Posted By thestatedtruth.com on February 3, 2010
Feb. 3 (Bloomberg Multimedia) — The U.S. may lose 824,000 jobs when the government releases its annual revision to employment data on Feb. 5, showing the labor market was in worse shape during the recession than known at the time.
Click here for a Bloomberg Multimedia interactive visual analysis of the economy’s job losses.
Posted By thestatedtruth.com on February 2, 2010
It may be several-fold that we approach these issues. China probably expected much smarter and less partisan cooperation within American politics to enable a recovery; at least one worthy of the term. Even though they intentionally outfoxed us at almost every turn in terms of trade negotiations (as we’ve often denoted that in recent years, along with comparisons with what the United States is doing now versus Japan in the so-called ‘lost decade’), I doubt that China would commit what they have just to ‘buy’ their position in the world; especially since that also meant erosion of best customer status for their myriad of produced goods. However, it may be reasonable to say that China wins something by default, based on the history of countries that lost the edge in the mercantilist history of marketing; as none were able to maintain their leadership in projecting economic or military power abroad thereafter. Years ago Great Britain of course; and more recently look at what happened to Japan after the projected ‘crash’ there so many years ago (from which markets somewhat recovered; but image and prestige in the world never really did).
Just as Japan worries today about an aging as well as really financially-unsustainable economic situations (aside a mere lateral behavior for the most part); so too must the U.S. be concerned not only about debt service for the future generations to bear, but even the inability to launch new initiatives that galvanize a Nation with enthusiasm as new innovations spin-off from such projects (to wit: the ‘moon’ cancellation hits much the same nerve here, as did the Supersonic Transport cancellation years ago; when a Nation like the United States stops striving to go higher and faster and better too; it is disconcerting, and is a sign of erosion in vision; not to mention that no Nation really advances smartly, but falling-back on an attempt to underwrite service industries; and provide incentives for depreciating or dubious assets, rather than funneling funds for the future of mankind, and thus industry and eventually technologies and advances it is impossible to even contemplate as of yet).
Yes we’ve addressed these issues in the past; and yes it’s impossible to entirely call for prosperity in the 2020-2030 timeframe as we have suggested feasible. However it is also known from history that while you can’t project that far ahead with accuracy (it may be that every past President would concur), it can be said as we have, that this era of focus on an aging society (which politically demands entitlements untrimmed, as well as pulls essentially subsidizing funds from a hard-pressed younger segment of society), along with ‘Federal Paternalism’ (as we’ve dubbed it) that suppresses as it superficially seems to stimulate initiative, now has ownership of a deficit that’s very difficult to envision being grappled with. While we’re not yet willing to contemplate an approach to ‘bankruptcy’ for the United States (though Gold bugs called for that for a couple decades perennially, and even we have said the debt will eventually be repaid in a sense with depreciated Greenbacks); it’s reasonable to say that this President as well as this Congress are now ‘boxed-in’ with relatively little maneuvering room. That means initiative and innovation shift almost solely to the private sector, which leads in all cases best, but usually with grants or underlying projects that allowed innovation, or in many cases provided the impetus through research and development for those (whether in space, in computing, with the internet, or even in drug development and medical research). To wind-down all these areas is to put the U.S.A. into reverse. It’s why this comment tonight; as aside ‘security’, the focus ought to be not only deficit as well as debt containment (in a serious way), but not simply trying to ‘muddle through’.
Solutions . . .are limited; however let’s consider a couple. After all to do otherwise is a bit reminiscent of that cartoon that shows a well-dressed man and woman going up on an escalator that suddenly comes to a halt. Instead of simply walking forward they cry-out for help. After all, they’re not stuck in an elevator, but on an escalator. Trying to buy-down debt without enhancing the citizenry’s earnings ability overall, and quite substantially at that, is like crying out for help on an escalator versus just climbing on up to the next landing. Politicians are acting as-if they were in an elevator so needed to get assistance; and behaving as if they can ‘money-print’ their way to salvation. It’s not feasible, even with the stock market moving higher (which actually gets riskier as it proceeds). Historically the market almost always runs into trouble when the rescue actually results in recovery by the way, which means higher interest rates prevail. As that occurs investors stop chasing yield in equities and an equity unwinding occurs.
But as for solutions (to the case at hand); whether it be a flat-tax; whether it be fees or a true level-playing-field trading policy as we’ve advocated for a generation now; or a realization that (for all but the senior or near-senior citizens) entitlement reforms are not a choice but a requirement if we’re to channel funds to wind-down an overall debt structure that is unsustainable even if we recover smartly; something must occur. To us it seems that merely raising taxes and fees on everything in life won’t muster real mainstream support; and as the financial media generally focuses on progress (great where that actually exists, limited as it may be); they have forgotten the derivatives or other holdover and even ongoing (foreclosures and commercial property declines) as are likely to ruffle the edges at minimum of this environment acting as if problems are behind. They are hardly even being worked-through; so far we’ve avoided the abyss in a sense; but not much more (not even reform) has really been generated so far.
More at www.ingerletter.com
Posted By thestatedtruth.com on February 2, 2010
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This column was in the Financial Times by Mohammed El-Erian, chief executive of Pimco, and someone who qualifies to be introduced as one of the smartest men on the planet. It is short and to the point. ( www.pimco.com)
Posted By thestatedtruth.com on February 1, 2010
“Those who stand for nothing fall for anything.”
           – Alexander Hamilton
Posted By thestatedtruth.com on February 1, 2010
On the opening MarketCast this morning I emphasized oil strength; not just because of Exxon-Mobile, but because of the growing Persian Gulf tensions. On Sunday we’d become aware of several stories (most have heard it I suspect by now) which have at least a slight correlation to Iran’s constant jockeying to ‘buy time’ for their nuclear and other ambitious programs. This complements their aggressive stance against not just their neighbors, and their own people; but their refusal to return Uranium to Russia. In a sense Western powers likely realized that Obama ‘carrot diplomacy’ hasn’t gained a bit of ground with the 7th Century mentality of the ruling despotic regime that most of their own people would like to retire to the dustbin of history.
Likely this is a reason Teheran (typical old school thinking) looks for an international aspect to their problems; so as to galvanize dwindling support among their own flock. Actually they may not be successful in that quest, but they are trying. On February 11 the opposition has scheduled a protest rally, and has released a statement saying in no uncertain terms that what their government is doing is “un-Islamic” and also totally “unconstitutional” based on Iran’s current constitution. The response from the radical leadership has been: ‘just wait until February 11, and we’ll show the West a shock so severe they are unprepared’. Nobody knows what that means, but clearly they aren’t at all amenable to civilized negotiations or proper behavior. Plus they hanged one of the protestors today (a 20 year old innocent kid) and a 37 year old protestor, with 16 others potentially facing similar fates. It’s they the leadership that needs stringing up.
Well, according to sources several things are in the works by Teheran to throw-off a growing acquiescence to sanctions or other restrains of the revolutionary extremists. One is a threat against not just Israel, but Qatar, Bahrain, the UAE and the Saudis as well. Oil installations are being reinforced, and 2 Aegis Class advanced USN cruisers have augmented our Fleet in the Gulf (these have Standard 3 missiles which are the newest and more effective against some, but not all, missile types). The US is using a ‘public relations’ approach to let Teheran know that we are preparing for them; as it seems the US is also saying we’re not only dissuading Israel from action, but going at it in a defensive posture. No military leader would fail to have an offensive capability if risks are truly rising; so we presume that strike forces (both seaborne or land-based) are being prepared just in case. Given our Forces fighting on both sides of Iran; how do we have any choice but to be prepared with multiple contingencies at the ready?
Clearly we are preparing; that’s why something like 90 US and NATO warships are in the region now. At the same time, another story has leaked suggesting that Iran has a plan to have Hezbollah invade northern Israel from Lebanon and overrun one city (Nahariya) with shock troops, so that the Israel Air Force couldn’t respond given the population. I would think that is bravado on the part of the terrorists in Lebanon, and would invite their total devastation by whatever it takes; except that if coordinated in a conventional or nuclear attack on Israel, there would be a certain amount of real risk.
More realistically, Iran should realize by the U.S. putting a defensive umbrella over the area (this has been ongoing for several months, only the news has it freshly by the way), any attack by Iran on any sovereign nation in the region would be an act of war, and bring about annihilation of Iran’s military capability, trying to avoid most of the major population centers, which are generally opposed to their own regime. And if Iran were to fire a missile (even though the U.S. assumes they’re not that far along as of yet) and it was intercepted; that too would bring about a strategic response, since it would be clear what their intent was, and they wouldn’t have any second-strike depth.
