the 47% number without implying some meaning for the remaining 53%, that's not my fault.


zander said...

@ Allgreatthings. from previous post.

With energy equating to a big chunk of do-able work per industrial civilization, I'd say its a safe bet peak employment has been reached, however the employent figures could rise, theoretically, if manual labour was to replace the work done previously by energy input where such a transformation was possible, initially it could match or slightly overtake the slack, but would eventually be subject to diminishing returns as the work requiring a bigger energy input would eventually outweigh human ability to compete, a personal example would be me going back to cutting hedges with shears instead of using a petrol hedge trimmer as I do now.
This is all highly improbable of course.


Dan said...

On Jobs:

ben said...

perhaps the 'only' should be taken off the title if your insistent that nothing is being implied about the other 53pc.

"* 43.2 million Americans receive foodstamps. That's 18.1% of all working age Americans. If they all have on average 1.5 dependents, which is probably a reasonable estimate, a full one third of the US population receives at least part of their food through this system."

this doesn't sound right. the number of dollars credited to a card is based on the number of people in the household, so it seems pretty obvious to me that when coming up with 'total individuals receiving SNAP' they aren't counting 43.2M households and neglecting to multiply by 2.5, as you suggest, but instead they are simply tallying the numbers according to how much each card is credited, or, more likely, entering the contents of the approved applications into the database.

but let's not forget what we've heard before, that an estimated one-third of eligible people (i think that's it) haven't even applied for food stamps!

Frank said...

@Ilargi. Perhaps you should work with a native speaker of English on the implications and connotations of your writing.

Whether or not you mean to, several times per year you write something _sounds_ like you're making a really strong statement. Then when you're called on it, you point out the escape clause. The famous "_may_ not recognize your town by Christmas" remains the classic example.

I doubt that anyone though you meant that literally, but many clearly thought you were solidly predicting a much bigger downturn than actually happened.

Again, whether or not you mean it, this is classic politician/advertising prose technique.

HappySurfer said...

Playing with figures I did a bit of back of envelope stuff this weekend which fits in with the theme.

The Locals are sprouting proud about the final year exam whole country pass rate of how it is now 67.8% - pat pat on the back.(There is a universal exam the school leavers write )

Ok so lets look - figs rounded.

1 320 000 in 1999 entered school system

645 000 wrote exam 2010

67.8% pass rate ( pass is 30% !!) up by 7% from previously.

= 437 000 passed 207 000 did not

added to the 675 000 who dropped out the system

gives 882 000 uneducated / year

Assuming 18y age exam written and stats stay same =

15 876 000 potentially uneducated of a current population of 45 000 000.

This is NOT educated, NOT unemployment figures.

There will some overlap between unemployed and uneducated but overall a problem.


C.E. said...

Okay, if I add

Employed 139.206
Unemployed 14.485
NILF 85.200

I get the 238.889 non-institutional civilian labor force

But then if I add the part-time for economic/non-economic reasons, then I get 266.006.

What am I missing here?

C.E. said...

Okay, if I add

Employed 139.206
Unemployed 14.485
NILF 85.200

I get the 238.889 non-institutional civilian labor force

But then if I add the part-time for economic/non-economic reasons, then I get 266.006.

What am I missing here?

I think I got it.

The 139.206 is including the part-time employed (8.931+18.184).

So underemployment is 27%, and everything else works out.

radzimir said...

"...the insufficient or barely sufficient creation of new credit to make up for debt paid down — or defaulted on — would cause a low growth in aggregate prices..."

This statement is based on current accounting rule, that debt payed back or defaulted destroys fiat money.

But banks are politically enough powerful to "temporally" suspend it. They suspended already mark-to-market accounting, and Nixon "suspended" dollar convertibility. If this happens, they have no need for fresh capital from the FED and may start immediately report huge gains and pay bonuses.

Last developments in the world shows, that it doesn't matter what fiat-economy rules are, they may be changed overnight to benefit the stronger party.

Here we came to the point, where you are 100% right: what will happen is not what some economic school or logical thinking may predict, but what is most beneficial to power elites and realistic to perform. So the main question is, if elites see any interest in perpetuation of the free market and democracy illusion, or have none. If they have, they will inflate and preserve public order by making everybody happy. If no, they will let deflation develop to scary people enough to let introduce saving plan - "suspending" democracy and introducing china-like state, anyone protesting will be treated by FEMA which has already stored millions of coffins, just for the case.

What decision will be made? Resources are the key. If there is enough stuff to "live a dream", so we will inflate and preserve "democracy".
But if they take peak oil seriously, then "growth dream" will be "suspended", crisis hit anyone and everybody will be screaming for a savior who put the mess to the end.

So, the best strategy to anyone is obvious one: just became hired by FEMA, don't write blogs or any comments on blogs, and don't wear eyeglasses, collect some paper evidence you are mentally ill.

Anonymous said...


A "loss of morality"? On the part of JP Morgan or the State of Indiana? The old saw that you can't legislate morality might stem from the fact that legislatures don't typically regulate themselves. In any case, it's an interesting assumption that morality existed in the first place. Personally, I opt for clarity and leave morality to the "moral".

Anonymous said...


Well, that explains what has happened to our tax rate since I started working as a nurse...we owed nearly $6k the first year I worked, and $2k last year even with DH working only part time. I expect it will be worse this year since TPTB are talking about reducing or eliminating mortgage interest deductions.

I keep telling people at work that my goal is to work myself to part soon as our smaller debts get paid off. When they ask why, I tell them that if I only make enough money to qualify for food stamps, and have little to no debt, I can afford to live yet still not be taxed to death. More and more people are starting to think I might be on to something with this.

I'm finishing my bachelor's degree by June, and I'm going back for my NP degree this fall. I'll have to drop to part time at some point in order to do the work required. I'll also be incurring staggering amounts of student loan debt, but since I figure I'll die owing student loan debt I'm OK with that. At least as an NP I can take care of my community and family members, and make use of herbal therapies that don't involve big pharma.

DH works part time at a few jobs, and is going to school as well. We'll have to see if he can get a job when he's done.


gylangirl said...


Yes of course the real unemployemnt number is the shadowstat number not the .gov number. We already agree that the official number is an underestimation of unemplyment.

