Friday, March 4, 2011

March 4 2011: Damned if you do, doomed if you don't

Harris & Ewing Anchors Aweigh 1917
"Graduation exercises, U.S. Naval Academy, Annapolis, Maryland"

Ilargi: It's somewhat darkly funny, isn’t it: rising food prices are, as we all know, a major factor in the protests in the Arab world, and these protests in turn, according to the FAO, lead to higher food prices (oil being a main driver, for one). Irony, unintended consequences? No shortage of either these days, is there? Damned if you do, doomed if you don't.

You need look no further than Geithner and Bernanke "saving the US economy" (look at those markets!) in the face of persistent mile-high unemployment, with a fast growing percentage of new jobs paying $10 an hour or less with no benefits. Then again, are those consequences really unintended?

As the real economy is being gutted to the bone, the rising markets are nothing but a mirage, a talk-to-the-hand scheme devised by the spin masters who know what all of you like to hear and who feed you exactly that. Until their masters decide the time has come when they can't squeeze enough money out of you anymore to justify keeping the game going.

And then it will all vanish into thin air. And you won't even know what hit you. You’ll be left with a whole load of nothing. No services, no benefits, no jobs, no homes, just a huge bunch of empty bags. Don't let the markets fool you, look at the situation on the ground. That reflects the future much better. We will probably see another set or two of positive numbers for jobs, and the stock markets may not have reached their highest peak. But it's all the hot air of false optimism: the economy is irreparably broken. For a while, you can delay debt payments by creating more debt, but that is a dead end street, and the piper waits at the other side.

Richard Russell, who's about as old as Noah now, writes about Mary Meeker et al.'s USA Inc. report :
Dead Nation Walking
[..] Mary writes, "Imagine no Army, Navy, Air Force, Marine Corp or Coast Guard, no federal courts or prisons, no national park service, no food and drug administration, no embassies, no salaries for Congress. That's what it would take to finance the budget by 2025 and still pay interest on America's debts, without either raising revenues or reducing entitlement growth. That's certainly not a recognizable America."

Later in the article, Meeker notes that the nation's problem is not a revenue problem, it's a SPENDING problem. She writes, "Simple math says that balancing the budget purely by raising taxes would require doubling rates across the board, which would kill growth."

So as I see it, what's coming up is a massive cut-back in federal (plus states and municipalities and cities) spending. This is the stark and painful picture of the years ahead.[..]

But what about the markets? What of the Dow and the S&P which have been rising steadily for two successive years? As I see it, investors are taking it "one step at a time." Corporate earnings on a year-over-year basis have surged. And that's what investors have tuned in to. As far as the coming cut-backs, investors' attitudes are "We'll worry about that when the time comes.

In the meantime, hasn't the 'good ol' USA come out of every tight problem with ringing bells and confetti. We'll do it again, and the hell with the deficits." Recently and rather ironically, I read that consumer confidence was at its highest level in three years. The history of America has been perpetual optimism, or that well-known expression -- "What, me worry?"

Ilargi: Here I'm wondering where that consumer confidence number comes from that Russell talks about. A newly published poll done by NBC and the Wall Street Journal tells a different story. Neil King Jr. and Scott Greenberg write in the Journal:
Poll Finds Support Lacking for Entitlement Reductions
Overall, the new poll found deepening pessimism about the future of the economy and the country's direction. Only 29% thought the economy would get better over the next year, a dip of 11 points since last month and the lowest since August. "This is a country that refuses to feel better," said Mr. McInturff.

Ilargi: What'd they do? Talk to a different set of Americans? And what's that about "A country that refuses to feel better"? Do Americans not want to feel better? Or are they just finding it hard on the back of job losses, eroding pensions and benefits, full frontal attacks on collective bargaining, and all the other blanks anyone amongst you can fill in?

There's one line in the article on that poll that's really got to be the money shot of the day:
[..] more than half [of poll respondents] favored bumping the retirement age to 69 by 2075.

Ilargi: See, that's really a great idea: to have people today voice their opinion on the retirement age, 64 years from now, of kids that are 5 year-olds. It says a great deal about the folks who posed the questions, as well as about those who actually responded to such an absurd proposition, and of course about the entire discussion regarding the economy that's pretty much not taking place at all in any serious way, shape or form. Whenever you see predictions or polls that include dates like 2050 or 2075, please do realize that you're very simply being punked.

The overall message of the poll is that a large majority of Americans don't want significant cuts to entitlement programs. Unfortunately, as Richard Russell indicates, those cuts will come anyway, and soon. American leadership has decided that saving banks trumps saving people, and once you're on that road, it’s very hard to get off it. The die is cast, les jeux sont faits, there's no way back.

Again unfortunately, there are very few people out there who understand what must of necessity lie ahead. The sort of things we hear all over the place is: Buy stocks! or Buy gold! But that's not what we should be listening to, because it's simply not all that simple.

Yes, gold is a good investment, but only after you’ve covered your "basic bases", when food and shelter and access to water are taken care of. And when you can afford to sit on it for 5-10 years, or even longer. That will work for some of us, but not for most. Sitting on gold when you're hungry, cold, or thirsty doesn't make a lot of sense.

Our point of view at The Automatic Earth is that in the near future there will be far too many people who hold gold, but will have to sell to cover losses and/or necessities, and into a buyer's market to boot, to keep the price of gold up. Not a popular view, we know.

Where and how do we differ from the 'priests of gold'? It all comes down to the extent to which the world as we know it today is going to change. That extent is in our view greatly underestimated. In the world of finance, there is hardly any recognition of even the mere possibility that owning stocks, bonds, or even gold may not necessarily be the best way to go forward.

The main thought remains that if you have enough of something "fungible", you can always trade it and buy whatever it is you need. But that's not necessarily true. It may be the model we have grown up in, but it's by no means universal. Besides, even if you own a ton of gold, and you have water and food covered, but those around you where you live have not, what exactly is it that you have bought yourself? A prison?

Our western economic thinking is Flatland 1- (or maybe 2-) dimensional, in the sense that we think we can always buy what we don't have or can't make. That's not how it works, though. In Sri Lanka, or Guatemala, or some small town in the US in the future, you can't just come into a community and offer them a bunch of gold in return for the scarce or only water they have. There are circumstances in which water trumps gold, hard as that may be to believe living in Flatland. In a world in which water purification plants are ever more energy extensive and that energy ever more hard to come by, communities even in locations (think cities) in the US will find it increasingly harder to maintain them.

The money used to save our zombie banks, and with them the entire mortgage and finance systems, could have been used to save things like water purifying plants, and roads, bridges, sewer systems, and don't let's forget jobs, and, ultimately, people. But it wasn't. And that will turn out to be a fatal mistake for many.

But before we get there, we’ll have to negotiate a major number of steep speedbumps on the way. Like: what will happen to the US dollar in the near future? We at the Automatic Earth are convinced that reports of its imminent demise are greatly exaggerated. Yes, the dollar will eventually die. But it won't be first in line to perish. And that's where many analysts and experts get it all wrong.

As I said before, there are very few who understand what goes on. Mike Shedlock is in many aspects an exception, as he proves once more here, addressing precisely that issue:
US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?
A number of sites are commenting on a Bloomberg video in which El-Erian, PIMCO Co-CEO says "Dollar could lose its reserve currency status".

Bloomberg: "Mohammad what does a weak dollar signal to you, a dollar that can't jump up here on a day like we've seen today?"

El-Erian: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past."

Fact and Fantasy
The first part of what El-Erian said is factual. Here it is again for convenience. "People are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities." Those are true statements. Unfortunately, his "warning shot" regarding reserve currency status is fallacious.[..]

Global Beggar-Thy-Neighbor Policies
It is pretty pale to suggest the end of the US dollar as a reserve currency when countries hold dollars as a function of math, then hold still more dollars to suppress their currencies, hoping to keep their exports up to "stimulate growth".

Mathematical Impossibility
Another mathematical relationship says the dollar, the pound, the Yen, and the Yuan cannot all be weak at the same time (relative to each other). Yet that is precisely what every country wants. It's mathematically impossible. You can see the effect in rising commodity prices.

If commodity prices were a function of the US dollar alone, then they would be rising in US dollar terms alone. Instead there is upward pressure on commodities in all currencies. At some point the desirability to hoard commodities will peak.[..]

Will Another Fiat Currency Replace the Dollar?
[..] The Canadian and Swiss economies are simply not big enough for them to be global reserve currencies. In regards to the Euro, is Europe in a better fundamental situation than the US? Would it matter even if it was? To answer the second question, please remember trade deficit math.

As for the Yuan, it is complete silliness to suggest the currency of a command-economy dictator-led country that will not even float its currency will be some sort of major reserve currency. To the extent that China trades with Russia, South Korea, etc., local reserves in varying currencies can happen (and are happening already), but the global significance of it is wildly overstated. The amounts in question are tiny, as a simple function of math.

Will the dollar remain the global reserve currency forever? Of course not. However, it is highly unlikely any of the presumed leading Fiat candidates including the Yuan and the Keynesian wet-dream IMF SDRs (Special Drawing Rights), will take the dollar's place. SDRs are essentially a basket of currencies. The concept of trading in baskets of currencies backed by nothing is even more ridiculous than the existing setup. People do not buy goods and services in baskets of currencies.

What can replace the dollar?
Gold, or a mechanism like gold that would impose hard restrictions on perpetual deficits is what it takes to restore sanity. However, we may not see a significant move towards gold until there is a massive currency crisis or revolt against fiat currencies in general, not just the US dollar.

Ilargi: And Mish is not the only one who agrees with us on the dollar, as Erik Schatzker and Sree Vidya Bhaktavatsalam write at Bloomberg:
BlackRock's Fink Says He's a 'Big Buyer' of Dollars That Gross Says Avoid
BlackRock Inc.'s Laurence D. Fink, chief executive officer of the world’s largest asset manager, said he’s a "big buyer" of the U.S. dollar, which rival Bill Gross has urged investors to avoid. [..]

"I’m a big buyer of the U.S. dollar," as the sovereign- debt crisis in Europe will cause volatility in the region, Fink said [..]

Ilargi: In other words, for the near to medium term future the US dollar is the place to be. Don't forget that we have started to see volatility rear its rising head in many places. It may still be in far away lands for now, but that won't last. Once it becomes clear, as in when the markets start falling for real, that there will be no pensions for the boomers and no jobs for their children, we’ll see people in the streets all over the western world too. And the US dollar will be the first flight to safety haven. Gold will have its day, but that day is a long time away, and when it arrives, the world will be a very different place. And there is no perfect reaction or preparation for it. All we can do is "minimize the suffering of the herd". Our way of life is over. For good. We’ll have to find other ways.

Dead Nation Walking
by Richard Russell - Dow Theory Letters

In prison on death row, they often refer to condemned men as "dead men walking." We are now living through a period in history when the US and its economy are "dead nation walking." Why do I say this?

I've gone over this before, but the cover of the current Bloomberg Businessweek put it so starkly, that I decided to discuss the whole picture again.

The cover of the magazine reads, "Would You Invest In a Company that lost $2 trillion last year, and has a net worth of a negative $44 trillion?"

And what is this company? Why, it's USA Inc. The article is written by the well-known stock analyst, Mary Meeker. She writes about the US's finances as though the US was a corporation.

Mary writes, "Imagine no Army, Navy, Air Force, Marine Corp or Coast Guard, no federal courts or prisons, no national park service, no food and drug administration, no embassies, no salaries for Congress. That's what it would take to finance the budget by 2025 and still pay interest on America's debts, without either raising revenues or reducing entitlement growth. That's certainly not a recognizable America."

Later in the article, Meeker notes that the nation's problem is not a revenue problem, it's a SPENDING problem. She writes, "Simple math says that balancing the budget purely by raising taxes would require doubling rates across the board, which would kill growth."

So as I see it, what's coming up is a massive cut-back in federal (plus states and municipalities and cities) spending.

This is the stark and painful picture of the years ahead. The pressure is going to fall on our craven politicians. They are going to be faced with the duty of ordering massive cut-backs in spending. Every politician wants to cling to his or her office (because of the power and huge perks), and one of the ways to do that is to present juicy spending programs to their constituents. Now politicians are faced with the exact opposite. They will have to present the voters with LESS in the form of painful cut-backs and with those cut-backs the chance of being voted out of office.

But what about the markets? What of the Dow and the S&P which have been rising steadily for two successive years? As I see it, investors are taking it "one step at a time." Corporate earnings on a year-over-year basis have surged. And that's what investors have tuned in to. As far as the coming cut-backs, investors' attitudes are "We'll worry about that when the time comes. In the meantime, hasn't the 'good ol' USA come out of every tight problem with ringing bells and confetti. We'll do it again, and the hell with the deficits." Recently and rather ironically, I read that consumer confidence was at its highest level in three years. The history of America has been perpetual optimism, or that well-known expression -- "What, me worry?"

Which is where I believe we are today. The Bernanke experiment with massive money-creation has been going on for a few years. The Fed has fought the "bogeyman" of deflation with huge infusions of liquidity. Ben Bernanke, our Fed Chairman, is convinced that if he creates enough liquidity, housing will levitate like the stock market, and business will, in turn, rocket up with the stock market. The Bernanke creed: "Give them the money, and they will spend, once business improves, businessmen will hire again, and the unemployment problem will be solved". I believe this theory will be put to the test during the remaining months of 2011 and into 2012.

What do I see ahead? The debt and deficit problems alone will keep the market and the economy on edge. The Dow can levitate just so far with the help of enormous Fed-created liquidity. I think we are close to the upper extreme of the Dow level now. "So what's really new about the current situation?" you argue. My answer is that we are, indeed, experiencing something very new. Never before in history have trillions of dollars been manufactured out of busy computers -- all in an effort to create a bit of inflation in the face of world deflationary forces. Furthermore, much of the happy market action has been created by an anxious Fed with the help of enormous stimuli. Soon the stimuli will end. And that will have a negative effect on the markets, particularly the stock market. At the slightest sign of a 'double dip,' I think the Fed will turn to Qe3 and more money creation.

"But what about the dollar?" you ask. I'm convinced Bernanke is willing to sacrifice the dollar in his relentless effort to jump-start the US economy.

But there's another problem that is exerting negative pressure against a higher stock market. And it's the dividend yield. The dividend yield on the S& P 500 Composite has now declined to 1.80%. The real kicker behind the growth in stock portfolios has, for decades, been reinvestment of fat and rising dividends. But on balance, stock dividends are ridiculously low today. With a dividend yield of 1.80%, stocks are not priced to generate profits in the years ahead.

While I'm at it, I'm asking my subscribers to be sure to read the article in this week's Barron's by Stephanie Pompoy. It's an eye-opener and a must read.

Up-date on the economy, as seen through the eyes of Richard Russell (and with the help of anecdotal evidence).

I live in La Jolla, which happens to be a very wealthy community. Actually, home prices in La Jolla have not come down in the same way they have in the rest of the nation. In other words, La Jolla tends to be somewhat immune to hard times, unlike the rest of the country.

Yet, everyone I talk to here in La Jolla needs business, needs action and needs income. Restaurants are coming up with juicy promotions in an effort to entice diners to "come in and try us" or they're simply going out of business. Dentists need patients and are giving out "special" cards to bring new patients in (free teeth cleanings are offered). Rents are outrageously high in La Jolla. Greedy or spoiled landlords have been reluctant to lower rents, As a result, many "for rent" or "for lease" signs are going up in La Jolla. Businesses that have been here for decades are suddenly closing shop.

I see vagrants all over La Jolla and further south to Pacific Beach. I've always quipped that "Nobody ever froze to death in San Diego." I guess the word has spread around the country, because we now have vagrants parked and sleeping on half the benches in La Jolla. San Diego provides pitifully few facilities for vagrants. San Diego's attitude is: "We don't want 'em here, and we won't baby them. Let them go someplace else to litter the streets and look for free handouts of food."

Frankly, it reminds me of the Great Depression days when, if you were sight-seeing around Southern California, the cops would stop you and ask if you were looking for work. If the answer was yes, they'd put you in the back of the squad car, and drive you to the nearest bus station. California didn't want out-of-staters looking for work in SoCal territory. I know this because I was here, and I was stopped and interrogated many times.

My conclusion -- if wealthy La Jolla is in trouble, then everybody is in trouble.

Poll Finds Support Lacking for Entitlement Reductions
by Neil King Jr. and Scott Greenberg - Wall Street Journal

Many Deem Big Cuts to Entitlements 'Unacceptable'

Less than a quarter of Americans support making significant cuts to Social Security or Medicare to tackle the country's mounting deficit, according to a new Wall Street Journal/NBC News poll, illustrating the challenge facing lawmakers who want voter buy-in to alter entitlement programs.

In the poll, Americans across all age groups and ideologies said by large margins that it was "unacceptable'' to make significant cuts in entitlement programs in order to reduce the federal deficit. Even tea party supporters, by a nearly 2-to-1 margin, declared significant cuts to Social Security "unacceptable." At the same time, a majority supported two specific measures that lawmakers might employ to shore up the shaky finances of the main entitlement programs.

More than 60% of poll respondents supported reducing Social Security and Medicare payments to wealthier Americans. And more than half favored bumping the retirement age to 69 by 2075. The age to receive full benefits is 66 now and is scheduled to rise to 67 in 2027. Depending on how they are structured, those two changes could eliminate as much as 60% of Social Security's underfunding, according to experts. Support for the two ideas in the poll is "impressive," said Chuck Blahous, one of the program's public trustees and a former Bush administration official. "I wonder if [public] receptivity is increasing."

The poll comes as Republican lawmakers, many elected on promises to slash federal spending, have focused mostly so far on cuts to non-defense, discretionary programs. But many political leaders say meaningful deficit reduction cannot be accomplished without making changes to entitlement programs. A small group of senators in both parties has begun discussions that include changes to entitlement programs, as well as to the tax code. House Republicans say they will address entitlements in their next budget. And several likely 2012 GOP candidates have vowed to to shore up the finances of Social Security and Medicare as part of their campaigns.