So where does that leave them? With the 3rd alternative, which is also a story making the rounds everywhere but the U.S. This story holds that Iran will ‘content’ that grants of property to Great Britain by the Shah (Embassy grounds and a separate Consulate property) were not fairly given; and use that as a pretext to try another hostage-style seizure of the British Embassy. That would shift the focus away from nuclear program worries, and start one of those never-ending sagas. No idea if there’s any merit to the story; but if so, good thing that it leaked out now. Royal Marines can be prepared and Embassy staff can be evacuated to London if deemed appropriate as a precaution. It is also conceivable that Britain could suspend relations with the Islamic whackos and in a sense encourage normal people to pursue overthrowing the despotic regime. As the regime knows their support is eroding daily; we really feel compassion for regular people who (those not already arrested illegally) risk their lives to restore normalcy.
For this reason (actually even last week as Oil slipped a bit) we forewarned that any oil slippage would be temporary and nobody should get negative just as the pattern broke a bit, which was probably due more to the Shanghai market at the time than to anything else. And today’s rally we think has more to do with Iran than yet-another of the Islamic rebel strikes on oil facilities in Nigeria. Here in the U.S. demand remains a bit constrained; and that’s why large and independent refiners are not responding on the upside (yet anyway; though increasingly cheap with relatively low risk) while large international oils certainly are. In a conflict with Iran, the terrorist regime would likely be attempting to mine or block the Straits of Hormuz, while the US Navy opposed it.
One of the keys to realize that tensions ‘really’ are mounting, is the disclosure that as this unfolds, the U.S. is helping Saudi Arabia develop a force to protect all petroleum installations. A couple months back we talked (before it became public) about Yemen not only being infiltrated by al Qaeda, but by Iranian-backed rebels and offshore boat forces, which gradually were confronted by the U.S. Navy (still not disclosed). Noting that a couple Saudi border guards were killed when Shiite infiltrators tried to move in the direction of a major oil facility, we thought that was the target; not Yemen itself of course. It would seem Washington reached the same conclusion. But before saying there is nothing of interest in Yemen; there is. It could be the terrorists first blue-water port, and that simply cannot be permitted. Very handy that so many warships (even from Russia and China) are in the area, ostensibly to fighting Somalia’s pirate boats. This could put a new spin on the term ‘mission creep’, and reveal the true colors of a few countries whose commitment to fight Islamic terrorism is a bit tough to pinpoint.
At the moment, we go on heightened ‘military alert’ for exogenous events that may in due course have impacts on markets, and more. While Feb 11 (if that date actually is meaningful) is a ways off, there is no telling what the Islamic Republic might attempt preemptively, if they see that their jig is essentially up. However, we’re sure (actually believe we know) that the United States would not ramp the rhetoric unless mostly all short-term preparations had been completed, rather than announce their initiation as superficially is in the news. As noted before, preparation has been ongoing awhile. It is the reversion to ‘official’ harder-line politics with Iran that, rightfully, is occurring.
Posted By thestatedtruth.com on February 1, 2010
When in doubt: create another derivative. Insurers now want to be protected against people living longer. According to The Wall Street Journal: “Eight investment banks and insurers have come together to develop an organized market to help them spread the financial risks and costs of an aging society more widely. The Life and Longevity Markets Association, which launches Monday, aims to take instruments known as longevity swaps into the mainstream. Most of these deals have so far been private, over-the-counter transactions between insurers and reinsurers. The initiative, which involves Deutsche Bank AG, J.P. Morgan Chase & Co.’s J.P. Morgan, and Royal Bank of Scotland PLC, as well as insurers Axa SA, Legal & General Group PLC, Pension Corp., Prudential PLC and Swiss Re, aims to replicate the success of insurance-linked securities markets. These enable insurers to pass on some of the risk from unforseen events, such as natural disasters, to outside investors like hedge funds.” Seems fitting, since hedge funds bought into the supbprime mortgage market near the top, why not see if we can have them hold the bag one more time?
Posted By thestatedtruth.com on January 31, 2010
U.S. Beefs Up Military Presence Off Iranian Shores
Sun, 31 Jan 2010 08:50:31 GMT
In addition to imposing new sanctions on the Tehran government, the US has reportedly begun beefing up its military presence and war paraphernalia off the Iranian coast.
US military officials told AP on condition of anonymity that Washington has taken silent steps to increase the capability of land-based Patriot missiles on the territory of some of its Arab allies in the Persian Gulf region.
Patriot missile systems were originally deployed to the Persian Gulf region to target aircrafts and shoot down missiles before they reach their target.
According to the officials, who were expounding on the classified information in a Sunday interview, the US Navy is also upgrading the presence of ships capable of intercepting missiles.
The officials claimed that details are kept secret, because a number of Arab states fear Iran’s military capabilities, but at the same time, are cautious about acknowledging their cooperation with the US.
Posted By thestatedtruth.com on January 31, 2010
U.S. speeds up arms buildup with Gulf allies
Initiatives with Arab nations, military aimed at thwarting Iran attacks
By Joby Warrick
Washington Post Staff Writer
updated 3:37 p.m. MT, Sat., Jan. 30, 2010
DUBAI, UNITED ARAB EMIRATES – The Obama administration is quietly working with Saudi Arabia and other Persian Gulf allies to speed up arms sales and rapidly upgrade defenses for oil terminals and other key infrastructure in a bid to thwart future military attacks by Iran, according to former and current U.S. and Middle Eastern government officials.
The initiatives, including a U.S.-backed plan to triple the size of a 10,000-man protection force in Saudi Arabia, are part of a broader push that includes unprecedented coordination of air defenses and expanded joint exercises between the U.S. and Arab militaries, the officials said. All appear to be aimed at increasing pressure on Tehran.
The efforts build on commitments by the George W. Bush administration to sell warplanes and anti-missile systems to friendly Arab states to counter Iran’s growing conventional arsenal. The United Arab Emirates and Saudi Arabia are leading a region-wide military buildup that has resulted in more than $25 billion in U.S. arms purchases in the past two years alone.
Middle Eastern military and intelligence officials said Gulf states are embracing the expansion as Iran reacts increasingly defiantly to international censure over its nuclear program. Gulf states fear retaliatory strikes by Iran or allied groups such as Hezbollah in the event of a preemptive strike against Iranian nuclear facilities by the United States or Israel.
For the Obama administration, the cooperation represents tangible progress against Iran at a time when the White House is struggling to build international support for stronger diplomatic measures, including tough new economic sanctions, a senior official said in an interview
Posted By thestatedtruth.com on January 31, 2010
China Suspends Military Ties With U.S.
Sat, 30 Jan 2010 13:48:25 GMT
China suspends military exchanges with the US and threatens to impose sanctions on US arms companies over a Washington decision to sell weapons to Taiwan.
China’s Defense Ministry suspended military exchange visits with the US, saying the suspension was “in consideration of the serious harm and impacts [of the 6.4-billion-dollar US-Taiwan arms deal] on Sino-US military relations.”
Chinese Foreign Ministry also threatened to impose sanctions on US firms that sell weapons to Taiwan amid straining relations between Washington and Beijing.
“China will also impose corresponding sanctions on US companies that engage in weapons sales to Taiwan,” the ministry said on Saturday.
“The United States must be responsible for the serious repercussions if it does not immediately reverse the mistaken decision to sell Taiwan weapons,” Chinese deputy Foreign Minister He Yafei told the US ambassador to China, Jon Huntsman.
Posted By thestatedtruth.com on January 31, 2010
Swiss warn UBS bank could collapse
GENEVA — Switzerland’s justice minister warned in an interview on Sunday that top bank UBS could collapse if sensitive talks with the United States over a high-profile tax fraud investigation fall through.
“The actions of UBS in the United States are very problematic. Not just because they are punishable but also because they threaten all of the bank’s activities,” Eveline Widmer-Schlumpf told Le Matin Dimanche newspaper.
“The Swiss economy and the job market would suffer on a major scale if UBS fails as a result of its licence being revoked in the United States,” she said.
Switzerland and the United States have negotiated an agreement under which UBS would hand over information on some 4,500 account holders to US tax police.
But a Swiss court ruling earlier this month put the deal in doubt.
Many in Switzerland, where banking secrecy is a source of pride and a key part of the economy, have accused the government of failing to protect UBS.
Posted By thestatedtruth.com on January 30, 2010
Jan. 29 (Bloomberg) — Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.
Paulson learned of the disruptive scheme while attending the Beijing Summer Olympics, according to his memoir, On The Brink.