My point is that the number who you say "choose" to be in the NILF category are really only a third of that NILF number; and so two thirds of the NILF number would otherwise be added to the unemployed number were it not for their government- induced removal from the available labor supply.

The point we all agree on is that the economy cannot match enough job opportunies to the number of Americans who want to work. But if you factor in the married formerly employed women who actually did NOT freely choose to be in the NILF figure, then the unemployment situation is even worse than Ilargi and shadowstats calculate.

Ka said...


i think an excellent article title and topic would be, "how hyperinflation could happen and why it won't."

I think the article you want can be found at the end of the post:

The Politics of Deflation
by Vijay_Boyapati - Market Oracle

Anonymous said...

@ Zander,

Good Day

Humm... I concur with you on the surface, but at the same time one human can only do so much manual work and then only in a limited time. (Work = Joules/second) There is also a problem with scale dependence.

Each of us on average have 150 energy slaves via embodied fossil fuel energy. It would be inappropriate, however, to assume that if I hypothetically stopped using fossil fuels this would create 150 new manual labour jobs.

Fossil Fuels are liquid carrying capacity/biocapcity. The human population is in excessive overshoot of its photosynthetic biocapacity precisely because we are using fossil fuels to feed the world. At small scales your point works but succumbs to the tragedy of the commons at large scales. If everyone were to stop using fossil fuels, there would be a massive theoretical glut of manual labour employment but everyone would starve. Humanities overshoot of earth's domestic biocapacity by using fossil fuels places us in a unique dilemma where peak oil likely corresponds to peak employment based on food production alone.

We may be able to recreate manual labor jobs at the small scale of a community (hand hedging your shrubberies)At large scales Peak oil energetically constrains earths carrying capacity and thus constrains employment on a more fundamental level.


Rumor said...

TAE has never suggested that hyperinflation of the US Dollar is unlikely; to the contrary, I&S have repeatedly stated that they expect to see hyperinflation following deflation and have repeatedly explained as to why. It's in the primers.

Incidentally, I find it pretty rich that a supposedly "native" English speaker, for whatever that's worth, suggests that Ilargi needs his intros edited by a "native" English speaker (presumably the commentator meant himself) while at the same time misinterprets the clear and unarguable meaning of the word "may". Christ.

VK said...

The point being made is that 47pc of the population has full time jobs. The rest are in some way supported by the 47pc that are working full time. Either by family support or government transfers through taxation and borrowing or by running down their savings or living on income from stocks/ bonds which are directly supported by those working full time.

So the dependency ratio is more than 1:1

Now let's break down the Not In Labor Force Category;

Men 16-64,
Disabled: 4.895 Million
Not Disabled: 16.208 Million
Total: 21.103 Million

Women 16-64
Disabled: 5.097 Million
Not Disabled: 27.339 Million
Total: 32.436 Million

Total of both sexes 16-64: 53.539 Million
Total not disabled both sexes: 43.547 Million

Over 65
Disabled: 11.312 Million
Not Disabled: 20.881 Million

Total over 16: 85.732 Million Not in Labor Force (slight discrepancy with the NILF figure total within BLS Statistics)
Total: 32.193 Million

craigb said...

13 or 26-week Treasury Bills. Good or bad?

TMO said...

The entire FIRE sector has spent the last 30 years concocting new-fangled tricks and monetary illusions to make it appear that the corpse we call the American economy is still actually motile.

No one should be shocked by anything the Fed does at this point. I wouldn't be surprised if during the next financial collapse the Eccles building rises up off its foundations and flies off into intergalactic space with all the gold.

Seriously, I would like to see those among us who are expert in the area of finance and accounting front-run the Fed and begin to anticipate some of its future "surprises".

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

@ Aaron,

Ok let's back out the 32.193 Million Americans over 65 who aren't in the Labor Force (but still require income to be clothed, fed, travel, heat, gas etc)

So the labor force becomes 206.696 Million. 

Now if we take these figures;

Part timers wanting full time jobs: 8.931 Million

Not disabled 16-64: 43.547 Million

Unemployed: 14.485 Million

Total: 66.963 Million
Rate of unemployment, underemployment & unemployment for not disabled 16-64 is 32.4 percent. 

If we add in disabled not in Labor Force 16-64 (9.992 million) we get a rate of 37.2 percent. 

If we add the 18.184 Million part timers we get the following 2 figures depending on disability or non disability

1) Rate of Unemployed, underemployed, part time or inactive non disabled workers 16-64 (Total of 85.147 Million) is 41.2 percent. 

2) Rate of unemployed, underemployed, part time or inactive workers both disabled and non disabled 16-64 (Total 95.139 Million) is 46 percent.

Dan said...

@ all

I don't intend to be disrespectful, but reading all of these comments (in which numbers are crunched in an effort to find the "real" unemployment rate) makes me think of the Abbott and Costello routine, Who's on First.

I see the whole thing this way:

1. Job growth since the 1970s has been predicated on credit expansion.

2. Job growth since the late 1970s has been decreasingly "productive" and increasingly in the service and retail sectors.

3. Each year, the aggregate number of people seeking employment grows (even more so in light of the inability of seniors to retire at 65)

Seems like an pretty clear picture. Credit contraction, a non-productive economy, more people seeking employment each a word, bad.

Ashvin said...

@mistah charley and others from the last thread in case you missed it (sorry to keep bringing this topic up)

I think we are really delving into some controversial territory here, in terms of psychiatric classifications of people who are "off" in one way or another. I would not be arrogant enough to say that these respected psychiatrists are absolutely wrong about schizophrenia, but I certainly think there is much more to Loughner's story than mental delusion.

Thomas Szasz, also a respected psychiatrist, would disagree that this shooting was motivated solely by some form of "mental illness", as explained in this article -

Some of the excerpts from the Dr. Torrey article also stand out to me as being broad, ambiguous statements that we should be critical of:

"It's common for schizophrenics to think people are trying to control their mind, but thinking the government is trying to control your grammar -- I've never heard that before."

Perhaps because we are not quite sure what he meant by "grammar", but it seems irresponsible to dismiss this thought as clearly delusional.

"This is the kind of disorganized speech that you virtually never get in any other condition. It's what we call pathognomonic of schizophrenia. That is, when you hear that symptom, it's 'schizophrenia until proven otherwise.'"