But Republican Bill McInturff and Democrat Peter Hart, the pollsters who conducted the survey, said the poll raises warning signs for anyone proposing cuts to the three main entitlement programs, including Medicaid, that provide health and retirement benefits to seniors and the poor. The programs, which already make up 41% of federal spending, are expected to balloon in coming years.

Mr. McInturff called the poll "a huge flashing yellow sign for Republicans on how much preparation will be needed if they propose to change Social Security and Medicare." Asked directly if they thought cuts to Medicare were necessary to "significantly reduce" the deficit, 18% of respondents said yes, while 54% said no; the rest were not sure or had no opinion. On Social Security, 22% said cuts would be needed, while 49% said they weren't.

The results cannot be compared easily to prior polling, but they suggest durability to the support for entitlement programs. In 1995, when Congress was considering cuts to Medicare, 36% said in a Journal/NBC poll that they supported a plan to cut Medicare spending and devote the money to deficit reduction. Some 52% called for maintaining Medicare at its existing level.

Overall, the new poll found deepening pessimism about the future of the economy and the country's direction. Only 29% thought the economy would get better over the next year, a dip of 11 points since last month and the lowest since August. "This is a country that refuses to feel better," said Mr. McInturff. Mr. Obama's own job approval dipped to 48%, from 53% last month, but was still higher than at any time since last May. Some 46% disapproved of his job performance. Mr. Hart, the Democratic pollster, said that until the unemployment rate dips significantly, "it is always going to be a struggle for the president to get majority support."

As a snapshot of public opinion, the poll highlights some of the perils ahead for Republicans as their core voters and tea party supporters demand big reductions in federal spending to tame the deficit. More than seven in 10 tea party backers feared GOP lawmakers would not go far enough in cutting spending. But at the same time, more than half of all Americans feared Republicans would go too far.

Among those most fearing spending cuts were younger voters, independents, seniors and suburban women—groups that include many swing voters in national elections, who potentially could turn against the GOP. "It may be hard to understand why someone would try to jump off a cliff" to solve the debt crisis, Mr. McInturff said of his fellow Republicans, "unless you understand that they are being chased by a tiger, and that tiger is the tea party."

Rep. Kevin McCarthy of California, the Republican House whip, said his party needs "to have a conversation with people" before moving forward on jarring changes to federal entitlement programs.Don Dunlap, an 82-year-old writer and Republican in Sunnyvale, Calif., is one of many voters who need some convincing. "We're spending ourselves to oblivion—we haven't seen a comparable level of spending since the Roosevelt era," he said. "But Social Security is not the right place to trim the budget." "You don't go out and lay out the solution without talking about the problem," he told reporters at a Bloomberg News breakfast Wednesday.

Assessing the president's position ahead of the 2012 election, the survey found Mr. Obama leading potential GOP challenger Tim Pawlenty, the former governor of Minnesota, 50% to 31%. Mr. Obama led by a narrower 49% to 40% margin in a hypothetical match-up against Mitt Romney, the former Massachusetts governor and a Republican candidate in 2008. When tested against an unnamed Republican running for president, Mr. Obama led 45% to 40%. Mr. McInturff said the finding contained warning signs for the president: Voters who remained uncommitted might be tough for the president to win, he said, as those voters disapproved of Mr. Obama's job performance and believed the country was on the wrong track by large margins.

Four years after starting his effort to win national office, Mr. Romney is known by 80% of the public, with 25% saying they feel positively toward him and an equal 25% saying they have negative feelings toward him. Amid the union protests in Wisconsin, the poll found that 62% of Americans oppose efforts to strip unionized government workers of their rights to collectively bargain, even as they want public employees to contribute more money to their retirement and health-care benefits.

The results suggest that public opinion may be tipping against Wisconsin Republican governor Scott Walker in his prolonged faceoff with the unions.

US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?
by Mike Shedlock - Global Economic Analysis

A number of sites are commenting on a Bloomberg video in which El-Erian, PIMCO Co-CEO says "Dollar could lose its reserve currency status".

Bloomberg: "Mohammad what does a weak dollar signal to you, a dollar that can't jump up here on a day like we've seen today?"

El-Erian: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past."

Reserve Currency Definition
Before we can debate whether or not the US will lose reserve currency standing, we must first define what it means.

Investopedia defines Reserve Currency as follows.

"A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate."

I accept that definition. Unfortunately Investopedia rambles on with nonsense about the implications: "A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing other countries to hold this currency to pay for these goods." That sentence is a widely believed fallacy. The reality is no country is obligated to hold dollars to buy goods denominated in dollars.

Currencies are Fungible
Currencies other that illiquid currencies with low or no trading volume (think of Yap Island stones or the Cuban Peso) are fungible. It is a trivial process to switch from one currency to another.

You can buy gold or silver in any country, and I assure you those transactions do not all take place in dollars. Thus, just because a commodity is widely priced in dollars does not mean it only trades in dollars. That holds true for oil as well.

I keep pointing this out, unfortunately to no avail, that oil trades in Euros right now. There is no selling of Euros to buy dollars on the front causing the oil producers to trade dollars for euros on the back end. The oil states simply sell oil for a price in Euros and then hold Euros in their Forex reserves.

Fact and Fantasy
The first part of what El-Erian said is factual. Here it is again for convenience. "People are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities." Those are true statements. Unfortunately, his "warning shot" regarding reserve currency status is fallacious.

To understand why, let's return to the definition of reserve currency: "A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate."

Foreign Currency Reserve Factors
  1. Trade Volumes
  2. Trade Deficits
  3. Currency Manipulation
  4. Hot Money

Trade Volumes and Trade Deficit
The US happens to be at or near the top of nearly every country's trading partners. The US runs a trade deficit with most of them. Those trading partners accumulate dollars as a simple function of math. We run a deficit, someone else runs a surplus.

Some wonder why the surplus countries do not buy oil or commodities with their accumulated dollars. OK, what does Saudi Arabia, Iran, or Venezuela do with the dollars then?

Does Iran or Venezuela even hold dollars now? Think of the implications of that answer in light of the widely viewed fallacy that one needs dollars to buy oil.

Regardless, of where the dollars end up, those US dollars will eventually return home. Recall that Dubai tried to buy a US port and China tried to buy Unocal. Both were rejected for security reasons. However, those dollars will return home, with China, Japan, and the oil states buying various US assets.

Currency Manipulation
Most US trading partners do not want their currencies to rise, especially China and Japan.

Consider the Yuan which does not float. To suppress the value of the Yuan, China takes US dollars and exchanges them for Yuan at a pegged rate. China does this hoping to create job and boost exports. The US calls this currency manipulation and it is. However, it is no more manipulative than Bernanke flooding the markets with US dollars hoping to weaken the US dollar and stimulate growth.

Hot Money
Hedge funds and other speculators have moved money to China banking on currency appreciation.

China needs to maintain currency reserves to allow for the repatriation of those US dollars. Michael Pettis at China Financial Markets points out that most of the hot money inflows into China are done by Chinese businesses that understand how to get around rules and regulations regarding currency inflows. That argument make perfect sense, but the math remains the same regardless of where the hot money comes from.

Global Beggar-Thy-Neighbor Policies
It is pretty pale to suggest the end of the US dollar as a reserve currency when countries hold dollars as a function of math, then hold still more dollars to suppress their currencies, hoping to keep their exports up to "stimulate growth".

Mathematical Impossibility
Another mathematical relationship says the dollar, the pound, the Yen, and the Yuan cannot all be weak at the same time (relative to each other). Yet that is precisely what every country wants. It's mathematically impossible. You can see the effect in rising commodity prices.

If commodity prices were a function of the US dollar alone, then they would be rising in US dollar terms alone. Instead there is upward pressure on commodities in all currencies. At some point the desirability to hoard commodities will peak.

Zero Hedge Comments
Zero Hedge commented on reserve currency status about a week ago.

Regarding El-Erian's statement: "I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past"

Zero Hedge quipped:
That's a given - the question however remains, which fiat currency, if any, is willing and ready to step in and replace the USD? With all eyes continuing to be look at the CNY, how long before China finally takes the plunge to find out just who is the real reserve currency in the world?

Will Another Fiat Currency Replace the Dollar?
For starters, Zero Hedge ignored the essential trade deficit math. The US runs a trade deficit, someone else must run a trade surplus.

Second, Canadian dollar and the Swiss Franc do not have enough trading volume. More importantly, there are not enough Canadian Dollars or Swiss Francs to go around. Look at what happened to Iceland when too many plunged into the Icelandic króna.

The Canadian and Swiss economies are simply not big enough for them to be global reserve currencies. In regards to the Euro, is Europe in a better fundamental situation than the US? Would it matter even if it was? To answer the second question, please remember trade deficit math.

As for the Yuan, it is complete silliness to suggest the currency of a command-economy dictator-led country that will not even float its currency will be some sort of major reserve currency. To the extent that China trades with Russia, South Korea, etc., local reserves in varying currencies can happen (and are happening already), but the global significance of it is wildly overstated. The amounts in question are tiny, as a simple function of math.

Will the dollar remain the global reserve currency forever? Of course not. However, it is highly unlikely any of the presumed leading Fiat candidates including the Yuan and the Keynesian wet-dream IMF SDRs (Special Drawing Rights), will take the dollar's place. SDRs are essentially a basket of currencies. The concept of trading in baskets of currencies backed by nothing is even more ridiculous than the existing setup. People do not buy goods and services in baskets of currencies.

What can replace the dollar?
Gold, or a mechanism like gold that would impose a hard restrictions on perpetual deficits is what its takes to restore sanity. However, we may not see a significant move towards gold until there is a massive currency crisis or revolt against fiat currencies in general, not just the US dollar.

BlackRock's Fink Says He's a 'Big Buyer' of Dollars That Gross Says Avoid
by Erik Schatzker and Sree Vidya Bhaktavatsalam - Bloomberg

BlackRock Inc.'s Laurence D. Fink, chief executive officer of the world’s largest asset manager, said he’s a "big buyer" of the U.S. dollar, which rival Bill Gross has urged investors to avoid. Fink, 58, doesn’t see a "bear market" in bonds and would buy U.S. Treasuries if yields rise above 4 percent, he said today in an interview from New York with Bloomberg Television’s Erik Schatzker. Gross, manager of the world’s largest mutual fund, has said the best days for bonds are over. He has cut holdings in U.S. government debt to the smallest level in two years, while boosting non-dollar securities.

"We believe rates will creep up," Fink said. Still, with inflation likely to be muted, "we’re not calling that a bear market." BlackRock and Gross’s Pacific Investment Management Co. are the two biggest bond-management firms, and both have advised the U.S. government. Fink’s views have diverged from Pimco’s before. In January, he told investors that he never believed in a "new normal" for the U.S. economy, a term coined by Pimco for its forecast of a prolonged phase of below-average economic growth and a diminished role of the U.S. in the world following the financial crisis. Unlike Gross, 66, who is the co-chief investment officer of Newport Beach, California-based Pimco, Fink doesn’t manage any BlackRock funds.

Europe’s Crisis
"I’m a big buyer of the U.S. dollar," as the sovereign- debt crisis in Europe will cause volatility in the region, Fink said in the interview. With banks in the region needing more capital, and unrest in the Middle East causing oil prices to rise, Fink said he’s "more worried" today about equities than he was six months ago. Political turmoil, which started in Tunisia more than two months ago, has spread to countries including Oman, Bahrain and Libya. "I think the market is pausing," Fink said.

Saudi Arabia’s benchmark stock index has plunged 15 percent in the past week on investor concern that protests may extend to the Middle East’s biggest oil producer. Any disruptions in Saudi Arabia could cause the price of oil to reach $150 per barrel in the near term, Fink said. "If there is uncertainty around Saudi Arabia that produces a slowdown of oil production, we will have severe issues in the world," Fink said.

In the U.S., "inflation may be a problem in the short run, but in the long run not so," he said. BlackRock, co-founded by Fink in 1988, in 2009 acquired Barclays Global Investors to more than double its assets under management and add passive strategies such as exchange-traded funds. The firm manages $3.56 trillion in assets.

Is the New York Fed Making a Big Mistake?
by Simon Johnson - New York Times

An uncomfortable dissonance is beginning to develop within the Federal Reserve. On the one hand, current and former senior officials now generally agree with the proposition that our leading banks need more capital – that is, more equity relative to what they borrow. (The argument for this has been made most forcefully by Prof. Anat Admati and her distinguished colleagues.)

The language these officials use is vaguer than would be ideal, and they refuse to be drawn out on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident of their case on this issue.

But an important split appears to be emerging within the Federal Reserve, with the Board of Governors (perhaps) and some regional Feds (definitely) tending to want higher capital levels, while the New York Fed is – incredibly – working hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends).

Officials at the New York Fed with whom I and others have spoken appear to be hardening their position against requiring big banks to maintain more capital (beyond the insufficient increases in the Basel III agreement), though no formal position has yet been taken. These officials will not speak on the record nor provide any details about their arguments or whatever evidence they have developed to support them.

So it is hard to know if any analytical basis exists for their evolving position. They have certainly put up no meaningful counterarguments to the powerful points made by Professor Admati and her colleagues – both in general and against allowing United States banks to increase their dividends now.

The single public document from the New York Fed on this issue is a working paper that appeared recently on its Web site. This paper simply assumes the answer it seeks: that higher capital requirements will lower growth, and it refuses to engage with the arguments and evidence to the contrary.

The empirical findings presented fall somewhere between weak and unbelievable. If this is the basis for policy making within the Federal Reserve System, I will be very surprised. The key point is this. Given that the final capital requirements under Basel III remain to be set by the Fed – and top officials say they are still working on this – what’s the big rush to pay dividends? Retaining earnings (that is, not paying dividends) is the easiest way to build capital (shareholder equity) in the banks.

There is strong logic behind not paying dividends until capital is at or above the level needed for the future. Without any substance on its side, the New York Fed is increasingly creating the perception that it is just doing what its key stakeholders – the big Wall Street banks – want. Bankers traditionally dominate the boards of regional Feds. We can argue about whether this is a problem for most of them, but for the New York Fed the predominance of big Wall Street institutions has become a major concern.

At the bottom of the Web page listing its current board members, you can review who belonged to the board every year from 2000 to 2008. Note the presence of influential bankers in the past such as Richard Fuld (Lehman), Stephen Friedman (Goldman) and Sanford Weill (Citigroup). Their firm hand helped guide the New York Fed into the crisis of 2007-8.

The Dodd-Frank legislation reduced the power of big banks slightly in this context, so that the president of the New York Fed is no longer picked by Wall Street’s board representatives (as was Timothy F. Geithner, who was president of the New York Fed until being named Treasury secretary, and William Dudley, the current president and former Goldman Sachs executive).

But the current board of the New York Fed still includes Jamie Dimon, the head of JPMorgan Chase and an outspoken voice for allowing banks to operate with less capital by paying out dividends. In fact, Mr. Dimon has a theory of "excess capital" in banks that is beyond bizarre – asserting that banks (or perhaps any companies) with strong equity financing will do "dumb things." This is completely at odds with reality in the American economy, where many fast-growing and ultimately successful companies are financed entirely with equity.

If the New York Fed’s top thinkers have convincing reasons for not wanting to increase capital in our largest banks – if, for example, they agree with Mr. Dimon – they should come out and discuss this in public (and some evidence to support their thinking would be nice). If the New York Fed were really pushing for higher dividends at this time — for example, by constructing a stress test to justify this action — it would be setting us up to mismanage credit, allowing the megabanks to misallocate resources during the good times and crash just as badly when the next downturn comes.

The top leadership of the New York Fed has a responsibility to engage constructively and openly in the technical debate. Yet some Federal Reserve officials act as if they have a constitutional right to run an independent central bank. This is not the case: Congress created the Fed, and Congress can amend how the Fed operates.

The legitimacy of the Federal Reserve System rests on its technical competence, its ability to remain above the political fray and the extent to which it can avoid being captured by special interests. The danger that the New York Fed will fatally undermine the fragile credibility of the rest of the Federal Reserve System is very real.

Insider trading: Brought to court
by Kara Scannell and Brooke Masters - Financial Times

Mark Anthony Longoria was busy fielding calls from Wall Street. As a supply chain manager with Advanced Micro Devices, he had broad responsibilities – but this was not part of his day job at the chipmaker. "Tony" Longoria also moonlighted as a consultant for Primary Global Research, a firm that matches industry experts with money managers seeking corporate information.

AMD was due to report earnings and Mr Longoria was in high demand. Paid $300 an hour, he participated in 40 calls with 15 clients over a 60-day period, according to court documents. On July 21 2009, prosecutors allege, he provided exact revenue numbers and other financial data to a securities analyst and a hedge fund consultant.

All three have been charged with insider trading. The other two have pleaded guilty. Mr Longoria is in plea negotiations with prosecutors, says his lawyer. The case is part of an expansive five-year US investigation into the misuse of secret company information that has ensnared more than 40 individuals from across Wall Street and corporate America.

The probe targets the myriad sources of information through which professional traders gain an edge in fast-moving global markets. Just this week, the US Securities and Exchange Commission filed civil charges against Rajat Gupta, former head of McKinsey, the management consultancy, alleging he passed on information he learnt as a board member of Goldman Sachs. He denies wrongdoing.

Not since the groundbreaking 1980s investigation that led to the jailing of arbitrageur Ivan Boesky has Wall Street been so shaken. The US probe comes, moreover, at a time when authorities around the world – most dramatically in the UK and Hong Kong – are also attacking insider dealing with unprecedented fervour. Seeking to restore investor confidence shaken by the financial crisis, government enforcers are targeting professional traders and their close-knit and personally beneficial relationships.