The Russians made a top-level approach to the Chinese that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies, Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.
Russia’s five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games. Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that war has started, according to Dmitry Peskov, Putin’s spokesman.
“The report was deeply troubling — heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets, Paulson wrote. I waited till I was back home and in a secure environment to inform the president.
Russia never approached China about dumping U.S. bonds, Peskov said today.This is not the case, he said by phone.
Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data. Fannie and Freddie were seized by regulators on Sept. 6, 2008, amid the worst U.S. housing slump since the Great Depression.
Paulson said he was surprised not to have been asked about the Fannie and Freddie bonds during a trip to Moscow in June. I was soon to learn, though, that the Russians had been doing a lot of thinking about our GSE securities,he said of his meeting with Dmitry Medvedev, who succeeded Putin in the Kremlin the previous month.
Putin kept Paulson waiting before their meeting at the government’s headquarters and made the conversation fun by being direct and a bit combative, Paulson said. He never took offense and we could spar back and forth,he said.
Paulson’s book is scheduled to be released Feb. 1, though Bloomberg News bought a copy at a New York bookstore.
Posted By thestatedtruth.com on January 30, 2010
By NICK TIMIRAOS
It is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders.
Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower’s income or outright lies.
The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won’t disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.
“Because taxpayers are involved, we’re being very vigilant,” said Maria Brewster, who oversees Fannie’s repurchase team. “No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”
The get-tough stance comes amid pressure on Fannie and Freddie to make the most out of more than $100 billion in taxpayer funds they got to stay afloat. The U.S. government took them over in September 2008.
The biggest losers are likely to be Bank of America Corp., J.P. Morgan Chase & Co. and other mortgage lenders when the housing bubble burst. Such lenders also are being deluged with loans kicked back to them by holders of mortgage-backed securities who uncover deficiencies with loans bundled into the pools. One common example: a borrower who said the loan was for an owner-occupied home but used it for a second house.
Overall, banks repurchased about $14.2 billion in loans from holders of mortgage-backed securities in the first nine months of last year, up from $3.6 billion a year earlier, according to Barclays Capital. The figures are based on data reported to regulators by federally insured banks and savings institutions.
Forced loan buybacks threaten to “wipe out a significant portion of the [loan] origination profits…made in the last year,” said Nicholas Strand, a Barclays analyst.
Fannie reported Thursday that borrowers of 5.29% of the loans it guarantees, or $2.9 trillion, were at least 90 days behind as of November, up from 2.13% a year earlier. At Freddie, such delinquencies reached 3.87% at the end of December, up from 1.72% a year earlier. While growth in subprime defaults is slowing, defaults on prime loans are accelerating. Such loans account for 90% of all mortgages guaranteed by Fannie and Freddie.
The Federal Housing Administration, which has seen its market share rise and its capital reserves decline during the past two years, has indicated it is considering more aggressive steps to force banks to pick up the tab on certain loans that default. The FHA doesn’t lend money to home buyers, but insures lenders against default on loans that meet the agency’s criteria.
To spurn a mortgage, Fannie and Freddie must conduct a forensic analysis to find misrepresentations, as they now are doing for millions of delinquent loans. Employees zero in on loan pools with the steepest losses and highest likelihood of faulty underwriting.
In response, lenders are being much more careful about new loans. Average credit scores for loans backed by Fannie and Freddie have climbed to about 760 from 720 two years ago.
Many of the loans bounced back to lenders were made in late 2007 and early 2008, before underwriting standards were toughened by Fannie, Freddie and most banks, said Guy Cecala, publisher of Inside Mortgage Finance.
In 2003, Fannie Mae and Freddie Mac bought or guaranteed $2.2 trillion of mortgages. Their combined market share fell to about 40% during the peak of the housing boom as Wall Street and other private issuers ramped up business. Since the market’s collapse in 2007, Fannie and Freddie’s market share has swelled to about 70%.
Bank of America repurchased nearly $4.5 billion of loans during the first nine months of 2009. That was triple the $1.5 billion repurchased in all of 2008. Some of the bad mortgages were made by Countrywide Financial Corp., which was acquired by the Charlotte, N.C., bank in 2008.
At J.P. Morgan, total buyback demands surged to $
5.3 billion in 2009 from $4 billion in 2008, according to Barclays. The New York company, which bought the failed banking operations of Washington Mutual Inc. in 2008, reported higher reserves for loan repurchases in the fourth quarter.
From www.advfn.com
Posted By thestatedtruth.com on January 30, 2010
The U.S. is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own “Greek moment.” Look at the graph below, and weep.
Obama offering to freeze spending by 17% in US discretionary-spending programs, after he ran them up over 20% in just one year, is laughable. Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt.
Posted By thestatedtruth.com on January 30, 2010
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries.
When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That’s a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.
Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week’s market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let’s assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.
Posted By thestatedtruth.com on January 29, 2010
But we are at an inflexion point and the middle class is largely being squeezed out. A recent study from the Commerce Department shed some light on an issue that we already know. Over the past 20 years the middle class has been falling behind:
Everything is relative in this world. Incomes have gone up during this time but the cost of housing, healthcare, and access to education have outpaced income gains in some cases by four to one. Money is only worth what you can buy with it. The grand housing bubble of this decade lured many into buying homes that they simply could not afford. Banks and Wall Street were more than willing to provide access to this dream since they knew if all bets crashed, and they did, that they would call on their connected politicians to bail them out and send the bill to taxpayers for their adventures in finance. Take a look at the chart above closely. Housing price changes have wiped out any gains in income. The relative amount of income needed to buy a home has put many two income households on the brink of bankruptcy. And the 4 million foreclosure filings in 2009 alone tell us that many Americans are unable to hold onto one cornerstone of the American Dream.
The middle class is absolutely vital to having a sustainable and flourishing economy. The massive debt machine coming from the big banks has created a new form of debt servitude. Some would argue that this is a personal responsibility issue and I will be the first to agree with that. People should live within their means. But think of the FICO score that has become like a permanent financial report card. Some employers actually screen for credit scores before hiring applicants. Want to rent a home because you don’t want to over extend and buy a home? You better hope that FICO is up to par. And many insurance companies base their analysis on this score. So even if you never had a credit card or any debt, you would be in a bad spot because so many people rely on this number. This is only one example of how people are actually forced to use debt simply to pursue the avenues of the middle class.
More at http://www.mybudget360.com/
Posted By thestatedtruth.com on January 29, 2010
So of married couples with two children 76 percent have two earners. The average American is simply working to stay on track or face being thrown off the treadmill. Jobs are so important to keeping a solid middle class. This should be obvious but current policy being driven by the corporatacracy is simply focusing on keeping prices inflated for the big ticket items (i.e., housing and healthcare). At this point in the game, housing values have gone up to points that are clearly unsupportable
This being the biggest budget item for most households, you would assume that lower prices would be welcomed from the government seeing that many Americans are underemployed and those with jobs have seen stagnant wages.
The middle class dream is at risk. This is a question of what we want out of our country. Are we simply obsessed on keeping home values inflated so banking giants could keep gaming accounting rules and claim billion dollar profits? If we want to prosper in the next decade, there will need to be a radical change to preserve what once was envied by the world. Otherwise, you can expect banks and their political allies to keep selling away the middle class of America. On the path we are traveling on the middle class is largely at risk for a big game over in the next decade.
More at….http://www.mybudget360.com/
Posted By thestatedtruth.com on January 29, 2010
We have many more people simply trying to stay afloat let alone pursuing the middle class ideal. Over 37 million Americans are now part of the food stamp program, not only is this the highest number ever but also the highest percentage of Americans ever to be on food assistance:
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More at :Â http://www.mybudget360.com/
Posted By thestatedtruth.com on January 29, 2010
Delphi Salaried Workers’ Pensions Cut
Judge OKs reduction for salaried retirees while suit continues
DAVID SHEPARDSON
Detroit News Washington Bureau        Â
  January 29, 2010
Washington — More than 500 of auto supplier Delphi Corp.’s salaried retirees will start receiving reduced pension checks starting Monday.
Delphi’s 21,000 salaried retirees and plan participants, thousands of whom live in Michigan, filed a class-action lawsuit seeking to block the company’s decision to abandon its pension plans and hand them to the government’s insurer, the Pension Benefit Guaranty Corp.
But a federal judge in Detroit this week declined to stop the cutbacks by the government pension insurer while he’s considering the merits of the lawsuit.
Some younger retirees will lose up to 70 percent of their pensions and the PBGC will be saddled with a $6.7 billion debt.
