Perspectives on the global economic meltdown

[kittoo]

Its strange how much the song 'Ka-ching!' by 'Shania twain' reflected it all a long time back. Here are the excerpts from lyrics-

Weve created us a credit card mess
We spend the money we dont possess
Our religion is to go and blow it all
So its shoppin every sunday at the mall

All we ever want is more
A lot more than we had before
So take me to the nearest store

When youre broke go and get a loan
Take out another mortgage on your home
Consolidate so you can afford
To go and spend some more when
You get bored

Wow!!

Sorry it was OT but had to say it.

[vsudhir]

So why did the states in US land into trouble? Any clear picture on that? The simple arithmetic says they are spending more than they earn. But is the nature of the spending? On what sort of programs are the money being spent?

IIRC, the biggest expense heads are pay and pensions, interest or debt service burden and welfare programmes (edu and healthcare are by far the biggest piece of this pie). All should face the axe but won't. The last will get cut disproportionately whereas union pressure will mitigate much of the first until major crisis forces open that deadlock.

The debt needs to be retired pronto. Some of the unsecured debt can perhaps be defaulted upon. To do that the state must first enter chapter 9. Then old contracts are voided and past pension commitments (esp to cops, firemen and teachers) can be reneged upon legally. Also unsecured and other creditors can be given haircuts. Sure, future borrowing costs will shoot up but the state should have been living within its means to start with, why need to borrow at all?

The three main sources of general revenue are personal income, sales and corporate income taxes. Each failed to meet expectations. Yet as soon as politicians responded to new, lower revenue collections, the floor beneath them sank yet again.

Matters would be worse if it were not for Washington’s stimulus package, which provides more than $135 billion to support state budgets. Most money, $87 billion, is for Medicaid, the government’s health-care programme for the poor. A further $48 billion created a State Fiscal Stabilisation Fund, mostly for schools and universities, with $9 billion for flexible grants. Despite some grandstanding, every governor accepted help. The governor of South Carolina tried to reject the stimulus, but he was overruled first by his legislature and then by the state’s highest court. {No wonder his sex scandal also broke around the same time. Too many interests involved in accessing the stimulus boondoggle}

However $135 billion goes only so far (though it did, for instance, allow Texas to close its deficit and pass its budget). Most of it will be spent in 2009 and 2010. The gaps for fiscal year 2010 alone amount to $166 billion, according to the Centre on Budget and Policy Priorities (CBPP), a research group based in Washington, DC. The CBPP estimates that by the end of fiscal 2011, the cumulative fiscal gaps in the 50 states will exceed $350 billion.

That, is the future. And no, it ain't so bright that one needs shades.

[SK Mody]

There are precedents. Ancient Egypt was especially prosperous during a period when they had negative interest through currency backed by grain with storage charges. In Medieval Europe, under the negative interest Brakteaten system, people didn't sit on money -- since it decreased in value -- but spent it on things that increased in value, including some of the best cathedrals.

Regarding negative interest rate, it means nothing by itself. What actually matters is the difference between the inflation and interest rate. So the quote above doesn't make much sense. The situation that he is talking about has already existed for many decades - a positive rate of inflation has been the dogma of mainstream economists all these years - so what has changed? The effect is mainly psychological. The value of money isn't decided by the central bank or the government - it is determined by the availability of goods and services in the market. They only create a temporary illusion by manufacturing notes after which the unit of money is automatically "renormalised" by the market.

[vsudhir]

Regarding negative interest rate, it means nothing by itself. What actually matters is the difference between the inflation and interest rate.

Lest I mistake you, are you suggesting, sir, that these 2 quantities - inflation and the interest rate are exogenous i.e. determined independently of each other and other factors to the economic system?

The situation that he is talking about has already existed for many decades - a positive rate of inflation has been the dogma of mainstream economists all these years - so what has changed?

Interesting. many decades, you say? when and where? Gold retains such blessed value precisely because it represented this store of wealth that wouldn't depreciate with time, needed no maintenance and was readily carriable on the run. zero interest rate societies have certainly existed for long. But neg rate societies? I'm intrigued onlee.

BRAKTEATEN MONEY, by Margrit Kennedy

Between the 12th and the 15th century in Europe a money system was used called "Brakteaten."

Issued by the respective towns, bishops and sovereigns, it not only helped the exchange of goods and services but also provided the means of collecting taxes. Every year the thin coins made from gold and silver were "recalled," one to three times re-minted and devalued on an average about 25 % in the process.

Since nobody wanted to keep this money, people instead invested in furniture, solidly built houses, artwork and anything else that promised to keep or increase its value. During that time, some of the most beautiful sacred and profane works of art and architecture came into existence.

"For while monied wealth could not accumulate, real wealth was created."

We still think of this time as one of the cultural culmination points in European history. Craftsmen worked a five-day week, the "blue" Monday was introduced and the standard of living was high.

In addition, there were hardly any feuds and wars between the various realms of power.