Sounds kind of like "guilty until proven innocent". I know many psychiatrists would say that these methods of diagnosis are based on years of research and studies, but those in the "anti-psychiatry" school of thought may say that the "science" supporting many DSM classifications is too tenuous, subjective and institutionally biased to be reliable.

I especially like this excerpt from Szasz's article in response to the Torrey article:

"In contrast, Ashley Figueroa, a former girlfriend of Loughner, told ABC News that she remembers Loughner as “a drug user with a grudge against the government…. I think he’s faking everything…. I think that he has been planning this for some time.” A writer for adds: “Figueroa is not a doctor, and these claims conflict with the opinion of top doctors in the field of psychiatry. (Dr. E. Fuller Torrey actually told Salon that Loughner looks like a ‘textbook’ case of paranoid schizophrenia.)”

"True, Figueroa is not a “doctor.” Do we need to have a medical degree to diagnose a person we have never laid eyes on as schizophrenic? Does the fact that Figueroa knew Loughner, that they had a real-life human relationship, count for nothing?"

People may say that these types of views are too extreme, or they are assuming that every institution in our society is corrupt/misguided just because a few are. I obviously believe that this view is more common sense than's just the way I see the world.

ben said...

frank, accordingly you should work with a native relevancy on the implications and connotations of your condescending personality. snort!

The Anonymous said...

"Frank said...Whether or not you mean to, several times per year you write something _sounds_ like you're making a really strong statement. Then when you're called on it, you point out the escape clause. The famous "_may_ not recognize your town by Christmas" remains the classic example."

Not that Ilargi will allow this comment, but the funny thing is, that isnt what was actually said. Initially, someone suggested Ilargi said "_may_ not recognize your town by christmas", and then Ilargi ran with it saying, "I said MAY not recognize..."

The exact quote was:

"By Christmas, you'll be lucky if you recognize the town you live in."

As you know, you'll is a contraction of "you will" or perhaps "you shall". Accordingly this is a sentence without an escape clause.

So there you have it - the first and perhaps only time there is proof that Ilargi was indeed wrong about something!

sofistek said...


If the figures have no significance, why are you assigning a blog post to them? Why are you putting certain percentages in bold type?

So, you are now saying that the figures you meticulously calculated have no significance? Well, I find it hard to believe that you believe that, but that is your choice.

Look, as I've said, I'm not trying to catch you out or make you change your mind about how serious a situation we face. Let's suppose that the total of people who are staying home to raise a family, who have retired early, who are taking time out to do other stuff that interests them, and so on, is 50 million working age Americans. Note that I'm not saying this is the correct figure, it is for illustration only. That would mean that only 35.2 million people are not in the labour force but who would happily take a job if they could find the right one. So your 108 million number becomes 58 million, or about 25% of working age Americans.

That 25% would still be a woeful and significant figure so there is no reason to state a 45.5% figure which has no significance (because we don't know what impact it is having, because we don't know how many of those people don't want to be in the work force).

zander said...

@AGTEFC 1.42

Yes, agree with all that, and what is more, the surviving world populace will ALL have to work/be employed/labour manually essentially for nothing/peanuts in pursuit of general day to day survival.
There was a hint of devil's advocacy in my post. :)


Anonymous said...

I know you're Canadian, but your weird use of decimal points in the numbers makes it hard to read.

Ilargi said...

So Anon,

You found that you were lucky. And so were many others. But that by no means says that everyone was. Try Flint, or Detroit. Yes, I was afraid back then that it would come down harder and faster. But that doesn't mean I was wrong in the way I phrased it. It just means you were lucky.


Anonymous said...

@ Zander

I'm all about what you are talking about though :) :)

Being in control of the means of your own subsistence is the best employment in the world. It may be the most morally benign occupation?

Homesteading, gardening, hunting, building, etc.... I don't want anyone else to do my living for me anyways.

Bottom up solutions via subsistence living. :)


Ilargi said...

" sofistek said...

If the figures have no significance, why are you assigning a blog post to them?"

I have tried to answer you twice today, and all I get is more word twisting. No, thanks. You keep assigning the term "significance" in all the wrong places.

Once more, quoting you: ... part of your calculation is misleading. You even put it in bold type to try to give that 45.5% figure a significance it doesn't have.”

And once more, it's not my calculation, write to the BLS to complain.

For the details you seem so thirsty for, VK provided them earlier in this thread.


A Fall Guy said...

@ Anonymous

Ilargi's 2008 statement "By Christmas, you'll be lucky if you recognize the town you live in." doesn't strike me as incorrect. Perhaps people still "recognize" their towns (in particular the centres), but in a way you might recognize a homeless person as an old acquaintance. How many boarded up and vacant shops do there have to be to lose recognition (not in the literal sense, but in the sense Ilargi undoubtedly meant, which was as somehow consistent with the image in your minds eye)? Buildings take longer to degrade than societies.

How may people live with constant cognitive dissonance between how their towns actually are and what they imagine based on memories of former glory?

A Fall Guy said...


It seems like some of the discussion stems from two distinct conversations: true unemployment rate vs. proportion of people working to support society.

It seems like Ilargi is focusing on the latter: trying to get at an accurate estimate of the percent of the working age population who are actually working. No interpretations for why people may be unable to work or choose to not work. Just numbers from which other issues can be assessed.

The other conversation is what is the true unemployment rate. This is clearly a subset of the 53% of the working age Americans who don't have full time jobs. But it requires more in-depth info than is likely available from gov't publications to tease out why people don't work (chosen vs. forced retirement, taxation biased against mothers, etc.).

Both are important issues. A better picture of unemployment can help us understand the actual state of the economy. A better picture of the proportion of people actually working can help us understand the feasibility of carrying the weight (i.e. complexity) of society.

Phlogiston Água de Beber said...

People are committing mass murder and self-immolation across the surface of this little blue Ball of Confusion. Meanwhile the bureaucrats, pundits and commentariat devote their mental resources to seeking statistical precision, or imprecision as suits their motives, as to the size of the monstrous pile of aggregated tragedies all that unemployment represents. Statistics are just numbers. Misery is an emotional experience and is not subject to multiplication or statistical fits. No one knows how big that pile is.

Mr. Anonymous devotes who knows how many kcals of energy trying to convince the denizens that all prophets are false. Not the sort ever to admit that perhaps all of us have been far luckier than we ever deserved. Except of course, for that wildly uncertain number of people who are definitely unemployed. It seems their luck ran out a little early.