PBGC spokesman Jeffrey Speicher said the benefits of at least 3,481 Delphi retirees will be cut, but 4,100 will see no reduction.
PBGC is still reviewing the status of 700 complicated cases.
On Feb. 1, reductions ranging from $6.72 to $3,700 a month will be imposed on 581 retirees above age 62, Speicher said. Another 2,900 will begin seeing cuts from $10.25 to $2,200 on March 1.
The average retiree losing pension benefits will see a monthly cut of about $850, he said.
Delphi said it couldn’t exit bankruptcy without cutting benefits to salaried retirees, including their life and health insurance.
The PBGC insures pensions on a sliding scale — with the lowest benefits guaranteed to the youngest retirees.
While declining to immediately halt the pension cutbacks, U.S. District Judge Arthur J. Tarnow this week gave PBGC two options while he considers the merit of the retirees’ lawsuit.
Under the first, PBGC would place in escrow the amount that Delphi salaried retirees are estimated to lose.
The alternative: Agree now to pay if the court decides that the PBGC improperly assumed Delphi’s pension plans and that salaried retirees are entitled to their current benefit levels.
The PBGC said Thursday that if Tarnow declares the pension termination illegal, it would return the pension plans and assets to the “old Delphi” — the part of the company that didn’t emerge from bankruptcy in October.
Full benefits would be paid until the company “disappears” and then PBGC likely would again take over the pension plan.
The fact that Tarnow issued his either-or order to PBGC “speaks clearly to the fact that the court sees great merit” in the suit itself, said Den Black of the Delphi Salaried Retirees Association.
Posted By thestatedtruth.com on January 28, 2010
Pennsylvania Capital Should Weigh Bankruptcy, Controller Says
By Dunstan McNichol
Jan. 26 (Bloomberg) — Harrisburg, Pennsylvania, the capital of the sixth-largest U.S. state by population, should skip a $2.2 million debt service payment due Feb. 1 and consider bankruptcy, City Controller Dan Miller said.
Harrisburg faces $68 million in payments this year in connection with a waste-to-energy incinerator and should weigh Chapter 9 protection from creditors or state oversight through a program known as Act 47, Miller said today. Chapter 9 bankruptcy allows municipalities to reorganize rather than liquidate.
The alternatives are to sell assets such as an historic downtown market; an island in the Susquehanna River that includes the city’s minor-league baseball stadium; and the city’s parking, sewer and water systems, according to a preliminary 2010 budget and an emergency financial plan submitted yesterday.
“What I’m suggesting is we stop paying the debt service until we have a plan or we decide which way to go, in bankruptcy or Act 47,†Miller, a former city council member who became controller this month, said in a telephone interview. “I think it could save our assets instead of selling them.â€
Mayor Linda Thompson, who unseated 18-year incumbent Mayor Stephen Reed in a Democratic party primary last year to lead the city of 47,000, didn’t return a call to her office for comment.
Posted By thestatedtruth.com on January 28, 2010
Gloomy Scenarios As Bankers Duck For Cover
Jan 27 2010, 3:49 pm by Alan Friedman
DAVOS, Switzerland – The U.S. and European economic recoveries could run out of steam later this year, and they could be faced with a prolonged period of low growth, high unemployment, a huge debt overhang on both governments and households, dangerous budget deficits, and a continuing loss of competitiveness.
That was the gloomy consensus taking shape among members of the world’s business, financial and political elites attending the 40th anniversary meeting of the World Economic Forum here.
By contrast, China, India and the rest of Asia are likely to be the only real engines of continuing economic growth this year, according to most of the economists, corporate types, sovereign wealth fund managers and government officials I talked to on the opening day of proceedings in this freezing cold Swiss ski resort.
The other theme that emerged was a barrage of banker bashing, debate, and criticism of Wall Street that would even make President Obama blush.
Nicolas Sarkozy of France, who formally opened the Davos meeting on Wednesday, won hands-down the title of Bank Basher In Chief with a rambling, ranting and only occasionally coherent speech about why a fundamental rethink of capitalism was needed.
Posted By thestatedtruth.com on January 27, 2010
Airlines Suffered Record Drop In Traffic In 2009: IATA
Jan 27 05:19 AM US/Eastern
International airlines suffered their biggest decline in traffic since 1945 last year as passenger demand fell 3.5 percent, the International Air Transport Association said Wednesday.
Freight also fell, by 10.1 percent, as “full-year 2009 demand statistics for international scheduled air traffic that showed the industry ending 2009 with the largest ever post-war decline,” IATA said in a statement.
“In terms of demand, 2009 goes into the history books as the worst year the industry has ever seen,” said Giovanni Bisignani, director general of the world’s biggest airlines’ association.
“We have permanently lost 2.5 years of growth in passenger markets and 3.5 years of growth in the freight business,” he added.
Posted By thestatedtruth.com on January 27, 2010
U.S. Households Struggle To Afford Food: Survey
WASHINGTON (Reuters) – Nearly one in five U.S. households ran out of money to buy enough food at least once during 2009, said an antihunger group on Tuesday, urging more federal action to help Americans get enough to eat.
“There are no hunger-free areas of America,” said Jim Weill of the Food Research and Action Center. Weill said he hoped President Barack Obama would exempt public nutrition programs from a proposed three-year freeze on domestic spending.
Obama has a goal to end childhood hunger by 2015. He backed a $1 billion a year increase in school lunch and other child nutrition programs a year ago.
Nationwide polling found 18.2 percent of households reported “food hardship” — lacking money to buy enough food — in 2009, according to the group. That is higher than the government’s “food insecurity” rating of 14.6 percent of households, or 49 million people, for 2008.
Households with children had a “food hardship” rate of 24.1 percent for 2009 compared with 14.9 percent among households without children. Twenty states had rates of 20 percent or higher. Seven Southern states led the list.
Posted By thestatedtruth.com on January 26, 2010
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As to the comments the other night about AIG or the lack of New York Fed disclosure about what was going on, the general debate thinks that ‘National Security’ was cited as essentially a veil to prevent transparency, when there may be actually something it has come to my attention, a bit more substantial to account for the incredible secrecy. That something is a comment (not in the press, internet or elsewhere but a private as well as often-informed source) inferring that the CIA may have used AIG to provide at least a cover for the transfer of covert funds for various overseas efforts for years. If it is so; then that would actually be a valid reason for the 10-year redaction of schedule sheets being fully released as per our prior discussion. In Paulson’s new book he has stated that he was ‘not involved’. While cynical about anything he says, if the CIA and not the Fed, or Treasury, was behind the redaction insisted on through the SEC, it is at least feasible that his statement would be technically correct. Technically because it’s likely the Fed or Treasury knew, but weren’t involved in the referenced decisions.
Aside all this; the market is less worried about a Fed ‘exit strategy’, and more about a universe of shrinking markets for MBS (Mortgage Backed Securities); a trend that will not shift for some time with respect to consumers having been panicked sufficiently in fact by Government, into saving; plus the relative irrelevance of saving plans that the Government is proposing. Frankly what looks like a switch by Government plays well to what is probably mostly realization that they have to ‘cool it’ as borrowing ability as well as lenders desires to fund, is also entering a chill mode. So suddenly the fiscal conservatism by this Administration finds it politically convenient, when it’s probably an essential in any event. Further there is simply no ability for consumer credit growth this year, irrespective of consumer confidence being slightly better.
More at www.ingerletter.com
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Posted By thestatedtruth.com on January 25, 2010
Lessons from the Panic of 1907
by Clif Droke
January 25, 2010
In their timely look at the panic of 1907, Robert Bruner and Sean Carr focus attention on what they believe to be the underlying causes of the ’07 stock market crash and recession, drawing parallels between it and the credit crisis of more recent times. Their book, “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm,†is now available in soft cover published by John Wiley & Sons (2007).