However, people obviously disliked the money which lost so much at regular intervals. Finally, towards the end of the 15th century, the "eternal" penny was introduced and with it came interest and accumulation of wealth in the hands of increasingly fewer people, as well as the accompanying social and economic problems.

The effect is mainly psychological. The value of money isn't decided by the central bank or the government - it is determined by the availability of goods and services in the market.

There's a reason why lack of access to credit is considered a big reason for the perpetuation of poverty in the lower strata of many societies. The entire micro-credit revolution is partly premised on this basis. To imply that the amount of money printed by the central bank -> hence made available to the banks for lending -> guided by the CB's funds rate -> also impacts inventories and investment in the immediate business cycle has no effect on the availability of goods and services doesn't strike me as entirely correct.

They only create a temporary illusion by manufacturing notes after which the unit of money is automatically "renormalised" by the market.

Theek hai. We can agree on that.

[shravan]

Seven banks bring 2009 U.S. failures total to 52
Jul 2, 2009

------
According to a report in February, up to 1,000 banks may fail in the next 3-5 years.

[shravan]

Male Worker Jobless Rate In June: 10.6 Percent

The official "seasonally adjusted" unemployment rate for male workers in the United States over 16 years-of-age increased from 10.5 percent to 10.6 percent between May 2009 and June 2009, according to the latest Bureau of Labor Statistics data.

The official "seasonally adjusted" unemployment rate for white male workers increased from 9 percent to 9.2 percent between May 2009 and June 2009.

For all U.S. workers, the "not seasonally adjusted" jobless rate increased from 9.1 percent to 9.7 percent between May 2009 and June 2009.

The official "not seasonally adjusted" jobless rate for Black female workers over 20 years-of-age also increased from 11.1 percent to 11.7 percent between May 2009 and June 2009; and the official "not seasonally adjusted" jobless rate for all Black workers increased from 14.7 percent to 15.3 percent during this same period.

The official "not seasonally adjusted" rate for all Black male workers over 20 years-of age was still 16.1 percent in June 2009.

The official "not seasonally adjusted" jobless rate for Black youth between 16 and 19 years-of-age increased from 40.1 percent to 45 percent between May 2009 and June 2009, while the "not seasonally adjusted" unemployment rate for Hispanic or Latino youth was still 30.1 percent during this same period. The official "not seasonally adjusted" jobless rate for white youth between 16 and 19 years-of-age also increased from 21.1 percent to 25 percent between May 2009 and June 2009.

Between May 2009 and June 2009, the official "not seasonally adjusted" jobless rate for Hispanic or Latina women jumped from 10.5 percent to 11.5 percent, while the "not seasonally adjusted" unemployment rate for Asian-American workers jumped from 6.7 percent to 8.2 percent during this same period. The official "seasonally adjusted" unemployment rate for all Hispanic and Latino workers in the United States in June 2009 was 12.2 percent.
.
.
Male Worker Jobless Rate In June: 10.6 Percent
---------

[shravan]

So why did the states in US land into trouble? Any clear picture on that? The simple arithmetic says they are spending more than they earn. But is the nature of the spending? On what sort of programs are the money being spent?

Today the average American family carries:

* $9,000 in credit card debt;
* $18,000 in debt and loans inclusive of credit cards, auto, and education;
* $70,000 in mortgage debt
* Then there is borrowing by Uncle Sam. The $11 trillion national debt equates to over $31,000 per person.

If one sums up all recognized debt of federal, state & local governments, international, private households, business and domestic financial sectors, including federal debt to trust funds, the total debt in America is over $57 trillion, or $186,717 per capita.

Foreigners own over $5 trillion of the national debt and over $12 trillion of all US debts. Even at 10% savings rate, it would take a full decade for US citizens to pay its foreign obligation. But with hundreds of billions added to the external debt clock every quarter and a national savings rate of less than 7% even amid the current recession, the fat lady may never sing and foreigners may never get the payback in full, in today's dollars anyway.
Link

[vsudhir]

To nobody's surprise, the SEC "may" resurrect a rule its board had unanimously voted out at the peak of the debt-steriod boom in 2007 - the uptick rule for squeezing stock-shorting.

S.E.C. May Reinstate Rules for Short-Selling Stocks

They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it.

Now short-sellers, the market skeptics who correctly called last year’s downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult.

Mary L. Schapiro, chairwoman of the S.E.C., has said that considering new rules restricting short-selling is a priority.

For the moment, the most likely outcome may be for the S.E.C. to reinstate a rule that the commission itself abolished with a unanimous vote in 2007, under its previous chairman, Christopher S. Cox. Known as the uptick rule, it would bar investors from shorting a stock until its price ticks at least a penny above its previous trading price.

And who's leading this lobbying and propagandu charge against short-selling? Why, the banks of course- themselves the biggest organized shorters around!

Many banks, whose stocks came under attack last autumn, maintain that unfettered short-selling is dangerous. The shorts, their argument goes, helped bring down Bear Stearns and Lehman Brothers last year.

To some, the issue is clear-cut. The American Bankers Association, a trade group representing the vast majority of American banks — whose equity values have been especially battered in the last 18 months — recently submitted an opinion in favor of reinstating the short-sale restrictions.