"Insider trading corrodes that investor confidence. It undermines the integrity of the markets by tilting, unacceptably, the playing field in favour of those whose greed drives them to betray the duties and confidences they owe others," Robert Khuzami, SEC enforcement director, said recently. "It short-changes every other investor who executes trades, with all the attendant risks, on the basis of trading decisions made by dint of hard work and genuine analysis."

Prosecutors have charged a wide range of professionals: hedge fund managers, employees of listed companies, a credit rating analyst and two lawyers. The first big test comes next week when Raj Rajaratnam goes on trial. The billionaire co-founder of the Galleon Group hedge fund has pleaded not guilty to allegations that he traded in more than 30 stocks based on inside information.

The investigation has prompted some hedge funds to close. According to corporate security and investigation executives, some investment managers are also having their offices and homes swept rigorously for listening devices. The probe has also highlighted a potential downside of the exponential growth of the hedge fund industry, which meant thousands of investment firms were seeking to attract investors. With so many traders looking for some kind of edge, "expert network" firms such as Primary Global grew up to service them.

At the same time, institutional memories of the 1980s insider dealing probes began to fade, and many hedge funds lacked the elaborate compliance departments that big banks use to deter improper trading. Prosecutors allege some information providers then began peddling non-public information in exchange for fees to a cadre of all too willing buyers.

Across the Atlantic, the UK Financial Services Authority is flexing both its criminal and regulatory muscles against the suspicious trading that routinely floods its markets. The watchdog recently began using real-time monitoring and intelligence gathering to catch insider dealers in the act. Years behind their US colleagues in terms of bringing criminal cases, the UK authorities have nonetheless shocked traders with high-profile raids on City of London institutions last year and a series of warnings and civil cases that target leaks and rumour-mongering. In January, the authority won its longest criminal sentence to date in its first successful prosecution of an employed banker.

"A little enforcement goes a long way. If we can stigmatise this activity as criminal, the large majority of people will not want to engage in it," says Jamie Symington, an FSA enforcement department head.

Hong Kong’s Securities and Futures Commission, too, has brought a slew of insider trading cases over the past couple of years, including the 2009 prosecution of a former Morgan Stanley senior banker, who was jailed for seven years.

Authorities have also ramped up their cross-border information sharing and they are starting to bring joint cases. US and UK prosecutors are currently co-operating on a case in which UK spread betters allegedly traded ahead of technology mergers based on information leaked from the US. US prosecutors also convicted a London-based, Greek-born investment banker at Switzerland’s UBS for tipping off family members and a US-based portfolio manager at Jefferies, a New York investment bank.

The increased attention to professionals arises out of previous – sometimes failed – efforts to investigate and deter widespread trading ahead of corporate announcements. US authorities have previously investigated expert network firms but dropped the probes after failing to develop evidence of wrongdoing.

. . .

Insider dealing has been around for about as long as markets have existed. The FSA’s own statistics reveal unusual trading ahead of nearly 30 per cent of UK mergers in recent years; academic research suggests similar trends hold true in the US.

In the past, many cases involved one-off situations, where an assistant at a company obtained internal information and shared it with a family member or friend. But the recent cases purport to show a more sophisticated machine at work. Traders have allegedly peddled inside information as a cost of doing business, taking a calculated risk that they would not be caught. Insider trading has become "more professionalised" and "institutionalised among large networks of market professionals", Daniel Hawke, chief of the SEC’s market abuse unit, said recently.

Court documents allege traders use pay-as-you-go mobile phones to hide their tracks and store tips on flash drives rather than company computers that may be subject to compliance programs. Some also buy and sell stocks repeatedly to create false patterns, and print out research reports as apparent justification for their trades, prosecutors maintain.

In one instance, prosecutors allege, a hedge fund manager called Samir Barai told Jason Pflaum, an analyst, not to worry about the federal investigation because they could rely on the "mosaic theory" as a defence, according to a note sent using BlackBerry Messenger and cited in a court document. Mr Barai denies wrongdoing, while Mr Pflaum has pleaded guilty and is co-operating with the government. Under the mosaic theory, traders can defend themselves against insider trading charges by showing that they based their decisions on large quantities of information rather than a single element.

"Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance," said Preet Bharara, the US attorney in Manhattan, in a speech last year about what he called a "corrupt network" of insiders.

As traders have grown more sophisticated, enforcers too have had to become smarter. Insider trading cases are generally difficult to prove, because they are based on circumstantial evidence and juries have often been reluctant to convict. The SEC has recently lost two civil insider trading cases.

Both US and UK authorities are looking for relationships among bankers and traders rather than just unusual stock movements. US officials are also tapping phones to record conversations and wiring co-operators to build up more direct evidence.

US and UK law enforcement officers are also calling for longer prison sentences for insider trading, and the FSA is moving to publicise its civil cases more quickly – before the appeals process is complete. "We want to change the way people behave. The sooner we make the decision public, the sooner [people] can change their behaviour," says Tracey McDermott, of the FSA’s enforcement department.


Defence lawyers argue, however, that insider trading is a victimless crime: the person on the other side of the trade always has their own reasons for buying or selling. They also complain that US enforcers are going too far, attacking legitimate research techniques.

"An essential element in the deployment of enforcement resources is getting your priorities right," says Tony Woodcock, a UK partner with Stephenson Harwood, a law firm. "I question whether putting individuals or entities, who are in most cases doing their best to navigate unclear and moving standards in a complex industry, through aggressive and lengthy enforcement adds anything to what could more efficiently be achieved through better supervision."

. . .

Concern about professional insider trading has developed alongside the exponential growth of both independent research firms and hedge funds and other rapid-fire traders, say many observers.

Until a decade ago, banks were the main providers of corporate research on companies. But a 2002 analyst scandal changed the landscape. Ten US investment banks agreed to separate their research from investment banking operations and set aside money for independent research. At the same time, Regulation Fair Disclosure, an SEC rule forbidding companies from sharing confidential data with favoured analysts and investors, removed an important source of information about companies.

"It’s not like you can turn off the information spigot," says Peter Henning, a law professor at Wayne State University in Michigan. Instead, "it got channelled in a way that I don’t think anybody ever expected".

Some on Wall Street and in the City say the authorities are changing the rules of the game through criminal charges rather than writing new regulations. They argue that not all the information that is learnt from company insiders is material, which the US Supreme Court defines as information a reasonable investor would want to know when trading. Some of the data that were allegedly passed on by company insiders, such as the volume of semiconductor wafer shipments, might be important to someone specialised in technology companies, defence lawyers argue, but may not matter to an average investor.

The farther away the authorities get from pursuing traditional inside information, such as on corporate takeovers, the more difficult it could be to win cases, says Prof Henning. "That will be the challenge for the SEC if they start bringing cases more on the edge" of materiality.



A test of how evidence of rings plays before the jury

In a legal showdown set to start next week, US prosecutors will go head to head with hedge fund billionaire Raj Rajaratnam to try to prove he violated securities law by trading on inside information, writes Kara Scannell.

The battle, in a lower Manhattan courtroom, will pit a team of federal prosecutors who have been investigating the case for more than two years against John Dowd, a veteran Washington defence lawyer with a reputation for not pulling punches.

The stakes are high for the government. Though more than 20 people have pleaded guilty in its assault on alleged insider-trading rings of professionals, the trial will be the first test of how their evidence and legal theories play before a jury of New Yorkers.

For Mr Rajaratnam, whose Galleon Group hedge funds were liquidated after his 2009 arrest, the stakes are equally high. If convicted, the Sri Lankan-born American faces up to 15 to 20 years in prison. The former fund manager has denied doing anything wrong and is fighting for his reputation.

Mr Dowd, through a spokesman, declined to comment. The US attorney’s office in Manhattan, which is prosecuting the case, also declined to comment.

Prosecutors have alleged Mr Rajaratnam’s funds made more than $45m from trading nine stocks based on tips he received from various sources. According to the indictment, the tips came from four associates in several professions: Roomy Khan, a former Galleon trader; Rajiv Goel, a former finance executive at Intel, the technology group; Anil Kumar, a former partner at McKinsey, the management consultancy; and Danielle Chiesi, a former Bear Stearns hedge fund manager. Each pleaded guilty.

While neither side will reveal, even to the other, how it plans to present its arguments, lawyers following the case expect the government to rely heavily on Mr Rajaratnam’s secretly recorded phone conversations. The aim is to present the jury with Mr Rajaratnam discussing tips inappropriately, in his own words, with alleged co-conspirators.

To be successful, prosecutors will have to prove that the information Mr Rajaratnam obtained was material, or meaningful to an average investor, and that he received it from an insider who was prohibited from sharing it.

The defence is expected to attack the government allegations on many fronts. In a court filing, the lawyers argued that Mr Rajaratnam’s duty to his investors was to research stocks and that he did not necessarily know the source of the information.

Lawyers say that the evidence appears to be stacked against Mr Rajaratnam but his fate will boil down to which side does a better job of convincing the jury.

No Agreement Near on Penalties for Mortgage Mess
by Nelson D. Schwartz and David Streitfeld - New York Times

Even as state attorneys general and regulators in Washington approach the end of their investigation into abuses by the nation’s biggest mortgage companies, deep disputes are emerging over how much to punish the banks as well as exactly who should benefit from a settlement.

The newly created Consumer Financial Protection Bureau is pushing for $20 billion or more in penalties, backed up by the attorneys general and the Federal Deposit Insurance Corporation. But other regulators, including the Office of the Comptroller of the Currency, which oversees national banks, and the Federal Reserve, do not favor such a large fine, contending a small number of people were the victims of flawed foreclosure procedures.

As the negotiations grind on, there are signs that the banks still have not come to grips with the problems plaguing the foreclosure process. These problems burst into view last fall with accounts of so-called robo-signers processing thousands of foreclosures at a time without the required legal safeguards. The resulting furor prompted the attorneys general and other government officials to step in. Some banks suspended foreclosures to review their processes before resuming.

On Monday, though, HSBC disclosed that it had suspended foreclosures after regulators found "deficiencies" in its handling of them. These included problems with court affidavits, notarization, mortgage documentation and oversight of law firms, a spokesman for the lender, which is based in London, said. HSBC declined to say how many homeowners were affected.

"The events of the fall really uncovered and provided a degree of focus on fundamental problems in the way banks service and foreclose on mortgages," said Paul Leonard of the Center for Responsible Lending. "Regulators have a great opportunity to come up with some serious fixes." Assuming, that is, they can agree. As difficult as it is to decide on a figure for any broad settlement, the question of what to do with the money could ultimately prove more vexing.

If only victims of problems at the servicers are helped in a settlement, that would cover a small portion of homeowners who are in default and even fewer of those whose homes are valued at less than they owe. All the regulators declined to comment publicly on just how close they are to wrapping up a global settlement that would be presented to the banks. But signs of the differences have emerged in public testimony as well as in private conversations with government officials.

The acting comptroller of the currency, John Walsh, testified last week that while there were widespread problems with documentation and oversight of law firms and other crucial links in the foreclosure chain, only a "small number of foreclosure sales should not have proceeded."

Despite skepticism on the part of the comptroller’s office, other regulators would like a broader plan to help pay for modifications of mortgages that are delinquent or in default, even if homeowners cannot point to a specific example of wrongdoing on the part of servicers. In other cases, the money might be used to help mortgage holders whose loan principal exceeds the home’s current value.

What’s more, the Obama administration, as well as the F.D.I.C., sees any broad settlement with the servicers as an opportunity to do more than just fix the foreclosure process. They want to stabilize the housing market, where prices are continuing to decline, and try to help bolster the economic recovery, which is facing newer threats like higher oil prices.

Some two million American homes are in foreclosure, a third of which are vacant. Another two million households are behind on their payments and facing the prospect of foreclosure this year. To make matters worse, roughly a fifth of the nation’s home loans exceed the value of the underlying house, raising the risk that homeowners will simply walk away, further weakening the housing market.

Right now, the Obama administration argues, the housing market is facing the worst of both worlds — a big back-up in foreclosures as procedures are reworked, and a similarly long wait to get a mortgage modification in which the principal or the interest rate of the loan is lowered, easing monthly payments.

Any settlement would include provisions to streamline the modification process, which has proceeded at a snail’s pace at many servicers, frustrating many homeowners. The money from the banks, in turn, would help cover the cost of reducing principal and interest payments, paving the way for more modifications. Advocates argue that would finally get the housing market moving again.

But even if these proposals make it past all the regulators, they face fierce opposition from the banks, which argue that what the administration and the attorneys general have in mind is a back-door bailout for delinquent homeowners. "It’s like taking money that should be paid to the Treasury and using it for an unappropriated social program," said a lawyer for one of the top servicers, who spoke anonymously because the negotiations were still fluid and the banks had yet to be presented with a proposed settlement. "This is a bad idea, no matter who pays for it."

The nation’s largest mortgage servicer, Bank of America, is already readying what will be among the industry’s main arguments: that it is unfair to reward homeowners who are delinquent or underwater but cannot point to specific errors in their case. "The question is one of fairness, who should receive a modification and who should not," said Jim Mahoney, a spokesman for the bank. Too broad a rescue package, he said, "could forestall the housing market recovery or even create perverse incentives."

One possibility, industry insiders and banking lobbyists suggest, is that homeowners might deliberately become delinquent on their loans to get a principal reduction. Housing activists counter that homeowners seeking modifications are often told by their lenders to stop payments, and then end up in foreclosure. The debate reflects some degree of weariness with foreclosure, as the administration’s signature mortgage modification program is under attack by both House Republicans and housing activists as a failure.

"There has been a tension in this country during the financial crisis," said Michael S. Barr, a former Treasury official now at the University of Michigan Law School. "People want those who are in economic trouble to get a fair shake. But they don’t want them bailed out for making their own mistakes, like buying too big a home."

While regulators worry about how punitive any eventual settlement should be, lawyers and other advocates for the foreclosed who were hoping for criminal charges are set to be disappointed.

That sanction, everyone seems to agree, is off the table. In testimony in December about the improper foreclosures by banks, Daniel K. Tarullo, a Federal Reserve governor, floated the notion of imposing fines on individuals found responsible for violations or banning them from banking, but officials involved in the talks said this idea had not gotten much traction either.

"The fact is, when the banks prepared their foreclosure paperwork for the courts, they lied about the credentials of their witnesses," said Thomas Cox, a Maine lawyer who works with foreclosure assistance groups. "Criminal sanctions would act as a deterrent."

SEC Proposes Crackdown on Wall Street Bonuses
by Ben Protess - New York Times

Lavish Wall Street bonuses, long the scorn of lawmakers and shareholders, have met a new foe: the Securities and Exchange Commission. The agency on Wednesday proposed a crackdown on hefty compensation awarded at big banks, brokerage firms and hedge funds — a move intended to rein in pay packages that encouraged excessive risk-taking before the financial crisis.

The proposal would for the first time require Wall Street firms to file detailed accounts of their bonuses with the S.E.C., which could then ban any awards it deemed excessive. The rules would be aimed at top executives and hundreds of rank-and-file employees who receive incentive-based pay.

The move by regulators to have more say on Wall Street pay highlights the huge role financial institutions play in the economy. Although it would be highly unusual for the government to review the compensation of executives in most other industries, big banks pose a systemic risk to the system and in 2008 pushed the economy to the brink.

The S.E.C.’s plan, which closely resembles regulations already floated by the Federal Deposit Insurance Corporation, is mandated by the Dodd-Frank financial regulatory law. The proposed curbs on compensation ultimately will span seven federal agencies that regulate a wide range of financial firms. The S.E.C.’s three Democratic commissioners voted Wednesday to move forward with the rules. Their decision came over the objection of the S.E.C.’s two Republican commissioners, who contended the agency was overstepping its authority.

The party-line vote is noteworthy in that it mirrors a similar partisan battle playing out on Capitol Hill. Republican lawmakers have threatened to slash the S.E.C.’s budget to keep it from enforcing the Dodd-Frank act, a product of the previous Democrat-controlled Congress. Troy A. Paredes, a Republican commissioner on the S.E.C., argued that the agency was "not well-equipped to prescribe rules that dictate the specifics of how individuals must be paid." The restrictions, Republican commissioners warned, could keep firms from recruiting star employees.

Even Mary L. Schapiro, the S.E.C.’s chairwoman, acknowledged that the agency might tweak its proposal down the road. "This is an area where we want to be very attuned to unintended consequences," she said in a statement. "As with any such undertaking, there is a challenge involved in finding common means to appropriately address Congress’s mandate."

But Congress left little wiggle room for the S.E.C when writing the Dodd-Frank act. And significant changes appear unlikely now that other regulatory agencies have proposed similar rules. "There could be a lot of pushback, but I don’t know how much leeway there is," said David Lynn, a former top lawyer for the S.E.C.’s corporate finance division. "It’s like standing in front of a train — it’s coming," said Mr. Lynn, who is now a partner at the law firm Morrison & Foerster.

Investor advocates and shareholders had a mixed reaction to the S.E.C. proposed compensation restrictions. Amy Borrus, deputy director of the nonprofit Council of Institutional Investors, noted that "having to report bonuses may help provide that extra dollop of caution." But Anton V. Schutz, manager of the Burnham Financial Services fund, which holds stakes in several big banks, called the proposal "extreme" and said it would tax the S.E.C.’s already strained resources.

The S.E.C.’s plan is the culmination of a decade-long effort to temper Wall Street’s free-wheeling pay practices. Lawmakers have taken aim at executive compensation as a leading cause of the financial crisis. Incentive-based pay packages, critics say, invited questionable risk-taking at the American International Group and the nation’s big banks.

During the crisis, the Obama administration appointed a so-called pay czar to set compensation limits and negotiate lower pay packages at financial firms and the two automakers the government bailed out, a move that caused much consternation among top traders and bankers.