The authors list seven contributing factors to the 1907 crisis:
1.)Â Â Â Complexity
2.)Â Â Â Buoyant economic growth
3.)Â Â Â Inadequate safety buffers
4.)Â Â Â Adverse leadership
5.)Â Â Â Real economic shock
6.)Â Â Â Undue fear and greed and other behavioral aberrations
7.)Â Â Â Failure of collective action
In this review we’ll focus on factor number 4, adverse leadership, under which category the policies of the U.S. Treasury and Federal Reserve fall. One of the key statements the authors make is found on page 30. Quoting the passage at length:
“In the summer of 1907, a major economic shock hit the American capital markets. In an effort to harbor gold reserves, the bank of England imposed a prohibition on U.S. finance bills, which were loans with which U.S. firms could import gold. The contemporary economist, O.M.W. Sprague, considered this action ‘the most important financial factor in the panic of 1907.’  The prohibition slashed the volume of finance bills in the London market from $400 million to $30 million by late in the summer of 1907. This meant that American debtors could not simply refinance their obligations in London. As a result, the flow of gold to America suddenly lurched into reverse as gold was remitted to London to settle the payment on finance bills. This further contracted U.S. gold reserves nearly 10 percent between May and August 1907 and contributed to a national liquidity drought.â€
In the above paragraph we discover that the underlying cause behind the Panic of 1907 was none other than a restrictive monetary policy, exactly the same posture assumed by the U.S. Federal Reserve in the year preceding the late credit crisis. Although the authors don’t see this as the primary cause of the 1907 Panic, Bruner and Carr go on to provide more insight into the relationship between tight money and stock market crashes and economic recessions by recounting other examples of how money shrinkage and credit restrictions fed the crisis of 1907.
One prominent institution in the 1907 panic was the Knickerbocker Trust of New York. Headed by the colorful Charles Barney, the financial institution was one of the largest and most successful trust company in the country and was the third largest trust in New York City, with nearly 18,000 depositors.Â
Trust companies engaged in most of the functions of both common and private banks, including making loans, industry consolidation and underwriting, and distribution of new securities. They also sometimes owned and managed real estate. Trust companies were also generally less well regulated than conventional banks. They were allowed to hold certain assets that banks weren’t permitted to hold, such as stock equity. Of significance, trusts weren’t required to hold reserves against deposits prior to 1906. As Bruner and Carr point out, the State of New York required trusts in 1906 to hold 15 percent of deposits as reserves, though only a third of the reserves had to be held in cash. “This meant that trust companies could earn a higher return on their assets compared to banks, and thus, could pay higher interest rates,†according to Bruner and Carr. “Accordingly, the higher interest rates attracted deposits, and the trust companies grew rapidly. In 1906, the assets of all trust companies in New York City approximated the assets of all national banks and exceeded the assets of all state banks.â€
Trusts were a hot commodity at the turn of the last century, attracting investment funds from countless Americans of all walks of life. They also attracted scorn from the conventional banking community. America’s leading financier at that time, J.P. Morgan, was particularly critical of the investment trusts and viewed them as upstart competitors to his banking interests. This is an important point to remember when analyzing the events of the 1907 Panic.
Morgan was also very much in support of corporate oligarchy and was a pioneer in the creation and advancement of Big Business. He took every opportunity to undermine the role of small, independent firms in the business world, and according to his biographer Frederick Lewis Allen:
“Morgan seemed to feel that the business machinery of America should be honestly and decently managed by a few of the best people, people like his friends and associates. He liked combination, order, the efficiency of big business units; and he liked them to operate in a large, bold, forward-looking way. He disapproved of the speculative gangs who plunged in and out of the market, heedless of the properties they were toying with, as did the Standard Oil crowd. When he put his resources behind a company, he expected to stay with it; this, he felt, was how a gentleman behaved….That Morgan was a might force for decent finance is unquestionable. But so also is the fact that he was a mighty force working toward the concentration into a few hands of authority over more and more of American business.â€
Morgan’s antipathy toward “speculative gangs†and to trusts in general was brought to the fore when rumors started swirling over the solvency of the Knickerbocker Trust. The rumors concerning the solvency of the Knickerbocker were less a question of the firm’s standing in the New York financial community than a question of the Trust’s president, Charles Barney, who was believe to have connections to a failed corner on the stock of United Copper by August Heinze and Charles Morse. The connection between Heinze, Morse and Barney, however tenuous, was all that the increasingly jittery public needed to hear. Before long depositors in the Knickerbocker Trust began withdrawing funds and from there the public’s fears of the Trust’s solvency spread to other financial institutions in New York. It led to a full-scale banking panic that swept the country.
As the cash reserves of the Knickerbocker Trust began to dwindle, a meeting was called of the company’s board of directors by J.P. Morgan. The conference was an all-day affair and ran into the early hours of the morning. The board made the critical decision to keep the Knickerbocker’s doors open as long as it would take to secure assistance from other financial institutions in a relief effort led by Morgan himself. In the meantime, Morgan and his partners would examine the Knickerbocker’s books to determine the soundness of the trust. According to Bruner and Carr, if Morgan and his partners determined it was sound, then Morgan would find the money to keep it afloat.Â
The directors of the Knickerbocker made a fateful decision to open the doors to their depositors the next day under the assumption that help from the Morgan-led rescue operation would be forthcoming. They were disappointed in this expectation and were soon swamped by more withdrawals than they could stand. A classic bank run was soon underway and the Knickerbocker was to be among the first casualties of the developing crisis. As Bruner and Carr observe, “Despite the assurances of the financiers…the day before, the officials of Knickerbocker said that no money was forthcoming when needed.â€Â J.P. Morgan needed a high-profile victim for his plans to revolutionize the U.S. financial system and economy and he had one in the Knickerbocker Trust.
According to Bruner and Carr, the Morgan team concluded that the Knickerbocker wasn’t solvent after a review of the company’s accounts. Yet a state banking examiner who had reviewed the Knickerbocker’s accounts as recently as two weeks before the crisis had determined that the institution had sufficient funds to pay its depositors. The evidence points to the fact that the Knickerbocker was set up to fail by Morgan.
Another major factor in the 1907 panic was the tightness of money and credit alluded to earlier. Bruner and Cardded to ar observed, “The national banking system did not have an efficient mechanism for increasing the supply of currency quickly.â€Â In response to the panic conditions, depositors added to the woes of the financial system by withdrawing even more cash from circulation. According to the authors, about $350 million in deposits were withdrawn from the U.S. financial system. Most of this amount was hoarded in cash to the tune of $200 to $296 million.
One of the ways that banks sought to counteract the cash shortage was through the use of clearing house certificates, which amounted to temporary, emergency loans to member banks of the New York Clearing House. These certificates were used as a substitute currency when clearing accounts with one another each day. As Bruner and Carr observed, “Since the certificates circulated among member banks as a substitute for cash, they effectively freed up actual cash for the public, thereby artificially expanding the nation’s money supply. Without a central bank to provide this function, the certificates proved to be extremely effective at restoring the liquidity to the financial system during critical periods of stringency.â€
The use of clearing house certificates had been suggested during the crisis in New York. But as the authors point out, Morgan was opposed to this. The authors further hint that there could have been a hidden interest in the refusal to allow clearing house certificates by the larger banks: “delay might serve the interests of strong banks that want to discipline the weaker banks – as historian Elmus Wicker has argued, such behavior represented a conflict of private interest over the public interest.â€
Enter the U.S. Treasury. In an attempt at stopping the panic, then Treasury Secretary George Cortelyou transferred cash from the vaults of the U.S. Treasury to deposits in several national banks. By the middle of November 1907, however, the Treasury held only $5 million in ready cash, which significantly curtailed the rescue effort of the government. “A nation gasping for liquidity thus turned to other sources,†observe Bruner and Carr. “Bank clearing houses issued their near-money certificates in rising numbers, and imports of gold began to arrive in significant volume in November.â€
The authors quoted Oliver W. Sprague, a Harvard professor writing in 1908, as stating that “The position of the banks was far from desperate, yet they had already entered the fatal and discreditable path of suspension, paying depositors at their own discretion.â€Â In a remarkable historical parallel to the 2008 crisis, banks in New York during the 1907 crisis “actually conserved cash as a result of their membership in the clearing house and otherwise profited from the extension of cash to the trust companies.â€Â In November 1907, the New York banks obtained as much cash as they remitted elsewhere in the U.S. according to the authors. Sprague observed, “The New York bankers proved themselves wholly unequal to the duties of their position as the central reserve banks of the country.â€
In summarizing their post-mortem of the 1907 panic, Bruner and Carr quoted a 1983 study by the economists Diamond and Dybvig, who suggested that bank panics are simply randomly occurring events. “To be the last in line to withdraw deposited funds exposes an individual to the risk of less,†write Bruner and Carr. “Therefore, a run is caused simply by fear of random deposit withdrawals and the risk of being last in the queue.â€Â
A more pertinent explanation of financial panics is that they are at root liquidity driven phenomena, viz., the lack of liquidity causes the trouble. Bruner and Carr acknowledged the liquidity aspect of the financial panic of 1907 in stating, “In an effort to sustain the dollar, Treasury Secretary George Cortelyou and his predecessor L.M. Shaw sought to build government gold reserves for more than a year before the crash in March 1907. This took liquidity out of the financial system at a time when economic growth and the San Francisco earthquake [of 1906] and fire created an urgent demand for more cash. Correspondence within J.P. Morgan & Company noted the dearth of liquid funds with which to finance corporate needs.â€Â
Bruner and Carr further noted that Cortelyou deposited a large volume of gold into the financial system in early 1907, which had the effect of flooding the market with liquidity. “Yet this was not sufficient and then in June and July [Cortelyou] returned to attempting to build government reserves.â€Â Gold began flowing abroad ahead of the U.S. crop harvest, adding further strain to the cash-strapped financial system. An instructive graph presented by Bruner and Carr on page 165 showed that liquid assets held by banks on behalf of the public and the U.S. Treasury began to decline in June 1907 ahead of the worst part of the panic.