Sally Miller, a spokesman for the A.B.A., said the member banks thought there was a clear link between the market turmoil and the rule change.

Hah. Anyone else wondering why these geniuses are talking about squeezing short sellong when the mkt is supposedly in a rally? What do the insiders know? Are they expecting a crash that they'll have to engineer because not enough aam investors could be suckered into the stock mkt this time round?

Verily is it said " whom the gawds destroy, they first make mad". SEC's recent statements of intent at the behest of the thieving banks reminds me of the TSP fiasco a few qtrs back when the karachi stock exchange cleverly banned the selling of stock!

Anyway, the big banks in the emerged markets are the chief culprit who have deflty engineered the current mess (of course, all other parties such as regulators, gubmints, phoren central banks, investors, pension funds and consumers are hardly blameless). Wouldn't shed tears if the big banking empires, already insolvent and propped up only by gub, crumbled into the dust.

Like the great Bob Dylan once wrote and sang:

"The times they are a changin' '"

[SK Mody]

Regarding negative interest rate, it means nothing by itself. What actually matters is the difference between the inflation and interest rate.

Lest I mistake you, are you suggesting, sir, that these 2 quantities - inflation and the interest rate are exogenous i.e. determined independently of each other and other factors to the economic system?

No I'm not suggesting that they are perfectly independent. Interest rate and inflation rate depend on each other to some extent. But I'm not sure how my statement is related to this question of yours.

The situation that he is talking about has already existed for many decades - a positive rate of inflation has been the dogma of mainstream economists all these years - so what has changed?

Interesting. many decades, you say? when and where? Gold retains such blessed value precisely because it represented this store of wealth that wouldn't depreciate with time, needed no maintenance and was readily carriable on the run. zero interest rate societies have certainly existed for long. But neg rate societies? I'm intrigued onlee.

Are you saying that most economists advocate zero inflation? I have read enough articles containing some economic content (not that I understand all the jargon used in these articles), over quite a long period to know that any most economists say that strictly positive inflation rate is good and zero or negligible rate is bad.

BRAKTEATEN MONEY, by Margrit Kennedy

Between the 12th and the 15th century in Europe a money system was used called "Brakteaten."

Issued by the respective towns, bishops and sovereigns, it not only helped the exchange of goods and services but also provided the means of collecting taxes. Every year the thin coins made from gold and silver were "recalled," one to three times re-minted and devalued on an average about 25 % in the process.

Since nobody wanted to keep this money, people instead invested in furniture, solidly built houses, artwork and anything else that promised to keep or increase its value. During that time, some of the most beautiful sacred and profane works of art and architecture came into existence.

"For while monied wealth could not accumulate, real wealth was created."

We still think of this time as one of the cultural culmination points in European history. Craftsmen worked a five-day week, the "blue" Monday was introduced and the standard of living was high.

In addition, there were hardly any feuds and wars between the various realms of power.

However, people obviously disliked the money which lost so much at regular intervals. Finally, towards the end of the 15th century, the "eternal" penny was introduced and with it came interest and accumulation of wealth in the hands of increasingly fewer people, as well as the accompanying social and economic problems.

The effect is mainly psychological. The value of money isn't decided by the central bank or the government - it is determined by the availability of goods and services in the market.

There's a reason why lack of access to credit is considered a big reason for the perpetuation of poverty in the lower strata of many societies. The entire micro-credit revolution is partly premised on this basis. To imply that the amount of money printed by the central bank -> hence made available to the banks for lending -> guided by the CB's funds rate -> also impacts inventories and investment in the immediate business cycle has no effect on the availability of goods and services doesn't strike me as entirely correct.

You seem to be saying that micro credit revolution would not be possible without printing money, or that lending would be somehow less. Why is that so? Have you accounted for the fact that the people who hold money, ie: the ones who's money is being devalued will account for the devaluation of their money in all their economic interactions?

They only create a temporary illusion by manufacturing notes after which the unit of money is automatically "renormalised" by the market.

Theek hai. We can agree on that.

As for your "Brakteaten" example, it is not entirely clear. How was the money being devalued - was there more of it being minted or was there less silver/gold in the content of the coins.

In any case what is the difference between 7% inflation and 1% interest vs. 5.75% inflation and -0.25% interest?

[vsudhir]

No I'm not suggesting that they are perfectly independent. Interest rate and inflation rate depend on each other to some extent. But I'm not sure how my statement is related to this question of yours.

Interest rate and inflation depend not just on each other but also on the level of output in the economy thereby directly impacting the availkability of goods and services which are to be priced.

Hence, a 1% interest and a -0.25% interest mean entirely different things to a depositer whatever the average rate of asset inflation be. Unlike the CB interest rate on funds deposited by banks, which is a single neat data point, asset and price inflation typically span a band and the reported number is some weighted average of the same. Investors don't respond the same to a 1% and a -1% interest rate regime regardless of the nominal int rate averages. Esp when money is fungible and capital flows global in scope.