The punters that insist the hot tip on when the markets will tank is all they need to know, seem unwilling to contemplate that their own luck might turn before that of the pumpers and dumpers.

Ms. Tomlin has it exactly right. It is impossible for cynicism to keep up. Trust me on this, I have tried about as hard as anyone ever has, but it has not been enough. When cynicism fails to hold the line, weeping is the second line of defense.

jal said...

Don’t be left out of the news ...
Read all about it ...

Insurance Companies Sue Bank Of America Over "Massive Mortgage Fraud"

And Now, For The Real Sh$%show....

Anonymous said...

@ Board...

Think qualitative not quantitative! :) Approx half of the potential workforce contributes to labour supply. Details aside, that is an interesting summary statistic that begs the question... Where does the "real work and employment" in America comes from if that proportion of people in a complex society are not working?

It is relevant to remember that each of us has on average 150 energy slaves through embodied fossil fuels. (Preaching to the choir) That's approximately 45 Trillion manual labour workers, working 40 hour shifts just to meet the consumption needs of the average American.

If (when) there is a supply collapse of oil for any reason (middle east war, supply collapse following supply glut at bottom of deflationary depression, etc.) the sudden "unemployment" of our energy slaves could yield a much graver situation indeed.

Mother Nature is the CEO of this life experience. Last time I checked we all get fired anyways. Its just a matter of sequence. I still got a lot of work to do myself. (Impermanence drives perfection)


Unknown said...


The 'marriage penalty' was basically removed in the 2001-03 Bush tax cuts. Filing jointly is the same as two people earning half the total for just about any incomes. This didn't eliminate everything your article mentions (like daycare costs, or the SS tax cap), but the figures mentioned are way out of date.

Erin Winthrope said...

Turn that frown upside down TAE

Stocks are sizzling....
Buy yourself some Apple, some Intel, some Citi, some Caterpiller etc..

Corporations are sitting on $2 trillion in cold hard green backs.

America is getting back to work as coporate leaders put that cash to work. Banks are lending to consumers and small businesses. Unemployment claims are down. It isn't hard to see why the markets rip those bears to shreds.

Real Americans are getting their hands dirty again, not spitting bile and venom in the shadows.

Alexander Ac said...


Yes, I was afraid back then that it would come down harder and faster.

I think that "smaller and slower" unfolding of the events is only thanks to the "extent and pretend" policy.

It will only make the impacts more painful in the future...

S&P 500 still going up like there is no tomorrow. Is there?

p01 said...

Ready or not, here it comes:
UK economy suffers 0.5% contraction


p01 said...

Yay Monica! Tell it like it is! Real americans are getting their hands dirty alright (planting turnips anyone?)


VK said...

@ Monica

Your moronity is welcome on Yahoo boards. If you wish to immolate yourself please do so. The rest of us will sift through the data and use facts to judge US economic performance.

The British economy is contracting again, as is Greece, Spain, Portugal and Ireland. Only a matter of time before they implode and so does your delusion.

The US is headed for collapse. Within the next 5 years if nothing else changes, US payments on interest alone will exceed that of defence.

That is the death knell of empires. Always. Throughout recorded history.

VK said...

To all,

47pc of working age Americans are employed full time. PERIOD. This is from the BLS.

The rest of the working population as well as children and retirees are supported by those in full time employment. The Government collects taxes from those people and it's Trillions in borrowings are dependent on those 47pc.

Retirees income from stocks, pensions and bonds are also dependent on those 47pc which allows for wealth transfer to occur.

Wealth arises from productivity.

p01 said...




Eric Lilius said...

Just heard the official word from Obama. There are 14 million unemployed in the US and that American citizen have to get serious about debt management. Truly unbelievable.

Alexander Ac said...

Funny that british economy contraction has been blamed on cold december. Always "optimistic" MMF predicts

IMF predicts faster global economic growth in 2011

Anonymous said...

Thought this great expose by Peter Dale Scott might be of interest to some here:

"The Doomsday Project, Deep Events, and the Shrinking of American Democracy."

Hombre said...

@VK - Thanks for your realistic and astute contributions. A regular dose of realism keeps one aware and attentive.

@Monica - For Sale, one bridge to nowhere, cheap! Located in Alaska! Its your blindness, and that of others who also refuse to see properly our predicament, who are carrying us over the edge.

@Board - Dan is right! IMO Look, a hellava lot of folks are unemployed and another huge portion of the U.S. population is leaning on that monthly check, direct deposit, and/or food stamp "card." Whether there are 45%still working or 46.000001%, are you kidding me!

Ilargi's crucial point is not in the details so much as it is in the reality of our dire predicament. OK? Rather than nit-pick figures how about advancing an argument for optimism if you are optimistic! I for one am ready to hear that.

"Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital."
~Aaron Levenstein

Will said...


"It is relevant to remember that each of us has on average 150 energy slaves through embodied fossil fuels..."


Might the labor market improve as energy slaves contract?

Ka said...

It would help to appreciate that number (47%) if it can be compared to what it was in, say, 2000, or 1929. Anyone know?

Phlogiston Água de Beber said...


As the energy slaves disappear so will the labor "market", which energy slaves made practical. The slave work will have to be taken up by humans. I doubt many will see that as much of an improvement.

Do recall the old bumper sticker though.

I can't be fired, slaves must be sold

Phil said...

What's been amusing about the UK economic contraction is how all the media pundits and most of the politicians are all still singing the "growth is good, inflation is bad, we must raise interest rates to counter it" hymn sheet.

I marvel at their confident arrogance fronting their total ignorance.

Some idiot at the Spectator commented that one quarter's fall in GDP shouldn't be seen as a downturn, yet NONE of the UK mass media made similar comments when we had one quarter's "good" (i.e., bad) growth figures. No, they were all shouting from the rooftops that the recession had ended.

Meanwhile, back at the ranch (or cardboard box under a railway bridge), the real figures show we're at the start of or in a second great depression.

Average UK take-home pay, adjusted for "inflation", has decreased for the last six years in a row; the first time we've seen such a decline since the 1930s.

UK national debt is now £889 billion, highest since records started in 1993.

And all this is before Cameron and Osborne's central and local government job cuts start having an impact.

Nassim said...