The authors noted that “that summer recession was in full bloom; it was hardly a time to take liquidity from the system.  This, unfortunately, was a pattern to be repeated again, most notably by the U.S. Federal Reserve between 1930 and 1933. Economist Glenn Donaldson has noted that ‘market liquidity, or the lack thereof, is a primary element – perhaps the primary element – in determining the length and severity of a panic.’â€
The authors go on to break down what they see as the primary drivers behind the crisis and the eventual return to normalcy. There are many valuable lessons to be learned from a study of the Panic of 1907, and Bruner and Carr have done an admirable job addressing some of them. They emphasize that there is no single “magic bullet†explanation behind a crisis; rather, a confluence of factors must be analyzed in order to get the big picture. In distilling the causes of the 1907 panic down to seven, the authors present a compelling, if somewhat debatable, case for the reasons that led to the famous crash of 1907.
The authors also remind us that a nation that fails to learn from history is doomed to repeat it. On a cautionary note, the authors point out, “It is all too easy to saddle taxpayers with the costs of saving firms, jobs, and industries. Are we willing to pay for an absolutely risk-free society?â€Â
Short Selling
One of the demands among traders in recent years has been the desire to capture moves in individual stocks and ETFs in tough market environments. Most stock market literature specializes in trading techniques geared toward bull markets. Comparatively few books have been devoted to explaining techniques for profiting in down markets. Many traders are intimidated by the prospect of short selling and, quite rightly, view it as a risky proposition.Â
Short selling is risky if you lack a good technical discipline for selecting short sale candidates among individual stocks and executing the trade properly. With the right method, the risks in shorting can be minimized and the results profitable. Although the Wall Street press doesn’t like to publicize it, timely short selling can create profits for small traders much faster than conventional “buy and hold†investing. In the years leading up to the fateful 120-year Kress Cycle bottom in 2014, profitable opportunities for selling short will only increase.
© 2010 Clif Droke
Editorial Archive
Posted By thestatedtruth.com on January 25, 2010
The Scary Budget Numbers
By David Walker
New York, New York
The recession and attendant financial shock appear to be easing as I write this. But in Washington, financial imprudence is part of the fabric of government. You can see that in a single document that gets updated every year: the US budget. In putting together the budget, the president and Congress set our national priorities and allocate resources among them. The results have been pretty consistent. Over the forty years ending in 2008, revenues have averaged about 18.3 percent of our economy and spending has averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent.
But that gap began to widen under Bush 43, who cut taxes while starting two wars, bolstering homeland security, adding an expensive prescription drug benefit to Medicare, and increasing other spending. In 2007, the federal deficit stood at $161 billion, or 1.2 percent of our economy. In 2008 it was $455 billion, or 3.2 percent. In 2009, figuring in the billions spent to pull our economy out of recession and on various bailout efforts, the deficit rocketed to about $1.42 trillion, 9.9 percent of our economy.
In Washington, they speak of our “fiscal exposure” – the sum of all the benefits, programs, debt payments, and other expenses that will cost us big bucks in the future whether or not we want to cut spending. The term I’ve used for all of that is our “federal financial hole.” In the first eight years of this century it has grown from $20.4 trillion to $56.4 trillion – a 176 percent increase.
Maybe you have a few bills – mortgage payment, auto loan, cable TV, phone – deducted automatically from your checking account. How would you feel if those expenses had risen 176 percent in eight years while your income remained steady?
The hole is getting deeper because we are doing little to bring our income into line with our spending. And until now I haven’t even talked about the interest payments on our federal debt. Suppose our government fails to increase federal revenues above the current rate. Based on the GAO’s latest long-range alternative budget simulation, within about twelve years, our interest payments will become the largest single expenditure in the federal budget. By 2040, all of our federal tax revenues will add up to enough to cover only our two biggest expenses: interest on our debt and Medicare and Medicaid. Everything else – Social Security, defense, education, road building, you name it – will fail to be funded.
As you know, benefits payments are the biggest chunk of the government’s massive obligation. Since the 1960s, the growth of these mandatory payments has overtaken what we spend on defense as a share of our national output – and what we spend on everything else in our federal budget, from law enforcement to border protection, children’s programs to national parks, highways to foreign aid.
Although defense has declined dramatically as a percentage of the overall federal budget over the past forty years, we have actually increased total defense spending. In recent years, we have added resources to fight terrorism abroad. That means that other discretionary programs are much more susceptible to cutting. These include education, research, transportation, infrastructure, and other programs that, if properly designed and effectively executed, can promote economic growth and development. How will squeezing those areas serve to keep America great?
All of this puts us in a major-league quandary. Our nation has to bring what we earn into line with what we spend at a time when our spending literally is out of control. One option – cutting investments in America’s future in order to finance our large and growing mandatory spending programs – is another way of cheating the next generation. Unfortunately, today we are both cutting our investments in the future and handing our descendants a mountain of debt. That is a double whammy for young people and the unborn. It’s not just irresponsible, it’s immoral and downright un-American.
Posted By thestatedtruth.com on January 25, 2010
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A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.
The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006 the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.
By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors including the California Public Employees’ Retirement System, a Florida pension fund and the Church of England and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out.
Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money.
 Foresight Analytics estimates delinquencies on commercial real-estate loans held by banks will rise to 9.47% in the fourth quarter, up from 5.49% a year earlier.
Meanwhile, the delinquency rate on CMBS stood at 4.9% in December, according to Moody’s, up five-fold in just a year.
Source   The Wall Street Journal
Posted By thestatedtruth.com on January 24, 2010
Latin America To Meet On New Currency
Sun, 24 Jan 2010 08:40:07 GMT
Latin American presidents have organized a meeting to take a step to ‘break’ their dependence on US dollar in regional financial transactions.
Venezuelan President Hugo Chavez said on Saturday that the leaders would meet Monday in Caracas.
“We’ll have a very important meeting of economy ministers from ALBA (Bolivian Alliance for the peoples of Americas) to further shape an extraordinary project” on a new currency, Chavez said.
The currency, the Sucre, will “break the dependency on the dollar, its economic and financial colonialism,” he added.
The Sucre was named after Jose Antonio de Sucre who fought for independence from Spain alongside Venezuelan hero Simon Bolivar in the early 19th century.
Posted By thestatedtruth.com on January 24, 2010
January 22, 2010
Euro Pacific Capital…….John Brownes Market Commentary
Having been among the economic engines of Europe for much of the past decade, it appears as if the British economy has run out of steam. Inflation is rising while bankruptcies and unemployment continue to swell. It is a problem that would have left Lord Keynes’ head spinning. In many ways, the responses of the U.S. and U.K. governments to the financial crisis have been very similar. So far, the American advantages in size and reserve currency status have allowed us to avoid the storm-clouds now descending upon Britain. But these advantages only provide a temporary respite. In the meantime, the slow-motion collapse in Britain offers a glimpse of our own future – and a chance to prevent it.
The history of the United States and the United Kingdom are closely linked in almost every essential manner, from culture to defense to economics. This is hardly surprising because the Founding Fathers were basically British subjects who wished to restore the traditional liberties they were guaranteed in the mother country.
After the Revolution, America went its own way with enhanced freedoms that led to unprecedented prosperity. Most interestingly, the American Constitution was quiet on the subject of central banking. Two early efforts to imitate the British central bank were withdrawn. But in 1913, Congress eventually agreed to establish the Federal Reserve, which persists today as America’s central bank.
Many economists trace America’s economic decline to the activities of the Fed, in particular to the printing of massive amounts of fiat currency unsupported by the gold and foreign exchange reserves held by the central bank. It is a systemic fraud previously committed in Great Britain. But why would a country’s leadership pursue such a dangerous course?