Are you saying that most economists advocate zero inflation? I have read enough articles containing some economic content (not that I understand all the jargon used in these articles), over quite a long period to know that any most economists say that strictly positive inflation rate is good and zero or negligible rate is bad.

No. The fed is on record stating a 'target' inflation rate of 2%. 0% inflation in the era of fiat money not pegged to a fixed supply commodity standard like gold is a tough act anyway. The passage referred to the historical norm, where 0% inflation could well have been possible, even likely, in subsistence level societies as that assumes fairly constant production and productivity.

You seem to be saying that micro credit revolution would not be possible without printing money, or that lending would be somehow less. Why is that so?

You seem to have totally misread my statement onlee. The point being made was that access to credit impacts availability of goods and services. The goods and services, for example that the microdebtors were able to churn out and repay the loans did not exist before that credit creation came into being.

Have you accounted for the fact that the people who hold money, ie: the ones who's money is being devalued will account for the devaluation of their money in all their economic interactions?

Which is what I am trying to say, in another way. Perhaps we are indeed talking past each other.

As for your "Brakteaten" example, it is not entirely clear. How was the money being devalued - was there more of it being minted or was there less silver/gold in the content of the coins.

Dunno exactly. My impression was that the melting and remolding process iteself with premed tech was soemhow responsible to losing out small amounts of metal each time. But a 25% deval? Tahts excessive unless accompanied by an increase in money supply.

In any case what is the difference between 7% inflation and 1% interest vs. 5.75% inflation and -0.25% interest?

Admittedly not all that much in theory since the same real interest rates are being paid. Now that I think about it, in a deflationary scenario, which is just what is staring at the world right now, inflation has actually gone <0. So why should int rates (at least that paid by the CB) not follow to maintain some semblence of the old spread?

Interesting onlee!

[Nandu]

In any case what is the difference between 7% inflation and 1% interest vs. 5.75% inflation and -0.25% interest?

The difference is you can "earn" 0.25% simply by stuffing the cash in your mattress.

Modern currency and the modern banking system is built on trust. Since this riksbank news came out, I have been looking at various articles that advocate the possibility of negative interest rates, and they all come down to "how do we prevent mattress stuffing" and the answer all has to do with some kind of currency destruction. A fiat system built on trust simply cannot survive such an environment. People will simply move away from the currency in question. Maybe into gold, maybe into currencies of other countries.

Gold is supposed to be an inflation hedge, yet it has been holding up extremely strong in this deflationary environment. Maybe the threat of currency destruction stemming from such central bank shenanigans have something to do with it.

[vsudhir]

Nandu,

That is right. The banks are in a bind now. They are being charged by the CB for deposits but can't in turn charge their depositers fearing an en masse move of deposits "to the mattresses" - effectively, a bank run.

IMO, the banks will prefer to hold each others' money at 0% than pay <0 at the CB. The intended lending-boost effect on banks may not even come about.

*******************************
On a separate note:

The extreme end of the D&G spectrum is this bunch of nutcases convinced and preparing for a mad-max scenario post the 'coming collapse'. Diamterically opposite is the alarmingly large numbers of "sheeple" convinced that a recovery is just round the corner after which things will just like in 2006 again!

The slightly more moderate D&G ones (and I'm more moderate than these types) nevertheless make some good points, as I link below.

Here's a link to Dmitri Orlov's presentation at the 'The New Emergency' conference in Dublin held a few weeks ago (June 11, 2009) titled

'Definancialisation, Deglobalisation, Relocalisation'

The gist of his talk:

"What I want to say can be summed up in simpler words: we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours."

[SK Mody]

Interest rate and inflation depend not just on each other but also on the level of output in the economy thereby directly impacting the availability of goods and services which are to be priced.

Exactly my thoughts. And the output of the economy depends on a complex variety of interacting factors. But reading any of these economi(sti)c articles one would think that the whole thing is just determined by adjusting a few economic sliders. With such a deep problems do they really think that making 0.25% adjustment here and 1.0987% there is going to make _any_ change whatsoever? Abdul say it is all for public consumption.

[vsudhir]

Aha. Apparently that 'cute li'l cap-n-trade bill' COTUS passed last week had a few provisions nobody heard of prior to voting yes for it.

China joins carbon tax protest

By Alan Beattie in London and Kathrin Hille in Beijing

Published: July 3 2009 19:20 | Last updated: July 3 2009 19:20

Beijing on Friday joined a growing clamour of complaint about US plans for a carbon tax on imports from countries without their own emission caps, warning it could set off a global trade war.

The warning follows the passage of a cap-and-trade bill in the US House of Representatives last weekend, which contained tough provisions to impose carbon tariffs to ensure that American companies would not lose competitive advantage. A recent report by the World Trade Organisation and the UN said such taxes could in theory be crafted to be compatible with WTO law, but it would be hard to prove they were not an illegal disguised restriction on international trade.

Can anyone say trade war?