Now, two years after the crisis, big Wall Street paydays are staging a comeback. Wall Street’s overall paychecks rose 6 percent in 2010, according to a recent report by the New York State Comptroller’s office. Cash bonuses are down, however, as regulators have nudged banks into awarding more stock and other deferred compensation.

The S.E.C. in January enacted "say on pay" rules that give shareholders a nonbinding vote on corporate salaries, bonuses and golden parachutes. The plan the S.E.C. announced on Wednesday goes even further.

For starters, it would require brokerage firms and investment advisers that manage more than $1 billion to file annual reports about incentive-based pay. The S.E.C. would then halt any extravagant bonuses that expose the firm to a "material financial loss," according to a summary of the proposal. The S.E.C. would scrutinize bonuses doled out to executive officers, directors and lower-level traders and bankers.

Financial firms that have $50 billion or more in assets — like Goldman Sachs and JPMorgan Chase — would face even tougher pay restrictions. The rules would require executive officers at these firms to defer half of their bonus for three years. If a firm suffered losses, the bonuses would be clawed back. The proposal will now enter a 45-day public comment period, after which the S.E.C. will vote on a final version of the rules.

SEC Scrutinizes Bank-Loan Practices
by Robin Sidel and Jean Eaglesham - Wall Street Journal

The Securities and Exchange Commission is scrutinizing U.S. banks that have restructured troubled loans in order to make them appear healthier than they really are, according to people familiar with the situation. Officials at the SEC are seeking information from an unknown number of regional and community banks with large concentrations of commercial real-estate loans, these people said.

The agency is zeroing in on a variety of practices used by financial institutions as they work to clean up loan portfolios that were bruised by the financial crisis or recession. While the U.S. banking industry is in recovery mode, many banks still are weighed down by soured loans. Among the practices being examined by the SEC is one known as "extend and pretend" or "amend and pretend," in which a bank gives a borrower more time to repay a loan. Banks are permitted to modify loans to help troubled borrowers.

The SEC also is looking into a more common practice called "troubled debt restructurings." Such restructurings involve modifying an existing loan by changing the terms or breaking the loan into pieces. The scrutiny comes as banking regulators in the past year have supported the use of troubled debt restructurings, which may have opened the door to abuses. Although the practice is permitted, SEC officials are concerned about the way some banks are accounting for such loans, according to people familiar with the probes.

Banks sometimes break up a troubled loan in order to place a portion of it on "performing" status, a sleight of hand that reduces the reserves needed to be set aside. It isn't clear which banks have been approached by the SEC for more information about extend-and-pretend loans or restructurings of troubled loans, though several financial institutions have disclosed recently that they are the subject of SEC inquiries related to commercial loans prior to 2010.

Fifth Third Bancorp, a regional bank based in Cincinnati that said Monday it has been subpoenaed by the SEC, declined to comment Wednesday when asked if the inquiry is related to extend-and-pretend practices or troubled loan restructurings. Fifth Third Chief Financial Officer Daniel Poston said Tuesday that the SEC hasn't told the bank about the specific purpose of the inquiry. Fifth Third's "loan accounting is and has been appropriate," he said.

Restructurings of troubled debt played a part in last year's collapse of ShoreBank Corp., a Chicago lender. A report released Wednesday by the Federal Deposit Insurance Corp.'s Office of the Inspector General concluded that ShoreBank failed to "accurately identify and account for" troubled debt restructurings. The report said ShoreBank restructured "numerous" loans in 2009 without accounting for them properly "despite rate and/or other concessions provided to financially distressed borrowers."

U.S. banks hold an estimated $156 billion of souring commercial real-estate loans, according to research firm Trepp LLC. About two-thirds of commercial real-estate loans maturing at banks from now to 2015 are underwater, meaning the property is worth less than the amount owed. As of Dec. 31, 7.8% of commercial-property loans held by banks were delinquent, down from 8.6% a year earlier, according to Trepp. A Federal Reserve survey released Wednesday projects "a slow recovery" in commercial real-estate markets across the U.S.

The Financial Accounting Standards Board, which sets corporate-accounting procedures, is expected to soon finalize criteria that set new rules for how banks should account for troubled loans. Investment bank Keefe, Bruyette & Woods Inc. said in a report last month that the proposed criteria could result in fewer loan modifications, more losses or higher levels of nonperforming assets.

Mervyn King is surprised anger at bankers is not greater
by Telegraph

Mervyn King, the Governor of the Bank of England, said he is surprised that the public is not more angry with bankers as they face a fall in living standards.

He laid the blame for the financial crisis, the bailout and subsequent austerity cuts directly on banks in testimony to the House of Commons Treasury Select Committee on Tuesday. "Now is the period when the cost is being paid. I'm surprised the real anger hasn't been greater than it has," Mr King said, referring the harsh cuts being introduced by the government to slash the massive debts created by the financial crisis.

The governor and other senior central bank officials were being questioned on financial regulation and the inflation report. Mr King said the emphasis of future bank regulation would be to allow lenders to fail in such a way that did not jeopardise stability, rather than try to prevent a failure in the first place.

His position is in stark contrast to comments by Hector Sants, who will be the chief executive of the new Prudential Regulation Authority at the Bank, responsible for regulating banks and insurers. Mr Sants, who will also become a Deputy Governor of the Bank of England, has said that the regulator would have a "low tolerance" to the failure of large institutions. His comment raises questions about the Bank of England's new financial supervisory framework.

Mr King, speaking hours after data showed manufacturing growth matched January's record high last month and mortgage lending picked up in January, also said the economy appeared to have rebounded after December's snow disruption. Britain's economy suffered a shock 0.6pc contraction in the fourth quarter, much of which was due to severe weather which closed businesses and left many Britons stranded at home.

Minutes from the BoE's last policy meeting showed three of the nine committee members voted for an immediate interest rate rise and others were prepared to consider supporting one if the recovery appeared more assured after the fourth quarter dip. "Surveys that we have for the beginning of this year suggest that activity did pick up in the first part of this year," Mr King said. "The nature of the recovery with the rebalancing going on means that it is quite likely that this recovery will be, in the phrase I used some months ago, choppy."

King said the central bank was monitoring inflation expectations closely but there was no clear evidence yet that medium term inflation expectations had risen. He acknowledged that oil prices had risen much faster than the BoE had assumed in last month's inflation projections but noted that some of the factors driving prices - such as tensions in the Middle East - could drive inflation down as well as up.

"An awful lot will hinge on how far this rise in oil prices persists, whether the situation in the Middle East becomes clarified and it falls back again," he said. "These are very uncertain factors, these are the things that do move inflation around, not just up but down too."

Bank of England governor blames spending cuts on bank bailouts
by Phillip Inman - Guardian

Mervyn King tells MPs: 'The price of this financial crisis is being borne by people who absolutely did not cause it'

Mervyn King has risked reopening the bitter argument over blame for the financial crisis by saying that government spending cuts are the fault of the City and expressing surprise there has not been more public anger. The governor of the Bank of England said that people made unemployed and businesses bankrupted during the crisis had every reason to be resentful and voice their protest.

He told the Treasury select committee that the billions spent bailing out the banks and the need for public spending cuts were the fault of the financial services sector. "The price of this financial crisis is being borne by people who absolutely did not cause it," he said. "Now is the period when the cost is being paid, I'm surprised that the degree of public anger has not been greater than it has."

King has repeatedly pointed the finger at the City since the crisis erupted in 2007, but this was the first time he blamed bankers for the coalition's spending cuts. It became clear during the hearing that King and his fellow members of the Bank's monetary policy committee, which sets interest rates, believe the crisis will have a lasting impact on the economy.

Asked when living standards enjoyed before the crisis would return, King said: "The research makes it clear that the impact of these crises lasts for many years. It is not like an ordinary recession, where you lose output and get it back quickly. We may not get the lost output back for very many years, if ever."

King faced tough questions from Labour MPs who believe the Bank should not have supported the Treasury's cuts programme. Accused by Andy Love, the Labour MP for Edmonton, of giving George Osborne cover for spending cuts, King denied that meetings with the chancellor resulted in a cosy agreement to keep interest rates low to support austerity measures. He said: "There has never been any attempt on any occasion to influence the monetary policy committee on what decisions it should take."

In a further provocation to the financial sector, King set out plans for an overhaul of City regulation and oversight that would allow banks to fail when they get into trouble. He told MPs it was necessary to move away from rules designed to prevent banks failing, with a safety net provided by taxpayers, to a system that allowed banks to fail in an orderly way.

New Round of Stress Tests for European Banks
by Matthew Saltmarsh - New York Times

The European banking regulator said Wednesday that it would start a new health check of the region’s banks on Friday and would publish the results in June. It also announced the appointment of its first chief.

The tests will be conducted on a "large number" of European banks and "will take several months to run," the European Banking Authority, or E.B.A., said in a statement. Such stress tests, measuring banks’ ability to withstand economic shocks, have been carried out twice after the financial crisis struck but failed to win investor confidence. Since the last round, published in July, further balance sheet problems have emerged, notably at Spanish and Irish lenders.

The tests this year will be run against two hypothetical economic scenarios: a "baseline" and an "adverse" macroeconomic scenario to assess the solvency of the banks involved. The adverse scenario, designed by the European Central Bank, will incorporate a significant deviation from the baseline forecasts and country-specific shocks on real estate prices, interest rates and sovereign debt prices.

The banking authority said it would provide banks with details of the scenarios by the end of this week, after which there will be a period of feedback. The regulator plans to publish the macroeconomic scenarios in full, alongside the sample of banks involved, on March 18. It then expects to provide more details on the principles of the methodology in April. The regulator said it was still discussing with governments "remedial backstop measures that member states will put in place to address any weaknesses that the stress test may reveal."

European officials are eager to avoid mishaps that were made in the exercise last year. The French economy minister, Christine Lagarde, said recently: "We need to improve the overall credibility of the process, and that includes communication, range, scope, a combination of bottom-up, top-down quality control." In parallel, European supervisors are conducting what are known as liquidity tests.

These tests are detailed examinations of a bank’s liquid assets, which are the reserves of readily available assets and cash that can be used to pay off liabilities at a given time. But the results will not be published because of their sensitivity and the fact that they are extremely difficult to interpret. They change from day to day and are hard to harmonize given the range of accounting standards and balance sheet structures across the region. "It’s impossible to go public with this data," said a European regulator, who was not permitted to speak publicly. "There would be too much information for speculators."

The statement Thursday did not comment on whether the stress test results would be audited or assessed by an external body, an issue that has been debated by European policy makers. Such an auditor could be a private firm or a public entity like the Bank for International Settlements.

In a separate operation, the International Monetary Fund this year is conducting what it calls financial sector assessment programs in several European economies, including Germany and Britain. These will also provide a detailed analysis of the health of a country’s banks. And this month, the Federal Reserve plans to let U.S. banks know how they did on its most recent round of stress tests. The Fed gave the banks one economic scenario — a recession — to test their books against.

Regardless of this heightened global activity, there are still broad concerns among observers that complex and potentially damaging trading activities might increasingly migrate away from traditional banks, as regulation steps up, toward what is called the shadow banking system, a loose term for firms or operations that specialize in trading and often operate offshore.

The European Banking Authority said that a Hungarian regulator, Adam Farkas, had been selected as its first executive director. He will be in charge of the day-to-day operations and will remain in office for five years, with the possibility of one renewal. Mr. Farkas recently served as chairman of the Hungarian Financial Supervisory Authority and has held senior positions at private banks, the National Bank of Hungary and the Budapest Stock Exchange. The appointment needs to be confirmed by the European Parliament.

The authority was formed at the start of this year in response to the crisis and in an attempt to harmonize the layers of bank supervision in the European Union. Its board of supervisors, the principal decision-making body, comprises 27 voting members, or one from each E.U. nation. The authority has also established a banking stakeholder group that will meet four times annually to communicate with lenders. Internally, it has five committees and one panel to support its work.

A Stress Test Where the Banks Had the Questions and the Answers
by Jesse Eisinger - Propublica

Later this month, the Federal Reserve is going to let banks know how they did on its most recent round of "stress tests." Banks are eager to bring doctors’ notes to their meetings with investors, displaying their bills of health. They want regulators to allow them to start paying, or increasing, dividends to investors or to initiate stock buyback programs.

This set of exams, announced in November, is Son of Stress Test 2009, a followup to tests the Fed conducted in the wake of the financial crisis. But something seems different this time around. It’s almost as if the banks knew their results, even before the testing was complete.

Since the end of last year, banks have been bragging about their rude health. Bank of America’s chief executive, Brian T. Moynihan, suggested that the bank would raise its dividend above its current token amount. Jamie Dimon, JPMorgan Chase’s leader, did the same. Warren E. Buffett suggested in his shareholder letter that Wells Fargo was about to pass with flying colors.

Of course, banks ought to have a good idea of the results. They came up with the questions — and the answers. The Fed gave the banks one economic assumption — a recession — to test their books against, but otherwise the measures were chosen by banks themselves. The Fed just vetted them. Seems like a low bar. "It’s a take-home exam where you supply the math and then it’s pass/fail," said Joshua Rosner, an analyst with the independent research firm Graham-Fisher & Company.

Though the Fed isn’t labeling these exams an official banking system stress test, it could be every bit as consequential. Just as the 2009 tests required some banks to raise money — and the most fragile improved their capital to the tune of about $77 billion — this Stress Test Lite could allow some banks to slough off capital.

Unfortunately, declarations of banking system vigor seem premature. Housing has resumed its fall, and many analysts expect national prices to fall on average this year. Commercial real estate is a looming problem. Unemployment remains obdurately high. In 2009, critics complained that the stress tests were driven by appearances and that the government’s true, and thinly disguised, goal was to shore up confidence in the markets. The conclusion — that, over all, the system was sound — was inevitable.

"The stress tests were designed to reassure the capital markets that the government was not going to restructure the banks," said Damon A. Silvers, who serves on the Congressional Oversight Panel, which monitors the Troubled Asset Relief Program. "But the capital raises compared to the problem assets were not that big."

In the first round, the Fed disclosed the economic assumptions, a baseline and an "adverse" situation, which the banks had to test against. (In that event, even the adverse situation for 2009 wasn’t as dire as reality.) Unfortunately, the central bank didn’t disclose enough information to actually judge the results. The Congressional Oversight Panel enlisted two University of California, Berkeley professors who specialized in banking and risk assessment to judge the tests. They had to throw up their hands.

The two "were interpreting shapes on the wall," said Eric Talley, a professor of law at Berkeley, who worked on the project. "We couldn’t see what the shapes were, so had to look at residue to see if those were the shapes you would normally want to use." This time, the Fed hasn’t made even that cursory amount of criteria public.

The first round of tests was based on self-reported data of asset quality and loss estimates. This time around, that weakness is squared. Now the banks are reporting on their own internal capital plans based on their own asset assessment. "It could be that banks have been really assiduous about own risk portfolios," Professor Talley said. "Or it could be that too much control over the process has been handed over to banks. It’s hard to tell."

While the Fed got hammered by critics who assailed the tests as too deferential to the banks, the central bank was doing something unprecedented and holding the banks to what it viewed as a solid capital standard. Inevitably, though privately, banks screamed to the regulators about how harsh they were. They were reluctant to do so publicly because we were still in that fleeting period when bankers displayed a modicum of chagrin for the debacle they had caused. That moment has passed.

It would be alarming if the regulators had internalized their complaints. The operating theory of supervision from the Treasury secretary, Timothy F. Geithner, and the banking regulators continues to hold: we can push banks to restructure, without forcing them. Banks can be made to raise capital and reduce their risky activities, largely through encouragement and moral suasion. They can please shareholders and be safe at the same time. We had better hope that the banks actually are healthy. The banks say ‘Trust us,’ and the Fed is doing just that.

Sheila Bair, FDIC Chief: Too Big Banks Should Be 'Downsized'
by Dave Clarke - Reuters

America's big international banks should restructure their operations unless they can prove they can easily be broken up if they start toppling during a financial crisis, said U.S. regulator Sheila Bair. Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit.

"If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp. "There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said. She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.

The aim of orderly liquidation is to avoid a repeat of 2008, when the Bush administration bailed out American International Group and other firms but not Lehman Brothers. Lehman's bankruptcy virtually froze capital markets. The "living will" requirement mandated by last year's Dodd-Frank financial reform law is also designed to end the idea that some firms are too big to fail. It would put the greatest burden on banks with complex businesses and big international presences such as Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley.

By year's end, big banks are expected to file with regulators their plans that would show how they can be closed down if they face a liquidity crisis.

Regulators vs Shareholders
Bair said traditional deposit-taking banks in the United States probably can produce plans for a shutdown, but large multinationals with complex legal structures need to simplify. "The burden is on them initially to show us that they don't think they need subsidiarization," she said. "They need to give us a plan on how they can be resolved on an international basis without it."

A former general counsel at Bair's agency said there may a tension between banks trying to meet these new regulations and maximizing shareholder value. "If you set up a business in a way to optimize ease of liquidation, that may not be the way to optimize running a successful business," said John Douglas, now a Davis Polk attorney.

Others said the changes may be more hassle than expensive and the changes would be legalistic. "This is just the latest in 'Can you jump through this hoop backwards?'," said Paul Miller, an analyst with FBR Capital Markets.

Bair made clear she was not advocating that some large banks be broken up now -- only that they need to make structural changes so that they could be broken up if they begin to fail. "Far too many of them, they manage their businesses along business lines as opposed to legal entity," she said.

International Challenges
Bair is now in the final months of her five-year term heading the FDIC, which she led during the tumult of the financial crisis. Her term ends in June. Bair said she hopes to have major aspects of new capital requirements and the liquidation regime in place before she departs. Among her concerns going forward is that new capital rules, known as Basel III, agreed to by leaders of the Group of 20 leading nations in November, will not be carried out with their intended strength.

Banks have argued they are too strict and will impede their ability to lend and aid economic growth, an argument that may have traction with politicians. "I hope political leaders hold firm on this and understand that this is really something to protect their taxpayers and to protect their economies, this needs to occur," she said.