Foreign policy is a prime suspect. The center of a vast empire that covered almost a quarter of the world’s land mass and one third of its people, Great Britain accepted the role of ‘global policeman’ for much of the late 19th and early 20th centuries. As with ancient Rome, this proved vastly expensive both in terms of money and domestic tranquility. Funds diverted from the home nation hurt working people disproportionately, fueling socialist activism. Eventually, the empire rotted from within.
America took over the role of world policeman from the British after the Second World War. Predictably, it has proved hugely expensive, both in terms of money and domestic tranquility. Today, the debts are mounting almost at an exponential rate, such that the U.S. government’s current liabilities stand at a staggering $12.3 trillion or some $113,000 per taxpayer. [2009/01/20; usdebtclock.org] And if the recent election of a Republican Senator in Massachusetts is any indication, the people are fed up.
When I was a Member of the U.K. Parliament, under the now legendary Prime Minister Margaret Thatcher, we were successful in dismantling decades-worth of socialism and ‘progressive’ conservatism. The new freedoms unleashed an explosion of enterprise, investment and wealth creation. Thatcher cut back relentlessly on government waste and reckless spending. Initially, it resulted in an increase in unemployment – unpopular, but it worked. Thanks partly to oil exports, we instituted a public debt repayment schedule. Sterling rose from some $1.12 to $1.80. [1985-1988; miketodd.net/encyc/dollhist-graph2.htm]
Three successive socialist governments in the United Kingdom now have undone most of the good done by Thatcher. Westminster put pressure on the banks to make unaffordable property loans, just as Washington did to America. The British government has run up unprecedented levels of debt to finance the banks and its national debt, by means of quantitative easing, just as the American government has done.
Unlike America, Britain’s pound sterling has long since lost the protective shield of being the world’s official reserve currency. Therefore, the British are confronted with inflation and a possible credit downgrade now, while America still has time to reverse course.
If it does not, America may soon follow Britain into a lower credit rating, with untold damage to Treasury financing costs and the U.S. dollar.
However, shifting to a sensible economic path will inevitably involve short-term pain, as it did under Prime Minister Thatcher. Correcting the irresponsibility of socialism can be agonizing. Over the short-term, it may have a negative effect on U.S. stocks, even while the shares of the BRIC-CAN countries continue to rise.
Lady Thatcher once said, “The trouble with socialism is that eventually you run out of other peoples’ money.” Once again, the U.K. is broke, and this time, the U.S. is hardly far behind.
More at………http://www.europac.net/#
Posted By thestatedtruth.com on January 23, 2010
| Comstock Partners, Inc.
Banks Are Not the Only Problem January 2010 The President’s proposal to rein in the large banks is only a catalyst for a decline that was bound to happen. There are lots of other reasons, both fundamental and technical, why the market has and will continue to sell off. That the talking heads on financial TV are brushing off the severe two-day decline as a buying opportunity is only an indication of how excessive the overall optimism in the market has become and why there is risk of a significant decline. The market advanced about 70% from the March lows without a drop of as much as 10%, and has done so on declining volume. Each rally top has occurred on lower upside volume than the rally preceding it, while downside volume has recently been rising. The VIX has dropped from slightly over 50 earlier in the year to 17.5 a few days ago indicating an increasing willingness to take risk. This willingness is reflected in the major decline in junk bond yields to a level not far above the yield levels reached at the height of risk-taking in 2007. The percentage of bearish advisory services has dropped to its lowest level in 22 years. Since the fourth quarter earnings report season started favorable reports have only resulted in the stocks of reporting companies selling off on the news, an indication that optimistic earnings have already been built into market forecasts. Notably, the sell-off also happened after an election result in Massachusetts that was highly favored by the market. This pattern fits neatly with the indications of increased risk-taking and excessive optimism. Green shoots are no longer enough to move the market. At the same time there are some early indications that the effects of government stimulus to the economy may be starting to wear off. Non-farm payroll employment fell by 85,000 in December while manufacturing production declined 0.1%.  Retail sales were off by 0.3% and housing starts 4%. The NAHB index for January has drifted off to 15, down from 19 in September. Mortgage applications are scraping along the bottom and are down substantially from a few months earlier. The January Philadelphia Fed Index dropped to 15.2 from 22.5 in December. The ABC News/Washington Post Consumer Comfort Index has dipped from minus 41 to minus 49 in the last two weeks. After rising for a while the number of new job openings has declined in the last two months to a level barely above the July lows. Although the renewed decline in various economic indicators is recent and subject to reversal, there is good reason to believe that the fall-off will continue as the previous “green shoots” were largely a function of government stimulus that has already been ended or will be ended soon. No further income tax refunds are in sight and the “cash for clunkers” program is finished. The Fed has purchased a trillion dollars worth of mortgages, a program that is being wound down. Its purchase of long-term Treasuries ended in October. The extended home buyers tax credit ends on April 30th. Home prices are still about 10-to-15% overvalued based on wages and rents. Homes for sale and temporarily being held back from sale are at record levels and RealtyTrac is estimating a record 3 million more defaults this year. While all of the above is happening, let’s not forget the extreme importance of China beginning to tighten monetary policy, and Greek fiscal problems coming to the fore. China’s fourth quarter GDP increased 10.8% if their numbers can be believed. They also announced recently that their imports were up 53%. Now we don’t pretend to be experts on the Chinese economy, but with 70% of the world’s economy (the U.S., the EU and Japan) growing weakly or not at all, how does an export-oriented economy grow at 10.8%? And where are all those imports (mostly commodities) going? If China cuts back on commodity imports, which seems highly likely, commodities will take a hit, and this may already have started. The Greek problem may end up having even more market impact than any of the above. The Greek government’s fiscal deficit has reached 12.7% of GDP and Greek bonds have recently tumbled. Since Greece is an EU member it cannot use an easy monetary policy to offset any dire economic consequences of cutting back its deficit, and any move by the EU to tighten its own monetary policy would drag Greece down with it. Furthermore if Greece were to leave the EU in order to conduct its own policy, the EU and the Euro currency would be destroyed. All in all there doesn’t appear to be any good options. The Greek problem has led to a flight to safety toward the dollar and away from the Euro and concurrently out of commodities. In addition to Greece other EU members have serious fiscal problems as well. The fiscal deficit-to-GDP ratio is 12.2% in Ireland, 9.6% in Spain, 6.7% in Portugal and 5.5% in Italy.  EU rules call for a maximum deficit of 3%, and it is difficult to see how this goal can be met without economic havoc that would spread globally. In sum we think the stock market has a lot of serious problems far greater than the President’s banking proposal and that those who brush off the relatively small recent decline as a tempest in a teapot are making the same mistake they made at the peak of the dot.com bubble in 2000 and the top of the housing-related boom in 2007.        © 2000 Gabelli & Company, Inc. All rights reservered. Member, NASD and SIPC. |
More at…..http://www.comstockfunds.com/screenprint.aspx?newsletterid=1503
Posted By thestatedtruth.com on January 22, 2010
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The U.S. is facing a long and difficult road as it attempts to correct the over-indebtedness and wasteful expenditures of the past two decades. Both current and historical research help us to understand where we are in the continuing economic crisis, and to put it in perspective.
The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy’s debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different – Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.
We glean five important factors from this work that pertain to our present situation. First, financial imbalances occur when aggregate domestic debt is excessive relative to income, regardless of whether the government or private sector is accumulating the debt. Once debt becomes excessive, countries do not grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased saving.
Second, whether the domestic debt is externally or internally owed is not as critical as the excessiveness of the debt.
Third, government actions, even involving sizeable sums of money, are far less helpful than they appear. As the book states, “Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.”
Fourth, Reinhart and Rogoff cover countries in debt crisis with a host of different conditions, such as growth and age of population, political regimes, technology status, education, and other idiosyncratic features. Nevertheless, economic damage as a result of extreme over-leverage has remarkably similar results, whether the barometer of performance is economic output, the labor markets, or asset prices.
Fifth, further increasing leverage to solve the problem only leads to greater systemic risk and general economic underperformance.
The real question for financial participants is whether all these influences result in inflation or deflation, and the authors’ research details both outcomes. As is widely feared here in the U.S., they outline that many countries have had the right circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. Those particular circumstances are not currently present in the United States.
According to Reinhart and Rogoff the norm is that major economic contractions lead to deflation. Importantly, they call our present economic circumstances the “second great contraction.”
Thus, not only has the historical “qualitative” research on the subject of deflation chronicled the deflationary impulses emanating from overindebtedness (Fisher’s 1933 “Debt-Deflation Theory of Great Depressions”), but also modern “quantitative” methods have now essentially confirmed this conclusion. Over-indebtedness and major contractions lead to deflation.