So now it becomes clear how the G7 plans to squiggle outta their current rut. By pretending green virtue as they are 'forced to reluctantly onlee' impose punitive tariffs on Asian/turd world/ emerging mkt imports. wah bhai wah. Where have we seen this movie before?

jai ho.

[vsudhir]

William Buiter again. Worthwhile read.

Quantitative easing ... isn’t working in the US, the UK or Japan. Credit easing - outright purchases of private securities by the central bank, which can either be monetised or sterilised - is achieving little in the US or the UK, although it has not been pushed too hard yet. Enhanced credit support in the Euro Area - providing collateralised loans on demand at maturities up to a year at the official policy rate - is not working either. These policies are not improving the ability and willingness of banks to lend to the non-financial sectors. They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.

In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity. It is useless when the binding constraint is the threat of insolvency.

Today, liquidity is ample, even excessive. Capital is scarce.

Capital is scarce first and foremost in the banking sector. A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks. It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.

Sure, as the economy weakens, the demand for credit is racing the supply of credit down, but there can be no doubt that many firms and households are credit-constrained, and cannot find external finance either from the banks or from the capital markets. Only the larger enterprises, and those with a good credit track record have access to the capital markets. Small and medium-sized firms and new firms without a credit track record cannot go the the markets. So with zombie banks and highly selective access to the corporate bond markets, we are set for a slow and anaemic recovery.

This is made worse by the poor state of household finances in many western countries. With property prices down and banks tightening credit conditions, households have suddenly woken up to the true horror of their highly indebted state. Fear and caution have taken over from optimism and an instinctive belief in the sustainability of a consumption plan financed through Ponzi finance make possible through house prices rising at a proportional rate in excess of the interest rate on housing debt. This rediscovery of prudence by households has lead to a form of Ricardian equivalence that makes tax cuts ineffective and limits the multiplier from public spending increases. Many highly indebted households have reduced their consumption to a (generally socially defined) ’subsistence’ level. Any additional income is saved or used to pay down debt.

Link

[vsudhir]

Denninger unloads bigtime on the ekhanomic players running the faltering show in the khanate.

link

Folks, do you realize what we're talking about here? If you look at the 2009 "Year In Review" Ticker (linked above) you will find that I discuss (again) the fact that in 2000 the Internet fraud had created an "excess" 10% GDP that had to be taken down to restore balance. It wasn't - and instead of 10%, now we are faced with 25%.

But the automakers are telling us that the real number in terms of capital goods might be closer to thirty percent.

It is happening here and now whether the pundits like it or not. We have gone from a -3% savings rate (roughly) to a +6.9% one. This is a 10% swing and with the consumer being 70% of the economy that's an immediate hit of somewhere between 4.83% and 7% of GDP (depending on whether you "count" the negative as an additive force, and you probably should.)

Its no secret that the G7 khanomies are puffed up and look larger than they are. But a 10% puffery, now a 30% puffery? Dunno what to make of it. Yes, I do expect a GDP contraction in 2009 and further on 2010, and I'll not take the gubmint's optimistic numbers as the final word. Chances are things'll be much worse on the ground than in gubmint press releases. Look at the BLS today. Its unemp forecasts have lost much credibility. The khanomic team in the white house, that gave their grim forecasts of "pass stimulus of unemp will hit 8% in 2009" badly miscalculated as the official unemp rate, mid 2009 stands at 9.4% already.

The problem is that it doesn't stop there: The government calls this a "savings rate" but it isn't. It counts debt repayments as "savings" among other distortions, meaning that trying to use the "savings rate" as an indicator of future capital formation is a lost cause. In point of fact there is no capital formation going on - people are cutting back on their voluntary 401k and IRA contributions because they don't have any money to put in - they are furiously paying down debt as fast as they're able in an attempt to avoid foreclosure and bankruptcy.

This is an imp point. Though technically, if the savings didnt pay down debt, then the subsequent NPA on the banks books would've eaten up productive capital. So dunno if the net effect of saving as paying down debt is that different from saving as investment in future capital formation.

That of course means that spending drops which in turn means that employers need fewer people to work. Capacity utilization is in the toilet and average hours worked has fallen to never-before-recorded numbers in the history of the data being collected. This in turn feeds more layoffs which begets more people without income to spend on discretionary purchases (and in some cases non-discretionary ones!)

Plummeting demand aggravates overcapacity issues further feeding into inventory, gen price and asset deflation.
The well known vicious cycle of a debt-deflation spiral.

There is no avoiding the necessary contraction in GDP to bring the system back into balance, and the longer we continue to allow our government and media to LIE about what has happened, who is responsible, and what has to happen before the economy can clear and recover the worse off we will be.

Two years ago I began beating the drum on the prescription for a solution. It involved pulling the rug - intentionally - on housing price supports, and allowing them to collapse to sustainable numbers, all at once.

This would have resulted in a lot of people losing their homes. But by now, they'd be starting to buy them back at half or less of their former prices - and at sustainable payments under a 30 year fixed mortgage. They would have been able to save the 20% down payment too.