Corporate Tax Revenues Nearing Historic Lows As A Percentage Of GDP
by Maxwell Strachan  - Huffington Post

Even as the federal deficit has ballooned, U.S. corporations are paying lower tax bills than ever before, according to one measure. That's the takeaway from a new report by the Center on Budget and Policy Priorities dissecting the tax structures of corporations, which CBPP Director Chuck Marr says are now paying taxes at "historical lows as a share of the [total] economy."

Marr points to a basic discrepancy: While the U.S.'s top corporate tax rate of 35 percent is one of the highest in the world, the amount corporations actually end up forking over to the government is much lower, sometime as low as 4 percent. This is due to a dizzying number of deductions, write-offs, and other accounting tricks that allow corporations to legally reduce their tax burden.

In 2007, the report notes, the Treasury estimated federal government had missed an opportunity to collect $1.2 trillion due to various corporate tax expenditures over the previous decade. As New York Times columnist David Leonhardt columnist recently put it, a company like General Electric is, indeed, "expert at avoiding taxes." Using statistics from the Office of Management and Budget, CBPP created this graph, mapping total collected corporate taxes as a percentage of the overall U.S. economy:

US municipalities could default on $100 billion, warns Nouriel Roubini thinktank
by Dominic Rushe - Guardian

Buyers of bonds issued by US states and local authorities are being 'Pollyannaish' in ignoring the state of their finances

US states and local governments could default on $100bn (£60bn) of their debts over the next five years, according to a report from the consulting firm founded by economist Nouriel Roubini. The report follows dire predictions of a wide-scale collapse in the US's $2.7 trillion municipal bonds market by Meredith Whitney, the analyst who was among the first to warn of the 2008 banking crisis.

Roubini Global Economics' forecast is less gloomy than Whitney's, but it warns that investors are being "Pollyannaish" in dismissing the serious problems in the market.

"The municipal bond market has generated tremendous debate in the past months, with Cassandras predicting another 'sub-prime' disaster, while apologists (often with vested interests) claim there is little justification for these warnings," write the authors of the Roubini report, David Nowakowski and Prajakta Bhide. They conclude that while investors do face $100bn in defaults, the problems will not prove "systemic in nature" and will not "infect the financial system, though they will dampen economic recovery."

So-called "muni bonds" are issued on behalf of cities, local governments or other agencies, such as publicly owned airports or school districts, and used to finance local projects. They offer tax breaks to investors, and while returns are relatively low, they have traditionally been seen as safe investments. But, the report says, muni bonds are under intense pressure as states struggle with overspending, the recession and unfunded liabilities for pensions and other retirement benefits estimated to be over $7tn.

The worst recession since the 1930s has caused a steep fall in tax receipts; state tax collections, adjusted for inflation, are now 12% below pre-recession levels, according to the Centre on Budget and Policy Priorities thinktank.

Defaults will continue to be isolated events, according to the report, and will not cause damage to the wider economy by themselves. But they will slow down the economy as local authorities cut spending, lay off employees and increase taxes to avoid default and "pay for past promises". As the report points out: "State and local spending is $1.8tn, or one-eighth of US GDP, and employs over 19 million individuals, almost 15% of non-farm employment. Some 268,000 government jobs have been lost at the state and local level in the past year, despite federal assistance."

Last year, Whitney triggered an intense debate over muni bonds after warning of a coming wave of defaults totalling "hundreds of billions of dollars". She predicted that 50 to 100 municipalities would default on their debts this year. Her prediction provoked an exodus from the muni bond market; investors withdrew some $14bn from it between December last year and February this year.

But her predictions have been dismissed by other analysts and fund managers including Bill Gross, who manages Pimco, the world's biggest bond fund. Whitney said her claims were based on two years of research and has vigorously defended her team's work.

Bill Gates Calls for 'Clear and Honest' Accounting of State Budgets
by Robert A. Guth - Wall Street Journal

Billionaire Bill Gates on Thursday agitated for state governments to adopt "clear and honest" accounting of their budgets, saying states' true finances are being obscured from voters and threaten America's public-education system. Speaking at a meeting here of leading thinkers known as the TED conference, Mr. Gates said that state budgets need more scrutiny and should follow more-transparent accounting principles, such as those used by Google Inc. and Microsoft Corp, which Mr. Gates co-founded.

"It's riddled with gimmicks," Mr. Gates said of the "tricks" states use to balance their budgets. Citing moves such as selling state assets and deferring payments, he said some methods are "so blatant and extreme," that "Enron would blush," referring to the energy company that collapsed a decade ago amid an accounting scandal. The biggest concerns nationwide, he said, are the growing cost of state-funded health-care programs and public workers' health-care coverage, as well as the way states account for their pension funding. Those obligations threaten the ability to invest in education, Mr. Gates said.

"It is an increasingly difficult picture even assuming the economy does quite well," Mr. Gates said of the costs. Through his philanthropy, the Bill & Melinda Gates Foundation, Mr. Gates is a major donor to educational programs in the U.S. including pilot projects to better measure the effectiveness of teachers. But while he has billions of dollars at his disposal, his wealth can't counter the effects of broader cuts to education funding.

Mr. Gates said states are stuck in a system that pays out vast amounts for early retirement, health care and pension obligations while education suffers as teachers are laid off, class sizes increase and tuition increases. "It really is the young versus the old, to some degree," he said. "You're going to be de-investing in the young." His comments were tinged with sarcasm as he outlined the tattered state of some state budgets. "The games they play to hide that actually obscures the topic so much people don't see what are really straightforward challenges," he said.

Freddie Mac: U.S. home prices drop 4.3% in fourth quarter
by Kerri Panchuk - Housing Wire

U.S. home prices fell 4.3% on a year-over-year basis in the fourth quarter as foreclosures and slowing sales buoyed inventory levels, Freddie Mac said Monday in its Conventional Mortgage Home Price Index.

"Foreclosed-property and short sales remain a big part of the market. However, new foreclosures will begin to gradually slow," said Frank Nothaft, Freddie Mac's chief economist. "Delinquency rates reported by the Mortgage Bankers Association continue to recede from their peaks but remain high, particularly in distressed areas of the country."

Home prices fell in every U.S. geographical region in the fourth quarter, with the steepest declines occurring in the Mountain region, where home values fell more than 4%. The region includes the states of Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah and Wyoming.

Home values in the mountain region also plummeted 9.6% in the past 12 months and 20% over a five-year period. Prices remained the most stable in the Mid-Atlantic region, where the states of New Jersey, New York and Pennsylvania experienced  a 1.1% drop in fourth-quarter home prices.

Saudi Arabia contagion triggers Gulf rout
by Ambrose Evans-Pritchard - Telegraph

Fears of sectarian uprisings in Bahrain and Saudi Arabia have set off the first serious wave of investor flight from the Gulf, compounding market turmoil as civil war in Libya pushes Brent crude over $116 a barrel.

Saudi Arabia’s Tadawul stock index has tumbled 11pc in wild trading over the past two days, led by banks and insurers. Dubai’s bourse has hit a 7-year low. The latest sell-off was triggered by the arrest of a Shi’ite cleric in the Kingdom’s Eastern Province after he called for democratic reforms and a constitutional monarchy. The province is home to Saudi Arabia’s aggrieved Shi’ite minority and also holds the country’s vast Ghawar oilfield, placing it at the epicentre of global crude supply. "Unrest in this region can have fatal consequences for the world," said JBC Energy. "The plunge on the Saudi stock exchange can be interpreted as a sign of waning trust."

In Bahrain, the island nation’s Sunni elite holds sway over a Shi’ite majority that is denied key jobs and has a token political voice, making it a trial run for Saudi Arabia’s near-identical tensions in the Eastern Province. Bahraini dissidents have so far been much bolder, prompting a bloody crackdown last month when at least seven people were shot by the military. The ruling family – under intense pressure from Washington to stop the killings – has since held out an olive branch to protesters and let the radical Haq leader Hassan Mushaima return from exile, yet the crisis is far from contained.

My Mushaima said on Wednesday that protesters have "the right to appeal for help from Iran" if Saudi military units interfere in the struggle. Tanks were seen crossing the 17-mile causeway from Saudi Arabia to Bahrain on Tuesday. "These were supposed to be Bahrain’s tanks returning from Kuwait: that is not a credible story," said Firas Abi Ali, a Gulf expert at the risk group Exclusive Analysis.

He said the outcome in Bahrain will set the template for events across the border. "There is no good outcome from this for Saudi Arabia. If Bahrain offers concessions, the Saudi Shia will demand similar concessions. If they crack down, they risk an uprising. These people do not want to live under the House of Saud," he said. Saudi activists have called on Facebook for a "Day of Rage" on March 11, despite the penalty of lashing for street protest. A similar call to arms in Syria fizzled because people were frightened, and the security forces nipped it in the bud. "We will be watching closely to see how many people turn up, and how far their demands go," said Mr Abi Ali.

Saudi King Abdullah has scant leeway. His own legitimacy stems from Wahabi clerics, who refuse any compromise with the Shia. He is 87 and in poor health, raising the prospect of an imminent succession struggle that favours the hard-line interior minister Prince Nayef. He would undoubtedly crush any protests. The monarchy has sought to gain time by spending an extra $36bn (£22bn) on welfare and salaries, but patronage politics may strike the wrong note at this stage.

Whatever the hopes in the West, Mr Abi Ali said the Mid-East is now in the vortex of multiple uprisings that will create turmoil for years and destabilise oil supply for a long time. "The Arab world is not going to start behaving like the Swiss," he said. Libya’s slide into civil war has already cut oil shipments by 1m barrels per day (bpd), slicing into the world’s safety margin. The International Energy Agency (IEA) said the Saudis had covered the short-fall, though Saudi heavy oil is a poor substitute for Libya’s "sweet" crude.

However, analysts suspect the kingdom had already boosted output to 9m bpd before disruptions in Libya, and has not in fact added much net supply. There is a raging debate over whether the Saudi oil giant Aramco can raise output by 3m bpd if needed, as claimed. While two new fields have come on stream adding 2m bpd since the 2008 oil shock, "attrition" on old fields has offset much of this. "We think they’re close to full capacity," said one analyst.

Global spare capacity may in reality be less than 4m bpd, and perhaps as low as 2m. Meanwhile, oil demand from China alone rose by 850,000 bpd last year. Helima Croft at Barclays Capital said the longer Libya’s crisis continues , the more damage it will do to long-term supply. Foreign companies have evacuated staff and may be reluctant to restart operations until the dust settles.

Rebel leaders in Benghazi are planning to investigate oil contracts, reserving the right to renegotiate terms in accordance with the "will of people in the street". Ms Croft said foreign oil companies will not sink large sums of money into Libya until it is clear what will emerge from the cauldron of tribal divisions. A plan for $10bn of oil investments by BP, Shell, Oasis and over others the next three years is in tatters. "With the disintegration of a stable political regime in Libya, we view the bulk of the projects as being extremely unlikely to proceed on time, if at all," she said.

Fatih Birol, the IEA’schief economist, warned that investments in fresh fields across the Middle East "may be deferred for years. The age of cheap oil is over." The Libyan crisis has brought forward an oil crunch that was likely to happen within three years or so, given the relentless decline of non-OPEC output in the North Sea and Mexico. While the world can cope with the loss of Libyan crude for now, the stakes will rise sharply if one more country succumbs, and explode off the charts if Gulf monarchies lose their grip.

Baby boomers are Britain's secret millionaires
by Phillip Inman - Guardian

The inadvertent burden baby boomers have bequeathed the young is sending Britain broke

Baby boomers are up in arms: they are being criticised for stealing from the younger generation when so many of them are doing all they can to promote a sustainable and fair society.

They want to save the planet and protect welfare spending as much as other age groups. And anyway, they argue, there are plenty of older workers and pensioners who are poor and should not be blamed for bequeathing young people a life of low incomes, sky-high bills, a reduced welfare state and costly debts.

Tomorrow the National Pensioners Convention will head a lobby of parliament. Angry at the government's decision to downgrade the inflation link for annual pension increases, its message is that many over-65s are struggling to keep warm and will be made poorer, and colder, by the change. Their plea shows up the problem when debating the effect of the boomer generation on the rest of society, which is that this group is far from homogeneous. Rich and poor are both found in the boomer cohort just as much as they are in any other.

Yet the accusation that boomers are protecting themselves at the expense of everyone else still stands, because relatively ordinary boomers will retire as millionaires, paid for by younger workers. Even the poorer over-50s need to recognise they are going to take out of society more than they put in.

We need to address the question of how we can make a fairer society, and part of that is identifying who the rich are. The leftist finger pointing at the aristocrat and the company boss misses the boomer. The BT engineer on £60,000, the marketing manager on £80,000 and the teacher on £35,000 will all be in the millionaire bracket when they retire after paying only a fraction of the cost.

A teacher on £35,000 will qualify for a £17,000 a year pension with top-ups that can add another £3,000-£4,000 a year. A £20,000-a-year final salary pension with all the bells and whistles would cost between £700,000 and £800,000 to provide. Add a £300,000 house and bingo, you have a millionaire. The BT engineer and marketing manager will easily fit the millionaire bracket and, like the teacher, will have paid a fraction of the cost of purchasing these bountiful assets.

Whereas the super-rich once numbered in the tens of thousands, depending on where the line was drawn, they will soon number in the millions. Certainly every street in the south-east has a rich boomer, if not 10. The suburbs of all our major cities are no different, with bloomers who jet off on four or five holidays a year and drive gas-guzzling 4x4s.

Not all boomers lead this lifestyle, obviously. But the definition of rich has changed as pension assets, needed to cover at least 25 years of retirement, and inflated home values make many more people millionaires. That's why the super-rich could be a BT engineer or teacher as much as a City financier. The banker will be richer, but they will all be in the stratosphere compared with everyone else scrabbling for pennies.

The boomers' claims on the national income and assets are in addition to the City bankers and landed gentry. It was wrong when old money demanded more than its fair share, but it was affordable. With millions more having their hand out as a reward for retiring, we will soon be broke. No wonder risk analysis firm Maplecroft has said that Britain ranked among the top 10 countries heading towards bankruptcy based purely on the pressure from their ageing populations, substantial levels of debt and high public spending on health and pensions.

Boomers have convinced themselves they paid their way, but increasingly there are academic papers showing that this is simply not true. Last year Martin Weale and Ray Barrell of the National Institute of Economic and Social Research wrote a paper on the intergenerational transfer currently under way. They highlighted the huge rise in land values that in effect place a charge on young people. Last week Weale was in Oxford attempting to explain that it is a charge they must pay, whether they buy land at inflated prices or rent from someone who paid an inflated price.

Most boomers had no idea that a pension promise or the trebling of house prices was so harmful. The need now is to address the problem, not to blame. The government, like the previous administration, wants the market to decide. It is a decision that will allow powerful groups to protect their assets and incomes while weaker groups suffer huge cuts. Figures from Towers Watson show a decline in pension saving among private sector workers, especially the young, as they are shunted into cheap schemes with poor payouts. Today only a third of the 25 million private sector workers are putting money into a pension.

The £35bn we spend on pension tax breaks are mostly grabbed by higher rate tax payers. It is a scandal that the Liberal Democrats wanted to end before they joined the Tories in government. If nothing else, the savings would allow local authorities to maintain youth services, one of the biggest losers in the current round of cuts. Richard Murphy, the anti-poverty tax campaigner, has suggested allowing the tax break to be maintained, but directing the savings into home-grown investment projects that would upgrade Britain's infrastructure. This, he argues, would provide the biggest benefit to the young.

There are people in positions of power who believe one answer to the problem is simply to allow mass immigration from outside Britain to bolster the younger generation and do the jobs they are unable or unwilling to do. Higher GDP is the result. This rise, the argument goes, will be more than enough to pay the bills of the young and the old and invest in the future.

Philippe Legrain, a British economist and London School of Economics graduate, could be considered the cheerleader for this libertarian, supply and demand, let's just ignore the societal effects of mass immigration, kind of thinking. Last year he was appointed by president of the European Commission, José Manuel Barroso, as chief adviser to his personal think-tank.

Allowing the market to decide avoids us making decisions to share scarce resources more fairly. The trouble is that Barroso is a boomer and so are most people in positions of power. MPs, MEPs and company directors can lay claim to the most generous pension promises. They are all millionaires.

'I won't pay' movement spreads across Greece
by Elena Becatoros - AP

In light of austerity measures, citizens ignore tolls, transit ticket costs, even bills for healthcare

They blockade highway toll booths to give drivers free passage. They cover subway ticket machines with plastic bags so commuters can't pay. Even doctors are joining in, preventing patients from paying fees at state hospitals.

Some call it civil disobedience. Others a freeloading spirit. Either way, Greece's "I Won't Pay" movement has sparked heated debate in a nation reeling from a debt crisis that's forced the government to take drastic austerity measures — including higher taxes, wage and pension cuts, and price spikes in public services.

What started as a small pressure group of residents outside Athens angered by higher highway tolls has grown into a movement affecting ever more sectors of society — one that many say is being hijacked by left-wing parties keen to ride popular discontent. A rash of political scandals in recent years, including a dubious land swap deal with a rich monastery and alleged bribes in state contracts — has fueled the rebellious mood.

At dawn last Friday, about 100 bleary-eyed activists from a Communist Party-backed labor union covered ticket machines with plastic bags at Athens metro stations, preventing passengers from paying their fares, to protest public transport ticket price hikes. Other activists have taped up ticket machines on buses and trams. And thousands of people simply don't bother validating their public transport tickets when they take the subway or the bus.

"The people have paid already through their taxes, so they should be able to travel for free," said Konstantinos Thimianos, 36, an activist standing at the metro picket line in central Syntagma Square.