It has been more than a year since the Federal Reserve began a massive expansion of Federal Reserve Bank credit, from $1 trillion to $2.2 trillion, flooding the banking system with reserves. This unprecedented action naturally raised inflationary fears since it was assumed that this was the beginning of a monetary creation process which would eventually lead to job and income growth, excessive expenditures, and finally massive price increases.
If the economy were not in the throes of writing down bad debts that were caused by a massive decline in asset prices, it is possible that the money supply (M2) in response to this increase in reserves could have expanded by $4 trillion, or 96%. According to the late Nobel prize winning economist Milton Friedman, an increase in M2 of that magnitude would have been highly inflationary. However, M2 did not explode. Instead, in the past twelve months this aggregate has risen only 3%. This is less than 1/2 of the average growth rate over the past fifty years (Chart 2).
If, as Friedman assumed, the velocity of money is stable (MV=GDP) then nominal GDP expansion in the ensuing quarters can be expected to grow about 3%. If prices rise about 1.5%, then real GDP growth would also rise about 1.5%, which is far below the level of growth needed to employ new labor force entrants and existing unemployed or to more fully utilize our present unused capacity in our factories. In the last six months the growth rate of M2 has slowed to near zero. If this pattern continues, it would be rational to expect GDP to grind to zero with no change in the price level.
The very first step toward an inflationary cycle has to be to get the monetary aggregates expanding vigorously. That cannot be accomplished with the Fed “printing money”, i.e., adding more reserves into banks that cannot or will not make loans. The reason this process has not begun (and will not for a time) is the overhang of excessive indebtedness and asset price depreciations. No one needs to borrow, or has the resources or balance sheet to borrow, and banks are busily writing off bad debt. Irving Fisher warned of that process (note our Third Quarter 2009 quarterly letter).
Despite the concurrent developments of little money growth and declining loan growth (Chart 3), the fear nevertheless remains that an inflation surprise might be just around the corner. The reason to discount this notion is that excessive debt has contributed greatly to a flat, or perfectly elastic aggregate supply curve. A country’s inflation is determined by the interaction of aggregate supply and demand. Friedman wrote that a large increase in money in the hands of the non-bank public would be inflationary because he assumed a normal upward sloping aggregate supply curve (Chart 4). In this case the aggregate demand for goods (depicted as the demand curve Line A) would shift outward to Line A1, and thus prices would naturally rise. You will note what happens to prices if a demand curve B is intersecting the supply curve in the so-called Keynesian range where it is flat. If aggregate demand increases to B1, prices do not change.
Whether the supply curve is in a flat, normal, or upward sloping position depends on the extent of excess resources in the economy. Today it is obvious that the U.S. economy has plentiful excess resources, so any increase in demand will result in little price change. This will be the case until our unemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 68% utilization rate.
Thus, our current economic circumstances guarantee there will be no surprise inflation. Employing those who are out of work and fully utilizing our resources will be a slow process. More importantly, it will take time to get the monetary engine reignited. Banks will have to begin lending and people and companies will have to determine that prospects are good enough to take the risk for expansion and investment. It will take years for these processes to get started because of our over-indebtedness and falling asset prices.
The consequences of excessive debt are already painful at the household level. The civilian employment to population ratio, a highly important barometer of the average household’s standard of living, fell to 58.2% in December, the lowest reading in 26 years and down from a peak of 64.7% in April of 2000 (Chart 5). Thus, the standard of living has worsened as the debt to GDP ratio has marched steadily higher. With debt to GDP still rising, a further deterioration of the standard of living is inescapable.
Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced. In a separate research study Rogoff and Reinhart write, “At the height of Japan’s banking crisis in the 1990s, repaving the streets in Tokyo became a routine exercise. As a result, Japan’s gross (government) debt-to-GDP ratio is now nearly 200% and a drag on what once was a vibrant economy.” Our present high deficit situation suggests that taxes will rise (including those of state and local governments), depressing economic activity further. In addition to the expiration of the 2001 and 2003 tax cuts, the Obama administration is proposing substantial taxes on financial institutions to pay for the cost of the financial bailout. Since the tax multiplier is high, this will reinforce the drag on economic activity from the lagged effects of deficit spending.
Since 1990 Treasury bond yields have steadily moved downward in line with a more benign inflationary environment (Chart 6). Those yearly declines in yields continued last year with an average interest rate of 4.07% versus 4.28% in 2008. Obvious sharp reversals have occurred in their downward trend due to shifts in psychology reacting to generally transitory factors, as we saw in 2009. To remain fully invested in long Treasuries in this high volatility environment requires a simple discipline based on the academic literature which demonstrates that over time bond yields move in the same direction as inflation (Fisher equation).
Presently, we view the inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; 3) the federal government’s spending spree will necessarily cause taxes and borrowings to rise, further stunting any economic growth. These factors ensure that inflation will be quiescent. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. We are owners and buyers of long U.S. Treasury debt.
Van R. Hoisington
Lacy H. Hunt, Ph.D.
Posted By thestatedtruth.com on January 22, 2010
By Paul Merrion, Greg Hinz and Steven R. Strahler
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Jan. 18, 2010
While it appears unlikely or even impossible for a state to hide out from creditors in Bankruptcy Court, Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it’s not generating enough cash to pay its bills. Private companies in similar circumstances often shut down or file for bankruptcy protection.”I would describe bankruptcy as the inability to pay one’s bills,” says Jim Nowlan, senior fellow at the University of Illinois’ Institute of Government and Public Affairs. “We’re close to de facto bankruptcy, if not de jure bankruptcy.”
Legal experts say the protections of the federal bankruptcy code are available to cities and counties but not states.
As a result, fiscal paralysis is spreading through state government. Unpaid bills to suppliers are piling up. State employees, even legislators, are forced to pay their medical bills upfront because some doctors are tired of waiting to be paid by the state. The University of Illinois, owed $400 million, recently instituted furloughs, and there are fears it may not make payroll in March if the shortfall continues.
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Without quick corrective action or a sharp economic upturn, Illinois is headed toward a governmental collapse. At some point, unpaid vendors will stop bidding on state contracts, investors will refuse to buy Illinois bonds and state employees will get paid in scrip, as California did last year.”The crisis will come when you see state institutions shutting down because they can’t pay their employees,” says David Merriman, head of the economics department at the University of Illinois at Chicago.
A record $5.1 billion in state bills was past due at yearend, almost doubling to 92 days from 48 days a year earlier the average amount of time it takes the state to pay vendors such as doctors, hospitals, non-profit service providers and other contractors.
State tax receipts from July through December last year were running more than $1 billion behind 2008, including a $460-million plunge in sales taxes and a $349-million drop in personal income taxes. Even with a 22% increase in money from the federal government, thanks largely to the stimulus program, total state revenues were down 2.1%, or $284 million, from the previous year.
In addition to its day-to-day budget, Illinois faces rising pension expenses in coming years. Lawmakers have skimped on required contributions to employee pension funds and even borrowed to make those smaller payments. Unfunded liabilities and pension debt are projected to reach $95 billion by June 30. The state must contribute $5.4 billion to the pension funds next year, and more than $10 billion a year in the future. Required contributions will soon start increasing dramatically because the state has repeatedly pushed back a payment schedule enacted in 1995 to set aside enough to cover 90% of its pension obligations by 2045, up from 43% today, one of the worst unfunded liabilities in the nation.
The sharp rise in pension payments is the biggest factor pushing Illinois toward what a legislative task force last November called “a ‘tipping point’ beyond which it will be impossible to reverse the fiscal slide into bankruptcy.” The little-noticed report on the state’s pension problems warned that “the radical cost-cutting and huge tax increases necessary to pay all the deferred costs from the past would become so large that many businesses and individuals would be driven out of Illinois, thereby magnifying the vicious cycle of contracting state services, increasing taxes, and loss of the state’s tax base.”
While the Illinois Constitution protects vested pension benefits, that promise, like all the state’s obligations, is only as good as its ability to pay. The Civic Federation warned lawmakers last fall that “there is mounting evidence that a judge could find the state is already insolvent. If the state is found to be insolvent under the classical cash-flow definition of insolvency, which is ‘the inability to pay debts as they come due,’ it is not only the pension rights of non-vested employees that will be in jeopardy. All the obligations of the state, whether vested or not, will be competing for funding with the other essential responsibilities of state government. Even vested pension rights are jeopardized when a government is insolvent.”
©2010 by Crain Communications Inc.
Printed from ChicagoBusiness.com
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