The discussion about the precise number of unemployed Americans reminds me of Stalin's quotation:

The death of one man is a tragedy. The death of millions is a statistic.

The Anonymous said...

"Ilargi said...But that doesn't mean I was wrong in the way I phrased it. It just means you were lucky."

Ah, so it does! "Luck" was indeed an escape hatch in that sentence that I overlooked. A Fall Guy points out a second escape hatch in "recognize" which, (while nowhere near as good as Ilargi's) is yet another way for Ilargi to keep his 100% correct streak intact. Clearly, given his careful phrasing, its impossible for anyone to say he is "wrong" about anything.

I find this all humorous because the #1 rule of internet blogs seems to be: do not, under any circumstances, ever, ever admit you were wrong...qualify, twist, spin, torque, etc, as necessary such that you will never, ever be in a position to say categorically "I was wrong".

Look, if you really want to impress us with your prescience, make a declarative, easy to verify, statement such that there is no "escape hatch". I dont want to put you on the spot, so go ahead and review everything you think is determinative and answer the following:

1. Regarding stocks, today, the Dow Jones Industrial Average (DJIA) is at 11,925. Within one year from today (Jan 24, 2012), the DJIA will have fallen (at least temporarily) to at least _________ points.

2. Within two years from today (Jan 24, 2013), the DJIA will have fallen (at least temporarily) to at least __________ points.

3. Regarding housing, the Case Shiller 20 composite index (CS20) peaked in July 2006 at 206.52. As of November 2010 (released today) it is at 143.85. By November 2011, (results released in Jan 2012) the CS20 will have fallen (at least temporarily) to at least _______ points.

4. By November 2012, (results released in Jan 2013) the CS20 will have fallen (at least temporarily) to at least _______ points.

Answer these at your leisure, and feel free to tighten/clarify as necessary such that there are no escape hatches - but again, if you want to impress the rest of us minions on your ability to predict TSHTF, these should really be no problem to answer. I will likely take the over, versus what you say, but we'll see.

And again, whats the harm? If you are right, you get to say "I told you so" which you indeed relish, and if you are wrong, so what? Recently, Stoneleigh has been wrong all the time, yet that doesnt seem to dissuade any of her true believers from doubting her overall message.

Likely, I just spent 5 minutes wasting my time as you wont allow this message to be posted. However, if you are in any way intellectually honest with yourself, you will allow it and answer in kind.

zander said...

@ Phil.

Please don't think me a tory, I'd die of shame, and I know as well as anyone this sucker's goin' down regardless, but can you imagine where we'd be if Labour had actually won that election, with Moody's et al. finger poised and hovering over the "downgrade to AA" button? We'd be over the edge and in freefall (which is where we're headed anyhow) in joyful tandem with our Irish brethren, the debt interest is 120 mill. a day as it is, and that cretin Balls is now back in charge of Labour's finance policy, this is a man who's main attribute is maxing out whatever largesse is available to him and partly responsible for the carnage Labour left behind, he'd be in charge of finance now if that ponce Cameron hadn't gotten in.
it's RIP UK whichever window you look through.
Christ, even St. Cable has started lying.


Hombre said...

@Ahimsa - Thanks, an interesting, excellent article at your link!

Anonymous said...

@ WILL & I AM Nobody

You asked "Might the labor market improve as energy slaves contract?"

I AM Nobody provided a partially correct response, that falls short in one aspect.I AM Nobody quoted that "The [energy] slave work will have to be taken up by humans." This process of manual labour reinstatement, however, is scale dependent. What works at small scales does not necessarily work at large scales.

Just because each of us has 150 energy slaves, it would be inappropriate, however, to assume that if I hypothetically stopped using fossil fuels this would create 150 new manual labour jobs. As Supply of oil declines year on year, or there is a sudden supply collapse the total available energy to perform work declines also. A decline in energy available to perform work is strongly correlated with humanities ability to produce food. Peak oil means implies peak human carrying capacity. After peak, human carrying capacity declines year on year.

Fossil Fuels are a one time energy subsidy that is by definition liquid carrying capacity/ biocapcity. The human population is in excessive overshoot of earth's background photosynthetic biocapacity precisely because we are using fossil fuels to feed the population. At small scales reinstatement of manual labour works very well, but succumbs to the tragedy of the commons at large scales. If everyone were to stop using fossil fuels and try and subsist via manual labour, there would be a massive theoretical glut of manual labour employment but everyone would starve. Humanities overshoot of earth's domestic biocapacity by using fossil fuels places us in a unique dilemma where peak oil likely corresponds to peak employment based on food production alone. The reinstatement of energy slave "employment" to real manual labour is ONLY a local (small scale) solution to dealing with peak oil.

At global levels, peak oil means decline in carrying capacity. How fast the decline following peak proceeds will determine whether there will be large human mortality (100 millions) or massive human mortality (Billions) over a relatively short period of time.


Kate said...

@p01 Yep. Just did a germination test for the turnip (and other) seeds over the weekend. They're sound. And good, too - ate the resulting sprouts. Turnip planting, ahoy!

Nassim said...

It was he who invented a compass for spies hidden in a button that unscrewed clockwise.

It seems the Germans could not work that one out. I wonder if Hugh Hendry could tell me why the Japanese make Nikon lenses that use the same trick?

Phil said...


The only almost-sane economic policy in the UK came from the Green Party. Unfortunately, our one Green MP has zero power or influence in the Commons.

I'll repeat my maxim of the moment: Those who incorrectly analyse problems will invariably come up with the wrong "solutions".

It is painful to watch our politicians, cheered on by our clueless media, digging us into an even deeper hole.

Ruben said...

@the Anonymous

Correctly predicting numbers inside an envelope is a parlour trick that would not impress me, as I am completely uninterested in the numbers.

Which means, I guess, that I am a different sort of minion than you. Your kind of minions are impressed by that, whereas my kind--call them M2--are not.

I think this blog is more big picture than you desire. I am sure you can find pages and pages and pages of people making numerical predictions elsewhere. I like TAE because their focus fits into patterns I have seen elsewhere. And so, while I have very little financial expertise, I have confidence in Ilargi and Stoneleigh because I have seen the pattern they describe. Not events, not numbers--patterns.

Anonymous said...


Peak oil represents the peak in human carrying capacity. Decline in fossil fuel extraction results in declining carrying capacity.