In one of their frequent occupations of the toll booths on the northern outskirts of Athens recently, protesters wore brightly colored vests with "total disobedience" emblazoned across their backs, and chanted: "We won't pay for their crisis!" The tactic has cropped up in the health sector, with some state hospital doctors staging a blockade in front of pay counters to prevent patients from paying their €5 flat fee for consultations.

Critics deride the protests as yet another example of a freeloading mentality that helped lead the country into its financial mess. "The course from initial lawlessness to final wanton irresponsibility is like a spreading cancer," Dionysis Gousetis said in a recent column in the respected daily broadsheet Kathimerini. "Now, with the crisis as an alibi ... the freeloaders don't hide. They appear publicly and proudly and act like heroes of civil disobedience. Something like Rosa Parks or Mahatma Gandhi," Gousetis wrote. "They're not satisfied with not paying themselves. They are forcing others to follow them."

Many accuse left-wing parties and labor unions of usurping a grassroots movement with legitimate grievances for their own political ends. "You think that lawlessness is something revolutionary, which helps the Greek people," Prime Minister George Papandreou said recently, lashing out in Parliament at Coalition of the Left party head Alexis Tsipras. "It is the lawlessness which we have in our country that the Greek people are paying for today."

But there is something about the "I Won't Pay" movement that speaks to something deeper within Greek society: a propensity to bend the rules, to rebel against authority, particularly that of the state. It is so ingrained that many Greeks barely notice the myriad small, daily transgressions — the motorcycle driving on the sidewalk, the car running the red light, the blatant disregard of yet another government attempt to ban smoking in restaurants and bars.

Less innocuous is persistent and widespread tax avoidance despite increasingly desperate government measures. "There is a general culture of lawlessness, starting from the most basic thing, tax evasion or tax avoidance, which is something that Greeks have been exercising since their state was created," said social commentator Nikos Dimou.

But many see the "I Won't Pay" movement as something much simpler: the people's refusal to pay for the mistakes of a series of governments accused of squandering the nation's future through corruption and cronyism. "I don't think it's part of the Greek character. Greeks, when they see that the law is being applied in general, they will implement it too," said Nikos Louvros, the 55-year-old chain-smoking owner of an Athens bar that openly flouts the smoking ban.

"But when it isn't being applied to some, such as when there are ministers who have been stealing, ... Well, if the laws aren't implemented at the top, others won't implement them."

German-Irish brinkmanship raises EMU stakes
by Ambrose Evans-Pritchard - Telegraph

German bail-out fatigue and fierce resistance to EMU "rescue creep" threaten to derail a eurozone deal this month, and risk triggering a fresh round of Europe's debt crisis.

Ireland's new leader Enda Kenny faces a daunting task as he tries to change the terms of his country's €67bn (£57bn) EU-IMF package, either by cutting the penal rate of interest or changing the remit of the rescue fund to help Ireland claw its way out of a debt trap.

The three parties in Chancellor Angela Merkel's coalition have issued a paper ruling out use of the bail-out machinery to purchase the bonds of eurozone states in trouble, or engineer a "soft" debt-restructuring by lending to these countries so that they can buy back their own debt cheaply from the market. They oppose any form of eurobond that puts Germany on a slippery slope towards a 'Transferunion', and have demanded a Bundestag vote on the accord reached by Mrs Merkel at next week's EU summit.

A group of 189 German professors has stiffened the Bundestag further by warning of "fatal consequences for the whole process of European integration" if the EU crosses the Rubicon to a de facto debt union.

"I cannot remember any occasion when lawmakers have set guidance like this before: Merkel has very little leeway," said Hans Redeker, currency chief at BNP Paribas. "There is going to be disappointment at the summit and that will make life even harder for the EMU periphery." Mr Redeker said the EU's new criteria for bank stress tests to be agreed this week adds another risk. If the tests are seen as a sham, like last time, they will sap confidence: If too tough, they will revive fears over the capital levels of weaker lenders.

The EU dispute comes as the latest oil spike queers the pitch for vulnerable countries on Europe's fringes. A report by Ernst & Young warns that if oil stays near $120 for the rest of this year, it will cut EMU growth to just 1.1pc this year and 1.2 next.

"We think the peripheral countries would suffer most. Spain, Greece, and Portugal face a double whammy since they have no room to offset the oil shock by slowing the pace of fiscal consolidation," said the author, Marie Diron. Oil at $150 would tip the eurozone back into recession, with the risk of cross-border bank contagion and default by at least one country.

German finance minister Wolfgang Schauble is hoping for a "grand bargain" in which weaker EMU states agree to stringent discipline in exchange for a boost to the bail-out fund, hoping this will assuage critics at home. However, Germany's plans for budget vetting and intrusive reforms set off a storm at an EU leaders dinner earlier this month, with some calling it a diktat that trampled on sovereign prerogatives. Mr Schauble has dug in his heels, insisting that "the German government is not willing to make any compromise on this issue."

The European Commission has sought to defuse the crisis by drafting its own compromise plan, but any dilution will inflame critics in Germany. Bundesbank chief Axel Weber has already attacked the EU proposals for a more 'pro-active' rescue fund as a move to eurobonds "through the back door", shifting debt costs onto EU taxpayers. If anything, hard-liners are gaining strength in Germany, Holland, and Finland, where the eurosceptic True Finn party is surging in polls. All three states oppose a cut in the penal rate on bail-out packages, fearing moral hazard and the risk that others will be tempted to tap the fund.

Ireland is paying 5.9pc on the EU chunk of its loans, far above the EU funding cost of 2.6pc. Jens Larsen, Europe strategist at RBC and a former IMF director, said the policy makes no sense. "This shouldn't be a mechanism to punish countries, but to help them turn around the ship. I think a 4pc rate would be reasonable. But what matters most is giving the European Financial Stability Facility a wider remit so that it can intervene in secondary bond markets. If there is no deal, we could see renewed contagion," he said.

Andreas Rees, Unicredit's Europe economist, said Ireland should have "no problem" paying 5.9pc. This rate lifts Irish debt service costs to 4pc of GDP, compared to 10pc in the 1980s. Mr Kenny's problem is that this hawkish view reflects broad German opinion. His other problem is what happens as recovery pushes up bond yields across the board, lifting rates on Ireland's loan package pari passu.

His trump card is to threaten 'haircuts' on senior bank creditors if the EU refuses to compromise, a move that might set off EMU-wide contagion and inflict big losses on German Landesbanken. To play to such a card would enrage Europe, but not to play it might test patience of an aggrieved Irish nation.

UK retail chiefs warn Treasury over wave of shop closures
by James Hall - Telegraph

The bosses of some of the UK's biggest high-street chains have warned the Treasury urgent action is needed to prevent a double-dip recession and the possible closure of thousands of shops.

In a crisis meeting on Tuesday night, Danny Alexander, the Chief Secretary to the Treasury, met with a delegation of retailers including Justin King, chief executive of J Sainsbury, and Charlie Mayfield, the chairman of John Lewis Partnership, to hear their concerns. The retail chiefs told Mr Alexander that the sector is already absorbing £670m of extra Government-imposed costs and warned him not to increase the burden. They also said they need Government support in creating jobs to help the economy recover.

The meeting, which took place in a central London hotel and was organised by the British Retail Consortium (BRC), over-ran its allotted time and was described by both sides as "constructive". "There was a frank exchange of views," said one of the people present.

Rising petrol and food prices have led to a squeeze in disposable incomes, meaning that sales on the high street have dropped off sharply in recent weeks. This week both Primark, the fashion retailer, and HMV, the music chain, warned of slowing sales. At the same time retailers' costs are rising dramatically. Other retailers present at Tuesday's meeting were Ben Gordon, chief executive of Mothercare, and Walker Boyd, chairman of WH Smith.

Stephen Robertson, director-general of the BRC, who was also present, said: "We're not asking for handouts but we are saying it's more important than ever that the Government understands the finely balanced position many retailers are in." He said that anecdotal evidence suggests high street sales slowed dramatically in February as shoppers reined in their spending. Mr Robertson said: "Retail chief executives are telling me that, apart from a bit of a boost from half term, February's sales were pretty weak."

One retail chief, who was not at the meeting, said that household incomes are being squeezed so much that people are not spending in stores: "If it costs £20 more to fill up your car and £10 more to feed your family, of course you are not going to go clothes shopping." Mr Robertson said: "Against a background of deteriorating sales, the Chancellor needs to support retail in creating new jobs, particularly new jobs for young people, by avoiding any new burdens and removing existing barriers."

At the weekend the BRC sent its Budget submission to George Osborne, the Chancellor, in which it laid out a 20-point plan for a "retail-led recovery". In the submission, which formed the basis of Tuesday's discussion, the BRC pointed out that 80pc of the new jobs announced at the Prime Minister's January Jobs Summit were in retail.

Measures the plan called for included the suspension of April's fuel duty increase, a moratorium on new employment legislation until growth is firmly established, and the extension of notice about National Minimum Wage increases from six to 18 months. The BRC is also working with the Department of Business, Innovation and Skills on the Government's growth strategy. A Treasury spokesman said the meeting went well. "We are in the process of conducting a growth review and the retailers obviously had a lot of ideas," he said.

The Breadline is Online ... Unemployed Get 15 Minutes of Fame in Movie
Two unemployed filmmakers, Sue Wolf and Nick La Penna, have created a compelling film, "The Unemployed Quilt Project", about the reality of unemployment. Like Andy Warhol's 15 minutes of fame, today's unemployed deserve their starring moment. The voices speak directly to the drama and crisis of unemployment by putting a face on the raw statistics.

Video artists La Penna and Wolf decided that the silent killer of Unemployment was no longer 'someone else's problem' and shot and edited a mash-up film that would freeze in time, the chorus of lonely voices. "When we searched for the proverbial breadline, we were stunned that it had migrated out of the streets and onto the web. The breadlines are online!" said Wolf.

From Danger Man, a middle-aged superhero in blue tights, to citizen reporters, the full story of unemployment, spanning denial to death and silliness to suicide, unfolds clip by clip. La Penna stated, "From kitchen complaints to basement confessions, the true reality show plays out on the web as everyday people from all walks of life confront the brutal effects of unemployment."

"The Unemployed Quilt Project" doesn't end with the film; a living video wall has been growing in cyber-space at La Penna and Wolf have been taking the pulse of discouraged workers, 99ers, minority un-employees, new-to-the-workforce youngsters, over50 pink-slippers, and the uncounted for over 2 years. Coinciding with the Bureau of Labor Statistics' body count, the filmmakers will add new faces to the Quilt Project every month.

This voyeuristic Pop Art film was inspired by the Unemployed Quilt’s video wall and shot on location in New York and Los Angeles. It opens a window into the intimate lives of out-of-work employees. The unemployed filmmakers premiered their video online for audiences to experience 24 hours a day on their site and on YouTube.

Scientists try to determine whether life on Earth is quickly heading toward extinction
by Nadia Drake - San Jose Mercury News

Life on Earth is hurtling toward extinction levels comparable with those after the dinosaur-deleting asteroid impact of 65 million years ago, propelled forward by human activities, according to scientists from UC Berkeley.

This week, scientists announced that if current extinction rates continue unabated, and vulnerable species disappear, Earth could lose three-quarters of its species as soon as three centuries from now. "That's a geological eyeblink," said Nicholas Matzke, a graduate student at UC Berkeley and author of a paper describing the doom-and-gloom scenario. "Once you lose species, you don't get them back. It takes millions of years to rebound from a mass extinction event."

This means that not too far in the future, backyards might not be buzzing with bees, bombarded by seagulls or shaded by redwood trees. And while that might seem far off, species already are disappearing on a global scale. In recent history, we've lost the dodo bird and the passenger pigeon, the Javan tiger and the Japanese sea lion, and now, maybe the eastern cougar -- declared extinct by the U.S. Fish and Wildlife Service on Wednesday. Amphibians, mammals, plants, fish -- none are immune to going the way of the dinosaurs, courtesy of the human impact on fragile ecosystems.

Such enormous losses have only occurred five times in the past half-billion years, during events known as "mass extinctions." The best-known of these events occurred 65 million years ago -- a "really bad day," according to paleontologists -- when an asteroid collided with Earth, sending fiery dust into the atmosphere and rapidly cooling the planet. These "Big Five" events set the extinction bar high: to reach mass-wipeout status, 75 percent of all species need to disappear within a geologically short time frame, meaning that Earth is currently on the brink of the sixth mass extinction.

To determine whether current losses could equal these mass extinction rates, scientists compared recent rates with species die-offs during the Big Five, taking into account presently endangered species. They also looked at the number of species lost in recent history and found that while rates are dramatically higher than expected, the percentage of vanishing species is not elevated -- yet. We already are engaged in a seemingly inexorable march toward barren landscapes and empty seas, a procession fueled by human population growth, resource consumption and climate change, according to scientists.

"The good news is, we still have most of what we want to save," Berkeley paleobiologist and lead study author Anthony Barnosky said. "But things are clearly going extinct too fast today."

The paper, published in this week's issue of Nature, resulted from a graduate seminar Barnosky organized in fall 2009. Together, he and students used fossils to compare extinction rates with more modern data, wanting to answer whether we really are seeing the sixth mass extinction. To make comparisons, scientists used information from well-preserved fossils and modern accounts of disappearing animals, focusing on our milk-bearing relatives: mammals.

Stanford University biologist Paul Ehrlich, who was not involved in the study, said evidence of the sixth extinction is all around. For years, he studied the Bay Checkerspot butterfly on Stanford's campus -- but then, the butterfly disappeared from the campus, more than a decade ago. And, when Ehrlich journeyed to Morocco to sample a different Checkerspot species, he found no butterflies, just "sheep droppings and not one blade of grass." "Anywhere you go around the world," Ehrlich said, "If you're a field biologist, your sites and organisms are disappearing. "

One particularly vulnerable group is marine mammals, according to study author and paleobiologist Charles Marshall, who said that while predictions are dire for our swimming relatives, they haven't yet reached the point of no return. "There really is time to reverse habitat destruction or massive overexploitation of resources," Marshall said. "I love sushi, but I just don't eat tuna anymore. I don't want to be part of the decline of that group."

Scientists say habitat destruction, global climate change, introducing invasive species, and population growth are contributing to losses. "Those four things working in concert are kind of a perfect storm that's setting up a recipe for disaster," Barnosky said. "But people are the ones who are driving this extinction, so we can fix it."

In addition to prioritizing species preservation, Ehrlich suggested starting with caps on human population growth and limiting resource consumption. "We could do something about it, but I don't see that we have the slightest inclination to," he said.


Unknown said...

Mish jumped the shark with that "Corporations are slaves" nonsense he was going on about the other day.

jal said...

Here is some anecdotal evidence concerning employment.
Working in the automotive industry I have noticed a large increase in personnel in both assembly plants and engineering departments.
These positions were filled in October through January. Here is the rub. Plants are hiring at substantially lower costs. Plant unskilled labor is starting at $14 with any benefits being offered. Benefits will be offered after one year of employment but hourly rates will bump to $16. This is a huge difference from the $27 hourly rate and $76 with benefits. Also most of the union cronyism is gone and along with the unecessary labor positions. Skilled labor, electricians, tool makers, millrights, etc are working for $18 per hour.
No benefits for new hires. Before the bankrupcies the skilled rate was $39 on average.
Now for the professional rates. Engineers were making $65K starting to $140K for 20 year employee. Now even though the 20 year employee is common there are much fewer of them, also they must contribute to their health care costs so burden is down substantially. In addition new hires are only receiving offers of $38 to $55k annually. No bennies until after one year of employment. Basically the auto industry has gone the way of steel industry.

p01 said...

ZH reports Riyadh Storm Rising. Please excuse the speculators for having white coat syndrome in the oil markets from the videos.

Fun Friday again!


The Anonymous said...

I & S -- regarding your thoughts on the safety of the US Dollar, doesnt it assume, more or less the status quo, politically?

For example, were there a popular uprising here in the US, and a violent or peaceful overthrow of the govt, its very conceivable the new govt will implement a new currency, making the dollar effectively worthless.

Likewise, suppose even by popular vote, a group comes to power like the tea party. Tea partiers & the like, may not honor certain promises of the govt, especially those that are unsustainable in the long run.

If they start reneging on certain govt promises, why would people continue to have confidence in the govt promise, printed on the front of each US Dollar "this note is legal tender for all debts, public and private"?

Greenpa said...

Fun watching the media/market game today. The MSM is drooling over the fact that "unemployment" has dropped! to 8.9%!! and "job creation" is up!

So, the market, of course, is down. That really seems to be the pattern in the last year - bad/good news ratio 2:1 or worse; market goes up; ratio 1:2 or better; market goes down. hm.... wonders why...

Meanwhile; here, thank goodness, are some more realistic numbers on unemployment, via The Atlantic:

The number of people who have totally given up on finding a job, in ultimate dispair - continues to climb. And, as more of the "work force" drops out- gosh, the number still looking goes down.

Amazing. Great news, too.

p01 said...

Central banks; always having their ninjas ready.

OK, it's not the central bank's fault this time, it's the mentality which I see even in Montreal, supposedly a "green and enlighted" city. That's why I quit using the bike :(

Anyway, the demand destruction continues unabated here, the streets are almost empty even at rush hour time.

This oil shock will be of epic proportions. And most of my friends live in exurbia and have two expensive cars. Some community we can expect to build...

Sorry I`m just so depressed :(


Greenpa said...

Ah, Doom is in the air! The sweet aroma of...

ok, let's not go there.

Doom is on my blog today, too. Someone asked (again) - "what would you do?".

To my astonishment, I discovered I had an answer, of sorts.

Bigelow said...

Thanks to Ilargi for posting Danny Schechter's ‘Will banksters get away with it?’

Blame is expertly applied by our demagogue enemies all the time. To sum the point:

“The case for criminality has still not achieved critical mass as an issue to become a dominant explanation for why the economy collapsed. In fact, it is still being sneered at or ignored.