We would have seen myriad banks, including most of the big ones, go under. So what? The FDIC would have consumed the "bailout funds" in paying off depositors, which is bad, but the debt would be out of the system. Instead we have gotten exactly nothing out of more than $2 trillion now borrowed and spent by government - the debt is still there, it is still toxic, and it is still preventing recovery.

This story is by no means finished. The government has spent $2 trillion it does not have and has committed to nearly $6 trillion more in either guarantees or outright payments, and yet capacity utilization continues to drop, employees continue to be laid off, consumption continues to fall and frantic attempts to pay down debt and avoid default continue to rise.

In response the economy has continued to shrink and tax revenues have sunk through the floor, skyrocketing the deficit. Treasury apparently detected a reluctance among foreigners to continue buying our used toilet paper and changed the rules on reporting of "indirect" sales - which then, even after the change to intentionally overstate foreign interest, have precipitously declined anyway. It is fair to say that foreign interest in Treasuries is all-but-exhausted and barring a collapse in equity prices to recreate a "fear" environment for holding government bonds, there is going to be an increasing problem with funding the insane "prop up the game" money flood policy of The Fed and Treasury.

I've grown tired predicting a bond mkt collapse. Just like many jingoes in the strat forum tire of predicting TSP's demise. Never seems to come about. Unlike in TSP's case, the UST mkt collapse will not be a sanguine affair for the rest of the world.

California is just the beginning of this unraveling; they are now issuing IOUs. Most other states will find themselves in similar circumstances and be forced to dramatically curtail spending along with raising taxes. The public labor unions (state and federal) are currently able to prevent their overly-fat pension and benefit programs from being brought in line with private industry, but this will not last forever, and when that wall cracks it will come with ferocious intensity. The "death spiral" of higher taxes leading people to erect their middle finger and either cocoon, go underground with their earnings, or depart has begun in California and will spread - count on it.

At some point reality must be faced, and we may as well do it now while we still have civil order. Those politicians, numbering nearly all of them from both parties, who argue that this can be "avoided" or that we can "support housing (and/or asset) prices" need to be run out of town on a rail.

There is no way to prevent the unwinding of leverage when the carrying costs exceed income and the more debt we as a society take on in trying to do so the worse things will get in the end, as we are simply adding to the pile of defaults that must occur.

Bravo for sticking your neck out and saying it like it is.

I am quickly running out of possible scenarios to prevent a severe deflationary depression from taking place. By "severe" I mean 20%+ U3 unemployment, GDP contraction of at least 25%, and a possible loss of federal funding capacity leading to the immediate destruction of Medicare, Medicaid and Social Security, a 50% reduction of defense spending and near-complete-elimination of all other Federal Programs due to a "sudden stop" in the ability to fund Treasury issuance. Yes, it could get that bad, and it could happen a lot faster than you think.

A tad alarmist perhaps? But so many gyani folx sound alarmist these days, its alarming onlee.

I wish there was good news - "green shoots" - that I could honestly find and report. There are not. There is only more obfuscation and fraud, which I have and will continue to chronicle here in The Ticker, not so much in the belief that government gives a damn, but rather so that historians have it available later and, if the collapse I believe is possible does materialize, the angry proletariat with pitchfork and torch will know where to properly direct their wrath.

Government needs to lock up the psychopaths that have run the asylum for the last 20 years and let adults into the room to rationally discuss the inevitable and how to best deal with it. They're refusing now, just as they did when Bush was President. This is not a partisan debate - even having lost badly in November the Republicans are wasting time with the same old canards about "Tax and Spend" instead of attacking the problem at the root: fraudulent credit issuance, much of which they championed and enabled themselves.

[vsudhir]

India Joins Russia, China in Questioning U.S. Dollar Dominance

July 4 (Bloomberg) -- Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

“The major part of Indian reserves is in dollars -- that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Aix-en-Provence, France, where he was attending an economic conference.

Singh is preparing to join leaders from the Group of Eight industrialized nations -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the summit.

[vera_k]

Sort of OT, but an amusing writeup with a different perspective.

Is the First World the new Third World?

[enqyoob]

AoA!

Since I have not been visiting this forum and browsing the Prognostications of Chicken Little, I have been sleeping quite well.

OTOH, I cannot avoid remembering that I took some of these sorts of predictions a bit seriously in January 2008, and did a big "SELL" of half of my 2 paise worth of stock on Jan. 23, 08, when the market had fallen some 10 to 20 % from the peak of Oct. 2007. Unfortunately I did not sell the other 1 paise's worth, for 2 reasons:
1. Half of it was in "safe" Equity-Income Funds that always do better than growth stocks in recessions. You know, safe investments such as banks, insurance companies, mortgage companies.. .....

2. The other half was in Global Equities, heavily weighted to Emerging Markets, yes, specifically India-weighted to a considerable extent. This was because I yielded to emotion and hoped that the Indian market was, as the oiseule Finance Minister puffed, "de-linked" from the US and Western markets.

Both got slammed, some 60%.

But today, the Global Equities have come back a lot, and India-weighted funds have roared back. I was feeling all happy since I have slowly bought back with my hoarded 1 paisa, and now I read this NEW Chicken Little stuff.