More importantly, however, human carrying capacity is threatened by antagonistic factors such as climate change, water crisis, destruction of natural capital, ecosystem collapse, and loss of non-substitutable ecosystem services. The natural sustainable photosynthetic carrying capacity is being destroyed. We have cut down half the worlds forests and are loosing productive crop land at alarming rates via desertification. Estimates that an area the size of Scotland is lost to desertification each year!!! Desertification is the ecological wild card that many have yet to fully acknowledge...It equates to permanent loss of carrying capacity just like declining oil production.


links to UN site on desertification)

Finance is critical because it can work at short time cycles, but you extend your time horizon a little further (>2020) and finance begins to become irrelevant compared to ecological collapse. Malthus has been falsified on numerous occurrences but IMHO we are setting the stage for the real Malthusian Catastrophe that he initially identified.


Phil said...

Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920s

Phlogiston Água de Beber said...

There is historical support for AGTEFC's contention that conversion from energy to human slavery will not "employ" anywhere near the available labor pool. The entire antebellum South hardly made a dent in the available labor supply of sub-Saharan Africa.

A crucial question for the Usanistani laboring class is to what extent might the 21st Century slave masters prefer imported to domestic slaves? I fear that not many domestics will be able to show much in the way of preparatory experience for the kinds of tasks that will be assigned. Also in doubt is the adaptivity necessary to make the necessary attitudinal adjustments that would make them suitable for the role.

As the horizon recedes, our perception of the death toll will almost certainly be constrained by lack of visibility. Within your locality you will likely be aware of thousands dying and many migrating away, their fate probably never known. Globally, it should almost certainly be in the billions.

I'm afraid it is not properly appreciated how badly agriculture will be impacted by the abolition of the energy slave force. Almost no one alive today, outside of primitive societies, knows anything about farming without them. In the "developed world" farmers will lose their land to people knowing next to nothing about farming. Ag production will plummet to a small fraction of current output.

@The Anonymous Bore

I regret to have to inform you that no crystal ball ever made came with a calendar function. They reveal what, but not when. The claims of Zager and Evans about what will happen in 2525 and beyond not withstanding. Consequently, I cannot tell you when they will be around to clamp the irons on you. Or call for your companions to bring out your carcass for disposal. You'll just have to wait and see, like the rest of us.

Alexander Ac said...


Steve Keen

just discovered physicist Albert Bartlett

even though he thinks he is mathematician. I thought he already knew him...

Promoting the exponential growth is the greatest fraud humanity has ever discovered - fraud against Nature, fraud against us. Pitty that the greatest fraud in history is also the MAINSTREAM :-(

jal said...

The Anonymous said...
"... if you want to impress the rest of us minions on your ability to predict TSHTF, these should really be no problem to answer...."

I'l take the time to answer.

First, those are the wrong questions.
Second, you have made presumptions that are wrong.


From your question it appears that it has not hit you and yours YET.

Ask yourself, " How relevant are those questions to those living in Haiti or those pretend middle class millions that are now on food stamps."

I expect that you know how the financial system, ponzi, works. Therefore, tell us what would have happened if the "socialist gov." had not printed money, (and still continues to print money), to cover up the grand theft of all the saving funds by the banksters "capitalists".


Will said...

Just because each of us has 150 energy slaves, it would be inappropriate, however, to assume that if I hypothetically stopped using fossil fuels this would create 150 new manual labour jobs..."

I think we have to parse this a bit. Once we realize peak oil, we have significant liquid fuel issues. No argument with about that. It does follow that the industrial ag. model must fail. That would mean NO LIQUID FUEL. Suffer yes, starve no.

With respect to the energy slaves. We do not need to replace 150/person. If we replace .25/person, (assuming real underemployment rate is 25%) we have full employment.

For sure these won't be comfy cube jobs...

Ashvin said...

@the Anonymous

If someone offered you 2 to 1 odds on betting a coin will land heads, and I told you it was a great bet and you should take it, would you say I was actually wrong in my advice after the coin lands tails to ten times in a row?

No, my advice would still be correct, and you would just be very unlucky. I don't think anyone on this site would attempt to predict the outcome of each "coin flip" in the American economy.

Anonymous said...

@`I AM Nobody,

Well said. I concur.

Small scales food production will work well providing you have the community strength to fend off a large number of hungry, pissed off, and desperate people attempting to make your subsistence theirs.


Supergravity said...

The heavier slavery in times of lower ambient energy flux density was surely done by oxen, horses and mules, camels, or even elephants, although it has been estimated up to 30% of arable land/time was utilised to produce their feed. Still, beasts of burden were the most ubiquitous and accessible form of kinetic leverage available for most of history, a vital capital asset for farmers, and they remain so in many places.

It's not quite the energetic endowment from fossil fuels, but there's a potent leverage, a similar flux density can't be had from mere manpower, beasts of burden are definitely the most efficient chemical capacitation of low-grade food inputs for tasks of severe slavery.

Supergravity said...

That 30% might be total calories, but doesn't sound right, read it somewhere, maybe such a high figure would be with particular land usage or crop rotations, or could include large stocks of horses, warhorses must eat a lot.

Translating horsepower to manpower is complicated by divergent efficiencies at certain tasks, but its definitely a form of energy slavery in those terms, beasts on the land also provide more synergistic fertilising services.

Phlogiston Água de Beber said...


Concurrence is always appreciated :)

I would say that community strength while vitally important is short of a decisive factor in how adequately small scale food production would work at least during the early phase of the die-off period. In a fairly isolated and already well knit community where weather cooperates and seeds and livestock are available, it may work pretty well.

I believe the sociopathic class will favor large scale farms worked by slaves, call them serfs if you like. The productivity will not be impressive, however, baring a serious catastrophe, a surplus is pretty much guaranteed. If production is inadequate to feed the Master and all the slaves, then some slaves will be sold, if there are buyers. If no buyers, then quietly disposed of.

I have to say that Will's suggestion that there will be full employment, even for cube rats, and no starvation, reflects a remarkable failure to appreciate what the energy slaves have done to agricultural practices. Land values are a pretty good proxy for productivity. Serendipitously, this chart appeared this morning on Kalpa's Big Picture Agriculture blog. If I read it correctly, in 1900 when the main energy slaves were horses and mules, Iowa farmland sold on average for $43/acre. It couldn't have been producing much of a crop to sell that cheap. Consider it a benchmark.