Finally, tenth, a big problem in my countdown, are the progressive critics of the crisis who also largely ignore criminality as a key factor and possible focus for an organizing effort.”

Schechter made his book into the documentary Plunder in 2009.

Charles Ferguson’s documentary Motorhead –Beat Up Bankers single

Nassim said...

Horses neigh ;-)


I wanted a description that would GRAB your attention :)

Dan said...

This one was, ummmmmmm, clarifying:

Dan said...

Even post-Keynesian Warren Mosler (MMT) is seeing red:

"...With only 58.4% of the population employed it’s a stretch for the Fed or anyone else to declare victory. Yes, there are some long term demographic changes.
Women entering the workforce probably drove this ratio higher,
and an aging population is probably going to drive it lower.
But we’re back to levels from before women entered the workforce. Best I can tell, yes, there are signs of improvement, but overall it remains an economic disaster..."

pasttense said...

"More than 60% of poll respondents supported reducing Social Security and Medicare payments to wealthier Americans. And more than half favored bumping the retirement age to 69 by 2075. Depending on how they are structured, those two changes could eliminate as much as 60% of Social Security's underfunding, according to experts."

Another set of clueless experts. According to these types of experts there are trillions of dollars in Social Security's trust funds. There aren't. There is no money whatsoever. It has all been spent on Bush tax cuts, Iraq/Afghanistan wars, special interest pork and general expenditures.

Bigelow said...

Charles Ferguson’s documentary Inside Job is now out on DVD.
Q. “Why do you think there isn’t a more systematic investigation being undertaken?”
A. “Because then you’d find the culprits.”

Beat Up Bankers

Hombre said...

Ilargi said - "Don't let the markets fool you, look at the situation on the ground. That reflects the future much better."

That's been my mantra for a long time, to friends, aquaintances, etc.! And here at TAE.
Some of these folks around here keep thinking that because there is no stock market crash things are in "slow recovery"! Serious!
I ask them why their son/daughter is out of work, or have lost their house, and/or job, and they are so deeply in debt?
I ask them to look around at the empty houses, the lost plants, the layoffs of police, firemen, and all sorts of construction trades people! I ask them from whence is the recovery coming? Where will be the source of revenue? From what turnip will we extract the blood of a new economic life?
I wish!
I also pine for Santa Clause, a Rapture, and the tooth fairy!

Rumor said...


The outcomes you posit do follow as a reasonable possibility, if those events actually happened. At least in the short term, however, they don't have much possibility of happening, even though it may be titillating to ruminate over them.

EconomicDisconnect said...

Great post.

77Prof said...

Mish (Mike Shedlock):

"California could fire all 200,000+ state workers on forced furloughs and still not balance its budget!"

Let’s try and follow Mish’s logic:

1. Mish argues that public employees are overpaid.
2. Mish also argues that firing all State employees would not solve the State of California’s economic problems.
3. But, according to Mish, state and local finances are completely broken because government workers are overpaid.

Nonsense. The problems lie elsewhere. This is scapegoating.

It is not workers, public or private, who are bankrupting us.

The States are now in deep economic trouble. Nobody is talking about the shrinking pie and why it is shrinking.

What happened? Tax payers are footing the bill for all the overpaid executives at all the bailed out Wall Street firms, at GM, GE, AIG, Fanny and Freddy; for Wall Street’s $140 billion dollar bonuses in 2009 and 2010; for all the billions and billions of dollars in losses they just took; and for all the trillions in losses they will take in the near future.

After all the money has been given away to bail out the rich, of course there’s nothing left to pay for much else . . .

Mister Roboto said...

You know, when libertarian types like Shedlock and Russell go off about entitlements, I always have to wonder why they neglect to mention that the USA spends more on its military than all the other major and medium-major powers in the world combined?

Ilargi said...

Teresa, 77 Prof (Proof?!), Loveandlight,

Yes, Mish has a few ideas that don't square with ours at all. As I said a while back, if you want to ban workers from organizing, you will also have to ban the Chamber of Commerce.

That said, though, I quote Mish -and Richard Russell, and Larry Fink-, because it's very hard to find people out there who understand what goes on with the US dollar, and gold.

Mish really does get that one. And that is so important from where we stand that we'll take the union bashing in stride, difficult as that may be from time to time.

And we can of course only do that because we have faith that our readers know what our position is on union-related issues.


VK said...


Very true. Valid points absolutely. Collapse could come along like a thief in the night and the next day you'd wake up with chaos. Where the ultimate currency is the leaded kind.

The just in time global supply chains are frighteningly dependent on oil & credit. Oil disruptions we can live with for a few months, credit disruptions - oh my, maybe not.

Once the trust is gone, it's gone.

So JIT systems fail, banks shutter, markets close, tanks in the streets & no food in the stores could occur in the span of days. In such a scenario you might have a sack load of dollars but they prove worthless given that food, alcohol, bullets, water purifiers etc could take much higher precedence in the currency food chain.

Scary? You betcha!

Thank the Bernank & party till you can.

Ps-to p01 & anyone who cares, my biggest weight loss was reached 2 days ago and was 55.66 pounds so far after which I proceeded to binge in celebration :O Chocs, fried foods, breakfast cereal etc. Damn, I love sugar :P

Hombre said...

Ilargi - A hat tip! I am with you on MISH.
The only difference is you (and he) understand the complex economic interactions involved and I admit I struggle very much to get even a partial handle on them.
But I can and do read "the street" where I live, which tells me many of the same things.

Hombre said...

@VK - Congratulations on your weight loss! Just don't reduce any of that gray matter. :-)

BTW board, our Big Berkey system is almost 2 years old and going great. For two people.
I re-backpurged the filters at about 15 months and they are still working fine.

Woody said...
This comment has been removed by the author.
Spence Cooper said...

Humm...rather confused by your gold call, Ilargi, and you're one of the more intelligent analysts around.

With Oil skyrocketing, North African countries dropping like flies, and an insolvent EU, I don't see anyone running to the dollar now, why will they in the future as much of the world is already hanging by a thread. Gold has been the de facto safe haven choice throughout history; what makes the 21st century any different.

Additionally, the Utah House just passed a bill recognizing gold and silver as legal tender, with a handful of other states in line to do the same.

I respect your always contrary, and unique perception though, so I watch with extreme interest.

Woody said...


Just beginning the process of purchasing property (in the US) which has no past or future mortgage. Any advice on things to watch out for?


Mark Hodgkinson said...

I was wondering if at the TAE the discussion could include more of the destruction that automation technology is having on the job market world wide. It really seems that until this is fully understood and accept that the jobs are gone for good and are never coming back!
Check this out it's free to read and explains what is really going on with the destruction of the middle class jobs!
Thank you for all the wonderful information you share here with the world. Without it I would be thinking, I was losing my mind to all the official propaganda they feed us!?!?

scrofulous said...

ilargi says:

"Sitting on gold when you're hungry, cold, or thirsty doesn't make a lot of sense. "

And neither did sitting stoney assed broke on cold wet concrete, a thousand miles from home, in the 60's either. I sure wouldn't have minded having even a lowly 1/20th gold Maple Leaf in my shoe at the time:

(Todays' buy/sell on
1/20 oz gold Maple Leaf $73.00/$94.00 Can.


p01 said...

A carb load does much more good than bad, as long as it's only one a week with rice, potatoes, fruit or beans. What you mention there is a once in a year sin ;)

War is coming.
Big War is coming.(youtube video, the usual suspects I quote, and yes, I listen to many many other types of music, but these guys are right on target)

This may be the last war...


ogardener said...

Blogger p01 said...

Central banks; always having their ninjas ready.

Hey man! You live in Canada. You got options eh.

A Fall Guy said...

@ Greenpa

Thanks for the link to your post. I entirely agree with the advice from the elves.

Really, one should do what is in one's heart (tempered with the mind).

Perhaps one of life's greatest challenges is to know what you really want.

People seek advice to clarify what they want to do, and at some level know they must do (since they unconsciously, or not, filter out parts they don't relate to).

It may be part of the human condition, but our minds have been so polluted by messages telling us what we should want (be they cultural, marketing, propoganda, peer pressure, ... or any of the other "system effects" of civilization). Maybe more meditiation would help us tone down the outside noise and listen more clearly to our inner selves. Easier said than done....

snuffy said...

Bob and Linda'

You indicated a desire to meet up.If my all-to-porous memory serves me,you have a shop in Estacada.I would ask one of our moderators to be kind enough to provide me w/your email,and we might get some coffee...I am going to try and make it home in a month',and it might be fun to make it part of "my vacation".[I am terrible w/email addresses]
I find myself in the same situation w/Nassim.For us to meet this summer,I will have to figure out how to do some private communication,outside this public forum.{I love you all,but we have some snakes in the brush here.I am grinding my way thru 1800-odd emails now.

Excellent points in this discussion.What I get here is a "refined"Doom that requires hard thought and consideration before I open my yap.

Bee good,or
Bee careul


Nassim said...

So now imagine how human beings who are totally in the dark about this can be deceived and manipulated by these individuals if they were in power in different countries, pretending to be loyal to the local populations while at the same time playing up obvious and easily discernable physical differences between groups (such as race, skin colour, religion, etc). Psychologically normal humans would be set against one another on the basis of unimportant differences while the deviants in power, with a fundamental difference from the rest of us, a lack of conscience, an inability to feel for another human being, reaped the benefits and pulled the strings.


A while back, you asked why African dictators were so corrupt. I think this goes some way to explaining it. Obviously, Western elected "dictators" are not very different.

The Trick of the Psychopath's Trade: Make Us Believe that Evil Comes from Others

jal said...

Woody said...

Just beginning the process of purchasing property (in the US) which has no past or future mortgage. Any advice on things to watch out for?

Do a lot of due deligence.
Get informed ie.

Don't be in a hurry to part with your money. ( I assume you will be doing a cash purchase)

scandia said...

Have been reading several articles about the " realities " the revolutionaries have to face to redesign and govern society. Already the price of " freedom " is high. What has been won is freedom from oppression. That is the first step only on the freedom road. Success is not guaranteed. Dark forces align against that dream.Many articles suggest that the Arab revolutions are manufactured by the above mentioned dark forces.
One can analyze and rationalize triggers and outcomes and I am doing so. There is, in fact, no deal to make. Conditions demand a restoration of balance. This is an irresistable force, of grand historical proportion. The best path is to co-operate with the balancing act.

@Ilargi, I have been snorting when I read how everybody is caught off guard about possible upheaval in Saudi Arabia. I snort because a very long time ago you wrote about expecting a revolution is SA because of the restless young demographic. You were surprised it hadn't happened already. I recall being quite shocked by your viewpoint.
Ha, back then, as a newbie, everything you and Stoneleigh said was shocking:)

sumacarol said...

To Woody buying property:

My experience is in Ontario Canada but for what it is worth:

1. Go to the land registry office and find out what the previous owners paid for the place, so that you don't pay too much.

2. Check if there are any right of ways for forestry, roads etc, that would limit the ways in which you can use the property.

3. If possible, check who owns the mineral rights under your property, if they are separate from the ownership of the surface rights. This is a big issue in Ontario where lots of people in cottage country discovered that they don't own their mineral rights and prospectors have been staking claims and digging up parts of properties.

4. Talk to the neighbours to find out whatever you can about the area -- it will also give you a chance to find out what the neighbours are like.

5. Try to find out if there are any pre-existing uses of your property that might be hard to get rid of after you purchase. For example, if people in the area have in the past been given access to the property for off-roading or hunting, this would be good to know up-front so that you can decide if you can address it or if this will be a show-stopper.

6. Check if the property taxes have been paid up and, if not, reduce your purchase price accordingly.

ogardener said...

Blogger logout said...

"And neither did sitting stoney assed broke on cold wet concrete, a thousand miles from home, in the 60's either."

Maybe you should have tried the woods instead of the city.

VK said...

Tech vs normal jobs

Google has 24,400 employees.
Wal-Mart has 2,100,000 'associates'

Yet they both have very similar Market caps.
Yet Wal-Mart employs 86x more people.

Between google, Facebook, microsoft, apple, twitter there are around 166,000 employees. McDonalds has close to 385,000 employees + worldwide.

The tech sector (hardware + software) has as a whole lost jobs over the last decade indeed. More with less jazz.

But does more with less mean social stability? Nope.

VK said...

Thing is, innovations even have declining marginal utility. That's why the timeframe required for the next major innovation required turns out to get ever shorter. To the point where major innovations are required in infinitesimally small amounts of time. Without which collapse occurs.

Marginal costs are relentless. The fact we've gotten this far is extraordinary. Party on! For the proverbial rock & hard place await.

Hombre said...

@Green Man Potter 9:11 - During the decades of the 80's and 90's I experienced at my workplace the evolution of automation and the resultant loss of jobs. Of course the corporate "productivity" percentages looked better with each advance in the manufacturing processes, just as jobs were being eliminated by multifunction CNC machines and "robots."
This is a big part of how corporate structures are predators of jobs, and they will grow and expand even as job losses occur up and until the time when full automation is in effect.
Then, they simply move the plant to a more favorable wage market and hire locals cheaply to push the buttons. Presto, the previous town is devastated and the "emerging market" begins the same or similar process.
The decisions made during all these manipulations are made by corporate board members (non-elected of course) and are completely isolated from the political system. The fact that this rather dictatorial economic system is THE MOST IMPORTANT FACTOR EFFECTING PEOPLE'S LIVES seems lost on most.
So... voters went to the polls each cycle to swap repubs and dems for decades, meanwhile the major factors of the their lives, and the lives of their towns, cities, and country were being decided--not by elected official--but by corporate board members, bankers and other powerful related forces.

Of course this is just a small and rather provincial economic factor in how we got to the present dire predicament. We humans are only smart enough to get ourselves into deep trouble on a little planet with energy and space limitations. We cannot quite envision the whole so we flitter around wasting energy and tearing up the place, which will likely lead to our own undoing.

Kelly said...

If I was going to buy in rural Ontario, I would be checking to see if nearby properties had contracts to install the large windmills. I would not want to live real close to them.


jal said...

Hombre said...
"...but by corporate board members, bankers and other powerful related forces."

I think you forgot the most influential ... Charted Accountants and the Legal profession.

Most people cannot do math or read legal papers/regulations and must relly on those "experts".


Spence Cooper said...


Interesting - Faber agrees with your "contrary" USD call.

"Speaking with Tom Keene on Bloomberg Television's 'Surveillance Midday' on Thursday, Faber said a correction period has begun where all markets will go lower, the dollar would rally and bonds would rally."

Anonymous said...

@ jal

Your anecdote by Rocky11 on wage cuts confirms the story I relayed earlier on union wages (and benefits) setting the benchmark for non union wages. The unions were all that stood in between the middle-class and the descent to permanent minimum Wal-Mart prison wages.

Here's a chart plotting the two. It doesn't mean they are cause and effect, but it does mean their fates are linked.

The faux dichotomy of the political 'parties' is mirrored by the Labor vs Management kabuki.
Personally, I've always been fascinated by employee owned companies. Like Johnny's Seeds of Maine, whose products I buy.

It's right there in their logo, it says: An employee-owned company

Someone like Mish, who I regard as savant in limited areas of finance, but a complete moron with the Rest of Life, will never mention, much less support the idea of employee-owned companies because frankly, he and his libertarian ilk are just not smart enough hominids to think outside their little mental gulags.

He and the rest of the limousine libertarian adolescences are blinded by their under developed quasi evolved partisan ideology and it literally makes most of his brain worthless for any real enlightenment on any higher order of thinking other than the lowly task of 'asset management' or some other such non-sense 'occupation'.

An employee-owned company is where Labor IS Management and if things go sideways, there's no one to blame but the face in the mirror each morning.

The 'worker should control the means of production' was bastardized and distorted and propagandized over history until no one seems to remember that it is true, but not on the scale of nation-states, but on the scale of enterprises, like Johnny's Seeds.

But traditional organized Labor and organized Management are threatened by employee-owned companies. Their petty little fiefdoms of control are irrelevant on the scale of an employee-owned company.

It is in the interest of both forms of corrupt organization ideologies that the concept of workers owning their own companies never see the Light of Day.

And they have done a great job down through the years of preventing just that.

Half hearted 'employee' profit sharing is a fuckingjoke.

Some crumbs from the table with no real decision making say in matters.

A let's not forget corrupt union management driving their membership off the cliff like herds of Buffalo with demands not grounded in the Reality Based Community.

Share holder 'rights' are also a fuckingjoke.

The CEO and board members hollow out and loot the company, drive it into the ground, then write themselves "Marie Antoinette" bonuses and golden parachutes and the Stockholders sit there with their collective fingers up their collective asses. 'Oh pleasee help us against the Management Meanies they bleat as their purses are drained. hahahaha take that fools!

Great Plan, it's worked out rather well in recent times, hasn't it?

H. s. Sapiens are pitiful excuses for 'higher life forms'.

And as we shall see, thank God they really are self limiting, just not in a conscious intelligent deliberate way :>)

Unknown said...

Seriously, you are quoting Mary Meeker in your article!!!! Mary should be in jail pumping internet stocks in 2000 when she worked for Morgan Stanley. She was pumping while her company was dumping.

sensato said...

Kelly said: "If I was going to buy in rural Ontario, I would be checking to see if nearby properties had contracts to install the large windmills. I would not want to live real close to them."

If I was going to buy in rural Ontario, I'd avoid communities averse to distributed renewable energy projects such as wind turbines. As Stoneleigh has pointed out again just recently, about 85% of our grid reaches the end of its lifecycle within the next 10-15 years.

p01 said...

A Walk in the Woods said...
"Someone like Mish, who I regard as savant in limited areas of finance, but a complete moron with the Rest of Life"

Thank you for puting in elegant words what I was trying to articulate in my head.
I also love the "limousine libertarian" stuff. I thank you for some of the best comments ever.


Ruben said...