Yes, yes, I hear that spending a trillion of newly minted $$ into a stalled economy which is broke due to debt, and where productive, competitive industry is as short as rain, may lead to hyper-inflation.

But does hoarding paise under your pillow guard against this? Does taking it all and putting it in Indian banks help any? So what option does the aam aadmi have other than buying stocks and hoping, as Dr. Winchester said in M*A*S*H:

Even in the sewers, the cream always rises to the top

???

There is some history to the N^3 Economic Prediction and Tarot Card Reading Theory here. Circa 1999, I predicted and argued convincingly that the real value of Yahoo! stock (which was trading at $498 then) was only $2.00 - and argued for an internet-based barter economy to break out of the western-fixed con of the Dollar-Rupee Conversion Rate. I argued that if the rupee started going up, ppl would buy it for the same reason that I bought Yahoo! stock - that it would go up, and so the rupee would keep on going up. The Energizer Bunnies here, all bright-eyed and busy-tailed from mugging up their silly Bubble Reaganomics textbooks in MBA school, of course, dissed me cruelly. Phooeey!

My HUUUUUGE error was that I allowed them to bamboozle me, and I did not take my own advice, so I did not bail out of Yahoo! when I should have. The stock reached near $2.00 as I predicted, then came back up to $7.00 or so and wallowed there for a while b4 rising again.

OTOH, I DID take my own advice, and increased conversions to Indian rupees through the most dismal days - and when the rupee started sliding up as the dollar slid down even faster, there were some happy years of smug self-congratulation. But then the UPA's mismanagement has taken over again, and we are back to 50 rupee conversion rates. OK, since I had little money to convert, and Indian interest rates went up, I didn't do so badly there either.

But today I cannot honestly see where all your Chicken Little rantings are wrong - this hyperinflation thing is beyond my modeling ability. Pls do advise me on what constitutes defense against hyperinflation. Hoard food? I hear that a loaf of bread hit about a Billion Marks in the Weimar Republic.

[vsudhir]

But today I cannot honestly see where all your Chicken Little rantings are wrong - this hyperinflation thing is beyond my modeling ability. Pls do advise me on what constitutes defense against hyperinflation. Hoard food? I hear that a loaf of bread hit about a Billion Marks in the Weimar Republic.

Deflation is the most likely scenario playing out ahead, IMHO. Job losses, wage deflation, rampant overcapacity and likely protectionst tendecnies ahead all point to deflation.

Hyperinflation is a possibility but is not reflected in long term bond yields, hence is rather unlikely, IMHO.

High inflation levels, what the fed desperately wants now, will help retire a lot of the debt with infalted $$$, happy scenario for them. Sadly, that is not happening.

Spinster garu is in the hyperinflationst camp. I was too. Moved into the deflationist camp since.

[vera_k]

What moves should one make as a "investor" to survive and perhaps prosper if the deflationary prediction is true?

[enqyoob]

Is "deflation" same as "depression", or how is it different? Didn't the GOTUS do all this largesse just to prevent deflation/depression? Pls illuminate, thx.

I hold that POTUS Obama is a smart guy and knows what he is talking about (I don't have any such hopes about the Hon. Pelosi, Boxer, Wrestler, etc. etc.) The spending is actually going into critically-needed infrastructure -AND - into high-risk, high-ambition Renewable Energy and Climate Change Control R&D and re-tooling. These are all critically delayed items that make a huge difference to competitiveness. The investment in the auto industry is under the condition of investing hugely into hybrids (I would have preferred direct H2, but they don't think that is feasible yet).

IOW, it is not into "glitz" Republican gimmicks such as "Y2K" or "Derivatives", but into the hard stuff, long-delayed. And that is why, I think, the stocks are coming back (they have come back quite well, actually). And other than the fact that it hits many desis, I fully support the moves to discourage mindless "outsourcing". It's a far cry from "protectionism" - it is probably going to slam the bottom-feeders (I HOPE!), and encourage the high-tech innovators and the real technical risk-takers.

Think of production lines that replace, say half the automobile fleet in the US, and 1/3 of the electric grid, and most gas stations, etc. etc. It's bigger than the Interstate System construction, if done right. These things generate jobs internally, and the US does not, IMO, depend on foreigners buying produce because there are enough domestic resources of just about everything.

Meanwhile, what is the rest of the duniya doing other than sitting on their thumbs gloating about the Demise of the Dollar? I read that the German drive to Renewable Energy has stalled (ran out of money, most probably) and they are now looking to the US. The US is slower, but once started, the pace just keeps on rising. The only reasons to buy phoren in the US are (a) status symbol waste, or (b) cut rates. If the product lines are switched to new technology, most of these evaporate unless the foreigners are more nimble and tech-savvy. Otherwise it's just ghost towns in the foreign lands where bottom-feeding low-cost sweatshops existed.