Anonymous said...

@ Hombre

You're welcome. Good to see you're still here! :)

Nassim said...

As the horizon recedes, our perception of the death toll will almost certainly be constrained by lack of visibility. Within your locality you will likely be aware of thousands dying and many migrating away, their fate probably never known. Globally, it should almost certainly be in the billions.


Or, it could it be a lot more visible. It has happened before:
Genghis Khan the GREEN: Invader killed so many people that carbon levels plummeted

Will said...

"I have to say that Will's suggestion that there will be full employment, even for cube rats, and no starvation, reflects a remarkable failure to appreciate what the energy slaves have done to agricultural practices...

That's not what I've suggested.

What I suggest is that the is a lot of labor that will be necessary. If oil powered machines can't do it, humans will do it.

That's not a doomer deal or a cornocopian deal, it's just what will occur.

Now... if we require 25% more labor than the present to get things done, that suggests that our energy shortfall will, at least initially, balance the labor market.

Whether that works out or not remains to be seen, but it's not foolish to suggest that replacing fossil energy with labor cannot happen. It will. And it will mitigate the downside somewhat.

A Fall Guy said...

@ Anonymous

Your last post doesn't merit a response, but for the entertainment of the commentariat:

There is a critical distinction between accuracy and precision. Accuracy relates to degree of correctness of a statement, while precision relates to level of detail in a statement.

Many people, like you, confuse the two. Consider the debate about the percent employed. A high quality estimate to the decile (accurate but imprecise) is much more useful than a low quality estimate down to the individual (very precise but probably inaccurate).

There is a trade-off between accuracy and precision. People believe they want precise answers (often mistakenly thinking that these will be more accurate), but increasing precision leads to a loss of accuracy. Accuracy is much more important than precision.

TAE generally concentrates on accuracy of the future trend, which is what I am interested in. Your obsession with precision likely clouds your ability to see the big picture.

Phlogiston Água de Beber said...


And I believe I was quite explicit that human and animal power would take the place of the diesel ponies. It does not compute that this will result in full employment for the present population. Most of the population will be deemed unfit for the work and animal power will substantially reduce the number required.

Most critically, crop yields will fall dramatically. Not at all unrealistic to expect around 12-20% of recent average yields. Much of that will have to be fed to the draft and meat animals.

No modern day Genghis Kahn will be required to engineer a massive die-off. Malthus will finally get his due.

sofistek said...

OK Ilargi, can we agree on this, at least?

The broadest official figure for unemployment, U-6, is currently at 16.7% (seasonally adjusted). The highest possible unemployment rate, from your calculations, is 53%. The real figure, that is, the percentage of working age Americans who need or want a full time job, is somewhere between 16.7% and 53%.

Is that fair? Note that I'm not placing any significance on any figure, just stating those figures. If you can find a reasonably accurate figure or narrow the probable range for meaningful unemployment, that would be great.

Nassim said...

About one in three people who said they were at a healthy weight actually had BMIs in the overweight range ... Thirty-eight percent described their diet over the last year as "extremely" or "very" healthy and 53 percent said their diet was "somewhat" healthy.

Delusions can take many forms:
90 percent of Americans say their diet is healthy, CR poll finds

Anonymous said...

@ Nassim,

yeah, "denial" isn't just a river in egypt.

however, almost no one understands what a "healthy diet" look like.

it is a diet where one's cellular hormonal inflammation is balanced - inflammation is created when needed and not created when not needed.

too many american diets are inflammatory - the cellular inflammation response is rarely turned off and it wears on the body and ultimately yields chronic disease in those without super human genetics.

joslin diabetes center changed their nutritional recommendations in 2005 and that is a good place to start...

if you want the leading edge anti-inflammatory diet, you need to look to dr. sears (phd lipid researcher, former MIT and boston university researcher) and zone diet.

manuel uribe (former heaviest man in the world), randall mccloy (lone survivor of the sago mining disaster), dara torres (42 year old olympic silver medalist) and valentina vezzali (only human to win 3 gold medals in fencing, her latest at 38 year sold) are a few of the most successful people who have applied zone diet anti-inflammatory principles.

Anonymous said...

Let's pick apart the 47% who have 'full employment' a little.

Are we talking 40+ hrs a week plus full benefits, i.e. nice plump 401k/pension fund plus full medical insurance plan?

First, I seriously doubt all 47% of the so called 'fully employed' have 'full benefits'. And the percentage that does is going to find out shortly that those 'full benefits' will be steadily eroded by their employers in the near future due to contracting financial outlooks or some such management double speak.

Second, their 'health benefits' will have the deductibles rise to thousands of dollars instead of the previous hundreds due to relentless double digit annual premium increases.

Thirdly, they will be asked to work harder and harder and longer hours for the same or decreasing wages. Bummer. But hey, the government will still classify them as "fully employed', they're the lucky ones after all. Just move the goal posts, the definition of 'full employed', just like how the government has gang raped the definition of standard accounting practices.

This 47% that is propping up the whole shebang is going to undergo a Real Stress Test, unlike the joke that the government said it administered to the TBTF banks.

Dmitry Orlov said in the USSR during their collapse, it was middle manager professional men who cracked first and most dramatically.

The movie Falling Down comes to mind.

It will be interesting to see how this unfolds in the Land of the Brave and the Home of the Free.

Brunswickian said...

Dow approaching 12,000!

Verily, we are in the Twilight Zone.

Meanwhile, here in NZ the Govt has borrowed NZ $1.1 billion in the last two weeks.

One gets the feeling the Welfare State is on life support. The sitting govt is proposing selling shares in state assets. So the funds can be invested more profitably. Yeah right!

Erin Winthrope said...


4-5% inflation in UK.

Interest rate on UK bonds ??? = Falling (Oh mon dieu, Stoneliegh!!)

According to TAE....interest rates should be spiking for UK debt


Attempts to run an ultra loosey goosey monetary policy should be met with an axe to the forehead by bond investors (interest rates spiking).

Nope...interest rates are LOw LOw Low.

Say what, Maverick?

You heard me Goose.

Mervyn King shouldn't be able to inflate the debt away at the expense of savers and investors in UK debt. But he is....he is dat ornery puddy tat.

Candace said...