I would try to get a house beside a wind turbine--the easier to reach it with a large set of jumper cables....

kelly said...

Oh, god - another 'strong dollar weak gold' screed.
I got gold and more silver when these screeds were being handed out like halloween candy.
Tripled the investment with a couple of good stock picks to back up the physical.
Gee, I wish I'd just stayed in $$ like they said. Then at least I'd have a third of what I now have.
This idiot blogger needs to check out the charts. I can't believe anyone outside the MSM is dissing PM's with the price action last year.

Yeah, listen to Mish. Sure.

Wyote said...

@ Walk in the woods:

Good rant! I too like the employee ownership model. A quick google produced this nonprofit site page:The Employee Ownership 100: America's Largest Majority Employee-Owned Companies

I have used Johnnys for a long time but recently switched to Fedco, a cooperative organized outfit that has better prices, less glitz, and seems much more grounded (a good thing for a seed company)in it's attitude toward the consumer. You may want to check it out. One thing I really like is their small quantity options. Who really needs 250 tomato seeds anyway?


Nassim said...

Guest Post: You Want Small Business to Start Hiring? Here's What To Do

A Walk In The Woods,

Everyone knows what to do if small business is to grow organically. That has never been the problem. The problem is that big business - which has no vote - has the governments everywhere by their cojones.

There are some amazing things going on in the US stock market (I have never owned shares in the US), Apple's share price is 10-times higher than during the dot-com boom and 40 times what it was when I used to buy their computers. As an outsider, it seems to me extraordinary.

Wyote said...

Oh, I guess I can't post 2 links in a comment. Anyway, here is the The National Center for Employee Ownership page. They claim (May 2010)as many as 25 million people in the US are employed by companies organized with at least 50% employee ownership of stock.


Anonymous said...

Employee owned companies also have a unique perspective on issues of automating the work place. Not as likely to introduce machinery that would put them out of work, only do it if it employs the same amount of people.

Automation is a product of cheap oil. So is Just-time-manufacturing. Both will die soon, along with their soulmate globalization.

Cabot Cheese of Vermont is a dairy co-operative, same general idea of the people having a very vested interest in the success of the venture. You see someone goofing off at work, you fix it, it comes right out of your bottom-line.

We will be lucky if we only backup in time to say, the 1880's or there abouts. I'm reading up on tails from that era.

Sail power for fishing and commerce, they did it once upon a time, we'll see if we, as a species, still have 'the right stuff'.

Bigelow said...

97% of All U.S. Mortgages are Backed by the Government

Bigelow said...

WSJ article says the $’s demise as world reserve currency will be over in ten years. Only off 8-10 years.

Why the Dollar's Reign Is Near an End -WSJ

“In fact, all three pillars supporting the dollar's international dominance are eroding.

First, changes in technology are undermining the dollar's monopoly…

Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan…

Finally, there is the danger that the dollar's safe-haven status will be lost.”

The GlobalEurope Anticipation Bulletin created its own US dollar index of euro, yen, riyal and yuan to more accurately measure global currency balances. The index shows a 20% decrease over 5 years in dollar value compared to the four currencies and 1% weakening in just the last two months.

The reflexive Flight to Quality into the US dollar during violence in the Arab world hasn’t happen alot this time. Gold went up though.

el gallinazo said...


"And neither did sitting stoney assed broke on cold wet concrete, a thousand miles from home, in the 60's either"

Are you the reincarnation of Otis Redding? Were you sitting on the dock of the bay? Do you have nightmares about fog? Do you get royalties as a reincarnation? I understand that they passed debts on to reincarnations in ancient China. But now the Communist party dictates to the celestial sphere who can be reincarnated and where. Now that' progress for ya.

Re the outraged holders of PM's

Stoneleigh's thesis is quite simple. PM's will continue to go up until they don't. When really TSHTF, many of the bigger boys are going to have to sell their gold to meet margin calls and most Joe Sixpacks are going to have to sell their gold to fill their fridge. Then we Gallinazos will sweep down from our perches and "buy the dip" (after plucking out the eyes first. (I like to stay in character :-) Of course, if extend and pretend lasts until the final blast to be viewed from the restaurant at the end of the universe, all of this won't happen. Stoneleigh's advice - only buy PM's if you are reasonably sure you can hold them for at least a decade, and only as a smaller percentage of your total asset base.

Greenie said...

This is hilarious. I read today's TAE post to the end, and saw this.

Unknown said...

Reading AutoEarth and other like minded sites it becomes apparent that two diverging outlooks are prevalent.

The 'ol inflation/deflation schism/debate again. It's like the energizer bunny, it keeps going and going.

Frankly though, I can't see the U.S. stopping QE until the US/USD implodes. Hasn't Ben given his intentions away? Do you expect a tiger to change its stripes. As such, there'll be no deleveraging as long as Ben is on the scene. U.S. Congress won't even remotely make the necessary cuts to balance the budget. Instead the U.S. will keep doing what it presently does.... until the day everything goes to hell in a handbasket.

Based on the above, I can't see the great unwinding/deleveraging that AutoEarth premises its predictions of the ultimate, killer deflation on.

Oh, to be sure... things are getting worse and that won't change. Eventually things will blow up. At that point it's like trying to imagine ...what came before the big bang.
Sure there's gobs of theories (weird, 11 dimension string theory equivalent financial theories) ... but really, who knows what will happen after the USD breakdown.

At some point though, after that initial confusion, barring a nuclear war or some such cataclysm, Currencies will re establish themselves. SDRs, Gold Standard, who knows.

Until then though, I can't see PMs tanking. There's just too much money printing going on.
I'm kinda with Marc Faber on this.

Agree though, get physical.
Not necessarialy PMs... but something tangible, something other than paper IOUs. Can't see paper as having a bright future.

Dan said...

@ Mailon...

It is a classic DEATH SPIRAL:

p01 said...

You mean you don't use Firefox with AdBlock Plus? :)


Jason said...

Anyone here reading the good Archdruid?

This was a quiet little article in yesterday’s Wall Street Journal commenting, in measured tones, that for the first time in living memory an international crisis has sent investment money running away from US dollar-denominated investments rather than toward them.


Interesting, interesting.

justaguy said...


Thanx for the adblock-plus plugin suggestion. Life can get better. :)

Biologique Earl said...

I guess it is time to change the old political saying "a chicken in every pot" to arsenic in every pot.

In addition to its extreme toxicity arsenic is believed to increase the incidence of bladder cancer.

Please see:



p01 said...

From the "Power to the People!!11" department:
Power to which one of the people?

And a (dim) glimmer of hope:
In New Food Culture, a Young Generation of Farmers Emerges


acomfort said...

Green Man Potter said...

"I was wondering if at the TAE the discussion could include more of the destruction that automation technology is having on the job market world wide."

Some thoughts:
What if payroll taxes followed the job instead of following the worker?

In other words:
What if taxes were based on the amount of work done instead of taxing the person doing the work?

In other words:
What if a machine doing the work of 10 people paid the equivalent taxes as 10 real people doing the same job?

Wouldn't this be more equitable for man versus machine?

Couldn't the taxes per job be lowered significantly making it more economical to hire people and less economical to use a machine?

Should the a machine doing the job of one person help pay for the retirement of one person? (SS)

Should a machine doing the job of thousands of people pay the payroll taxes of thousands of people? I'm thinking of the farm combine as it would take .

Could a job replacing tax be implemented fairly? I think yes, but that is another discussion.

ogardener said...

Blogger Jason said...

"Anyone here reading the good Archdruid?"

I read it. It was good.

p01 said...

Behold the power of the markets:
Arab revolution could trigger foreign investment boom.

I really need a quick smoke of what stuff he's having. And then we can all watch a game on TeeVee while the money machine hums in the background.


Supergravity said...

"Once it becomes clear, as in when the markets start falling for real, that there will be no pensions for the boomers and no jobs for their children, we’ll see people in the streets all over the western world too. And the US dollar will be the first flight to safety haven."

If the US itself was to somehow destabilise sooner than other dying currency powers, and had violent protests or persistent riots on the streets, so being publicly acknowledged as uncreditworthy (by the public), the USD might not be considered a safe haven for long.
Wouldn't this flight to safety only work to maximal effect if the US itself was not suffering similar unrest or percieved danger thereof at the time? But we're just about there, I'm amazed the public hasn't stormed the WH yet.
So then once it becomes really clear, as in when the markets start falling, what's going to prevent identical riots in the US destroying this perception of a safe haven?

mikel paul said...

@p01 (Paul)

you wrote....(the quip of the day).
I really need a quick smoke of what stuff he's having. And then we can all watch a game on TeeVee while the money machine hums in the background.

Butch Cassidy..."Who are these guys"?
Historically (and an incomplete list) is as follows: Chili, Honduras, Argentina, Iran, El Salvador, now Egypt, Libya, soon to come (fill in the blank ______).

Friedman's wet dream is alive and well. So is humanity's nightmare.

I suggest you stay away from his chosen herb. It kills human empathy, which you have and I would argue is why you are here. And are needed to continue being.

These guys, whoever they have been or are, can't stand to be connected. Eventually they will be...

I am at a loss to even find a word that can adequately descibe these '!@#$%^&**()'s.

Supergravity said...

@IM Nobody
One more thing on ponerology, I wasn't advocating any unachievable situation yet. I didn't mean the "ruling class" is already so oversaturated with sociopathy that it must be prevented from ruling at all, the vast majority of rulers are not grade-A sociopaths, but a larger than average minority is expected to be. It should be an achievable ideal to implement some type of screening measure in order to minimise rule by defined sociopathic persons in governance, real progress can be made there.

There's advanced behavioral neuroscanning equipment being introduced to screen the public for 'malintent', it should be possible to adapt such behavioral scanning for detecting intenser sociopathic intent in government bodies and agents with a decent success rate and few false positives. Such a system might detect most of the nasties within a month if installed in the proper places, congress, courts, state department, fusion centres, WH. The suspects would then merely be dismissed from public office on grounds of mental incapacitation/ethical dysfunction.

Hierarchy, government, rule, in some form, may be the default state of human existence, if only by the hierarchy of ideas, so that the understanding of power relations becomes a scarce resource between people, this creates certain lesser evils necessary to enable effective rule. However, I suspect that the structure of hierarchy in any configuration is fundamentally corruptive to the verity of ideas, including the idea of the common good, which is problematic, since this yields the leverage of lies. Perhaps all political power exists in a bubble, which is the leverage of lies. You'd see how sociopaths may enjoy an innate advantage there.

People, being moral actors, cannot be ruled by those who are incapable of knowing morality.
Any attempt to effect such a situation will lead to ruin or revolution. Some might say that people are not naturally moral actors, but to hell with them. No structure of hierarchy, especially government, can ever be the single source of human morality, probably. Certainly, the geometry of hierarchy is a function of Gravity, and nothing else. But there ought to be more equitable configurations than just the same old pyramid with the amoral bastards right at the top.

Nassim said...

Never has an imported concept been so jealously guarded by ruling families and political elites in the Middle East as that of the nation state, together with the holy grail of international relations theory, state sovereignty.

A Middle East without borders?

This is undoubtedly true. However, the idea of one massive country is a nonsense. Furthermore, putting Nasser's picture there as a symbol of unity is a joke in bad taste - Nasser invaded Yemen with 50,000 soldiers and was beaten by tribesmen who would not fight a Soviet-style engagement but preferred, like their cousins in Afghanistan, to pick off the Egyptian soldiers one by one. He also built an airbase as close to Saudi Arabia as possible so as to be able to threaten them.

IMHO, if they seriously want unity, they should start by allowing imports from their neighbours at zero tariffs and without bureaucracy - not at tariffs higher than they charge the Chinese and Germans as at present. Even discussing political unity before economic unity is a farce. However, if they do liberate private business (I am not talking about selling state assets to foreigners), they would be amazed at the transformation of their pitiful economies.

Nassim said...

Let me tell you a revealing true story about Nasser. He was from a modest background and was bad at school. When he attempted to enter the military college, he was rejected. He went to see an influential Pasha (i.e. Lord), Ibrahim Kheiry Pasha, to ask him to help him enter this college. This Pasha took him by car to the military college and met the director and requested that Nasser's application be reconsidered. He was accepted.

Later, when Nasser became the dictator of Egypt - the plotters had used a popular and respected senior officer (Muhammad Naguib) to be the face of their coup d'état and put him under house arrest for the rest of his life - he took the land of all the big landlords - without compensation just by presidential decree. The Pasha who had helped him into military college became almost destitute. Someone asked Nasser why did he do this to the man who had made it possible for him to become president. Without a moment's reflection, Nasser replied that this Pasha had him sit in the front of the car when he took him to see the director of the military college.

I am mentioning this example as it demonstrates pretty clearly the characteristics that articles on ponerology mention.

Hombre said...

From: Of Two Minds - Food for thought. A critical examination of so-called progressive thinking.

"There is absolutely nothing Progressive about this rapacious "growth" of consumption based on stripmining the planet and borrowing from our future."

scrofulous said...

ogardener and El Gal

Looks like I touched a golden nerve, with you two at least.

Gardener guy ,all there was, at the time, other than highway was woods ... the city was what I was trying to reach:) ( By the way for what it is worth, I grow all my own vegatables except rice).

El Gal, talk to Stoneleigh and ask her about the size of the gold market in comparison to the bond market. If there are sales in the tiny PM market by those wishing to do any covering they will be more than made up by any of us, spare dollars in hand, waiting on dips.

If you have not bought even the pitiful 5% of your 'disposable wealth', that your everyday humdrum conservative umbrella carrying financial advisor would recommend, then when the dollar (US that is) sings it's swan song and dives into the deepy deeps then you will be just plain out of tortillas.

ogardener said...

Blogger logout said...

ogardener and El Gal

"Looks like I touched a golden nerve, with you two at least.

The buzzard and I have some things in common like "The Dock Of The Bay" for example.

ogardener said...

Blogger Nassim said...

A Middle East without borders?

I'd like to see the entire planet without borders.

p01 said...

ogardener said...
I'd like to see the entire planet without borders.

Good luck with that!


scrofulous said...

Anybody here tired of the term, resilient communities?

I do hope so!

The phrase,'Resilient communities', along with the word 'networking' are two items that really git up my wick.

As soon as I run across these two self serving means of saving one's ass, I tune out. Possibly they are used with the best of intentions but, IMO,like with the best of intentions they are paving stones to the road to hell.

Think about it.

Supergravity said...

Not to hell with those who argue that society is a constant struggle between prosocial and antisocial forces, I'd agree wholeheartedly, but, as dysfunctional government has been shown to be more conductive towards antisocial behaviour than even anarchy could be, its certain that inductive governmental psychopathology can indeed force otherwise moral people to act immorally, inhuman, whereas it has yet to be proven that any form of governmental hierarchy can be used to create morality where none exists.

That Nasser story could be some effect of narcissistic rage or narcissistic injury, several disorders might fit, but its a bit worrysome that sociopathy might be the newest social stigma.
Compulsive psychodiagnostic hysteria can lead to the mispathologization and unrightful persecution of almost all human behaviour, such as is attempted in the DSM-V.

Lastly, if all sociopathological misfits in government or business were to disappear tomorrow, it wouldn't actually improve things much at this point. All the current dilemma's of energy, money, resources, would be essentially unchanged, but political reform and more humane distribution of resources might become easier if given time. Seriously, systemic sociopathy might only cause about 10%-20% of societies problems/misery in total, more in times of mass hysteria. The rest is normal human folly, and there may be no cure.

Nassim said...

The rest is normal human folly, and there may be no cure.


Yes, it is clear that there is no cure to human folly. I am using Nasser as an example of how history gets rewritten and people gladly go along with it.

The fact is that this guy started wars which he lost and lost wars (1967) which he did not start on a grand scale. All of this while claiming to be a military "expert" as he was originally an army officer. He destroyed the real middle class while pretending to be helping the poor. I can understand why Napoleon is so famous - he did win a lot of battles before he ran out of money. Nasser never won anything. He was just a loud-mouth who didn't allow anyone else to have a say on pain of torture. When he died and they buried him, the local sewer burst and they had to relocate the coffin and the Egyptians joked that even the earth did not want to have him.

In the Middle East, there are two, younger, generations that almost venerate Nasser and who have absolutely no idea of what he did and what he did not do. I almost despair in perversity of human nature. :)

Stoneleigh said...

The Anonymous,

For example, were there a popular uprising here in the US, and a violent or peaceful overthrow of the govt, its very conceivable the new govt will implement a new currency, making the dollar effectively worthless.

Currency reissue is always a risk, but it wouldn't happen overnight. It would take several years at least IMO to get to that point. As I've said before, cash in general and the dollar in particular are not a long term bet, and they are not risk-free. They are simply the lowest risk in a sea of worse risks for the next while. Cash is a means to ride out deleveraging.

At the point where one can afford to purchase hard goods without debt, then that would be the way to go next. For those who can afford to hold cash and hard goods with no debt now, then that would be the best way to hedge against economic disruption. Most can't afford to do that though.

Stoneleigh said...


I can't believe anyone outside the MSM is dissing PM's with the price action last year.

That was then, this is now. Extrapolating trends forward is dangerous. It's better to look where we are going than where we have been. We at TAE think we are heading for massive deleveraging, which would undercut price support for almost everything, at least in the short term. As we've said, gold is no panacea. Check out the primer A Golden Double-Edged Sword.

p01 said...

Brent Over $118, Crude Passes $107, EURUSD Above $1.40, Futures Up, Silver And Gold At Highs, Dollar In Flight To Safety Freefall.

Wiseguys at ZH not having a clue what this means: Priceless.


scandia said...

Its looking like the newly elected coalition in Ireland is going to screw the voters. Why don't they default and tell the IMF to bugger off?! I must be missing some key information?

Ilargi said...

New post up.

Financial Threats to Power


trichter said...


It's not working I'm afraid