@ Board
Thought these links might be useful/interesting

Albert Bartlett lecture at Boulder, CO

US Census Stats 2000
Urban/Rural population percentage 79%/21%

US Census Stats-Population
1930 Urban/Rural population percentage 50%/50%

I think the physical distribution of population will have an important impact on what work gets done where, let alone the age group. It makes me think of the outcome of the forced deurbanization policy in Cambodia. I have aquaintences that were refugees from Cambodia, one still grieves for his two siblings that died of malnutrition in the 1980's.


Candace said...

Sorry for the cut off on previous post. I am not able to scroll down with in the box to make edits.

Ruben said...

@A Fall Guy,

It took me a while to remember the example I once heard about precision and accuracy.

If you are target shooting, accuracy is hitting the target. Precision is getting all the bullets in the same hole, even if you miss the target.

sofistek said...

Concerning jobs that can support a family, this video was on Dave Cohen's blog last month. David Stockman says that no family supporting jobs have been created since 2000. Wow!

p01 said...

Monica, quit trolling and start preparing. This is not a joke.

Crop warning over China drought:


Phlogiston Água de Beber said...


Please don't ask Monica to give up her job. She may be one of those rare full-timers keeping useless eaters like me alive.

I try to keep in mind that the Reaper will come for accepters and deniers alike, but long after we're gone, de Nile will still be a big river in Africa.

Unknown said...

Quick question: How many of the 47% full time workers are working for some form of taxpayer supported government? It seems to me that the percentage of people actually supporting everyone else is a bit lower than 47%.

Dan said...

@ all

I try to stay in "big picture" mode as much as I can. DOW 12,000, for example. Many of us understand that the DOW is a Ponzi-infused marketplace. We know that the FED's monetary policies are helping pump equity prices. We know that many of the corporations that comprise the equities markets are only going concerns because of their access (indirectly) to debt and credit. So...what does this mean in a big picture way???

For me it means, sure, if you have a lot of disposable income, go ahead and gamble. But if your resources are limited, you may want to steer clear of buying into the Ponzi.

Of course there are many other arguments for not participating in this terribly dishonest and exploitative system. But I am trying to address "people" like Monica.

I admit to having no idea what is going to happen. But I DO know that economic (and social and political) instability increases when Central Banks abuse their operational abilities vis fiat currencies,and when governments are controlled by a wealthy elite.

Just plan wisely, that's all.

p01 said...

Have you seen yesterday's markets? Surreal! "They" don't even care about apperances anymore. "They" will suck the last dime from the the last sucker before crashing it down in flames. Count on it.


Stoneleigh said...

The Anonymous,

I will not offer predictions such as you ask for, as they would be meaningless. As others have said, precise predictions need not be accurate. I remember in physics labs that young students were often tempted to report results to far too many decimal points (too much precision). We were taught to propagate the error bars on each measurement through all the calculations in order to get a margin of error on the final answer, and then to report that answer only in terms of the number of significant figures we could justify. This was for measurable physical quantities, which markets are not.

Any market analysis is probabilistic. One can identify a number of possible patterns and the limits on each interpretation, based on the guidelines for market fractals. This allows one to identify high risk junctures for a trend change, but it does not guarantee that one must happen at a specific time.

What we do here is primarily big picture analysis, looking at the structure of the systems we rely on, how their organizing principles function and the implications for our societies. This is far more important than precise timing. There are a number of subscription services that offer detailed market timing, so if that's what you want then you should be able to find it. Count on it being expensive, but if making short term profits from a collapsing system is your goal, then you would regard that as the cost of doing business. TAE exists for a different purpose.

Phlogiston Água de Beber said...

The only markets that matter are the one Ilargi devoted this Post to, the Labor Market, and the Supermarkets. Neither of these markets has any pleasing news for us. That was true yesterday, today and will be true tomorrow. The exact value of the DOW, down to the penny, can easily be learned 24 hours a day. As the discussion here has shown, no one can show anything to be certain about the Labor Market, except that it's lousy. At the Supermarket, an arbitrary mix of goodies will hardly ever cost the same two days in a row. Very rarely will they cost noticeably less than the day before.

The value of the DOW will not matter at all when these two markets cross some indeterminate tipping point. For reasons best known to themselves, the Big Dogs do their best to keep all eyes focused on the DOW and ignoring as much as possible the important markets. Methinks that is no coincidence.

Ilargi said...

New post up.

Moral Hazard Squared


sofistek said...

Remember that income taxes are not the only source of income for federal or local governments. So stating that X% of people support the rest is not quite true.

The Anonymous said...

"Stoneleigh said...
The Anonymous,

I will not offer predictions such as you ask for, as they would be meaningless."

Actually, you pretty much did last year when you proffered up statements like this on TOD:

"And that next phase should carry the market down much further than anything we've seen so far. By the end of 2010 I'd be surprised if the DJIA was still over 1000.
Stoneleigh on November 1, 2009"

I appreciate you having the guts to put your thoughts into something that can be measured with numerical precision like this. And no it is not "meaningless" its entiely "meaningful" as it allows an objective measure for me and others to prepare accordingly.

For example, say I could withstand something falling 5-10% in a certain amount of time, but would be absolutely devastated if it fell 40-50-60% or more. Clearly, I would prepare differently if I expected the former versus the latter, yes?

Well, the problem is, some people are very cavalier with the words like say "bloodbath". Say you used Bloodbath to convey a 10% drop in 2 years, where I was thinking something far more catastrophic like 40-50-60%.

Alternatively, they may say it will be down 40% "soon". Again, what is "soon" for me, it may have meant 6 months. To another, it may have meant 2 weeks. To another, it may have meant 2 years. Again, I would prepare very differently if someone meant soon as in 2 weeks versus soon as in 2 years.

Thus only way to clear up that ambiguity was to provide an objective standard which you used to have no problem doing (i.e. I would be surprised if DJIA was above 1,000 by the end of 2010). There was no ambiguity about what you meant, or expected whatsoever.

On the contrary, Ilargi seems to want to avoid your numerical precision like the plague. Thus, it would be interesting to see what he expected to happen in a certain timframe, hence my request for an objective, easy to determine statement.

Again, that doesnt mean that you can no longer use words like meltdown, bloodbath, catastrophic, etc. and only use numerical equivalents. Still, if someone is wondering exactly what you mean, it should be no problem to provide a numerical equivalent from time to time.