So instead of hyperventilating about the Coming Fall of America, I would suggest taking a hard look at the prospects for India. I think Oirope IS heading downwards - their panic at trying to ward off China is palpable, and their claims of Focusing on Quality fall flatter than the broken tails of their Airbuses. China will probably turn smartly around, dispose of 200 million displaced mass consumer factory workers, and also go into high-tech innovation. What is India doing in the hard stuff other than stuffing the politician's and their offsprings' pockets and doing the classic Milkmaid act?

[Nandu]

N^3, deflation is not same as recession. Deflation is when your money is worth more tomorrow than it is today, if you can just hold on to it. i.e. prices are coming down for everything. Since people don't want to spend today what could be more valuable tomorrow, or buy today what would be cheaper tomorrow, deflation can exacerbate a recession, but it is not the same thing. It is just the opposite of inflation.

I hold that POTUS Obama is a smart guy and knows what he is talking about (I don't have any such hopes about the Hon. Pelosi, Boxer, Wrestler, etc. etc.) The spending is actually going into critically-needed infrastructure -AND - into high-risk, high-ambition Renewable Energy and Climate Change Control R&D and re-tooling. These are all critically delayed items that make a huge difference to competitiveness. The investment in the auto industry is under the condition of investing hugely into hybrids (I would have preferred direct H2, but they don't think that is feasible yet).

While all this might very well be true, looks to me like all of this investments have long incubation periods before they start paying off. So the near term impact on the economy will be negative (since funds are being diverted from areas that can have an immediate effect).

[vsudhir]

What moves should one make as a "investor" to survive and perhaps prosper if the deflationary prediction is true

No investing guru but IMHO in deflation, cash is king. The 'liquider' the assets, the better.

Both Harvard and Yale learnt that the hard way when asset prices fell and their endowments, which under their strategy were invested in illiquid assets to harvest the 'illiquidity premium', became sitting ducks. These endowments have crashed between a third and a fourth since last year.

I hold that POTUS Obama is a smart guy and knows what he is talking about (I don't have any such hopes about the Hon. Pelosi, Boxer, Wrestler, etc. etc.) The spending is actually going into critically-needed infrastructure -AND - into high-risk, high-ambition Renewable Energy and Climate Change Control R&D and re-tooling. These are all critically delayed items that make a huge difference to competitiveness. The investment in the auto industry is under the condition of investing hugely into hybrids (I would have preferred direct H2, but they don't think that is feasible yet).
....
Think of production lines that replace, say half the automobile fleet in the US, and 1/3 of the electric grid, and most gas stations, etc. etc. It's bigger than the Interstate System construction, if done right. These things generate jobs internally, and the US does not, IMO, depend on foreigners buying produce because there are enough domestic resources of just about everything.

Great. Good for america and for the world. Imagine if the enormous resource and time wasted in the Iraq fiasco had instead been invested in getting off the phoren oil dependence thing....

So instead of hyperventilating about the Coming Fall of America, I would suggest taking a hard look at the prospects for India.

Great. From your mouth to the hyperventilators' ears. Far as I know, nobody but nobody (ok, packees, maybe) wishes a disorderly collapse of the USD. That would be a nightmare scenario thanQ.
/Now if the pound sterling were to tumble, personally, I wouldn't shed any tears.

I think Oirope IS heading downwards - their panic at trying to ward off China is palpable, and their claims of Focusing on Quality fall flatter than the broken tails of their Airbuses. China will probably turn smartly around, dispose of 200 million displaced mass consumer factory workers, and also go into high-tech innovation.

I agree that EU is quite likely, screwed. But I doubt anyone serious here is writing off the khanate, or for that matter PRC.

What is India doing in the hard stuff other than stuffing the politician's and their offsprings' pockets and doing the classic Milkmaid act?

Nothing. Masterful inaction onlee. Like someone once said of the palestinians, holds more true when it comes to the desi neta class:

they never miss an opportunity to miss an opportunity

/Have a nice day.

[enqyoob]

prices are coming down for everything.

Hallelujah! But not where I shop, unfortunately. Everything has gone UP, not down, esp. food. Of course, home assessment value has come down (but not as much as real real estate price, since the County wants as much tax as possible). Unfortunately I don't have any $$ to buy real estate. Car prices have not come down - for any car that I would want to own. Gas prices are up, not down. Although the airlines claim to be going broke, every flight I have been on is oversold, and the fares are NOT down, if you look at, say, December / January and beyond for US-India trips. Inside the US, air fares are about where they were 2 years ago, except that there are fewer choices.

What exactly is coming down, pls? Where do I find it?

[vsudhir]

There's inflation in the items you need (e.g., food, fuel, ammo) and deflation in the ones you either don't need (e.g. luxury items, electronics, name it - clearance sales from every other major retailer around) or don't want (fixed asset values - property being the prime-est example).
/Unscientific survey onlee.

Officially also, every major conomic area - NorthAm, EU, Japan and yup, even Desh is showing negative growth rates in the gen price level. Where the prices of everyday items are falling, dunno/ can't say.

[vsudhir]

OK. This should help clear the air, hopefully.

I can already hear some of you asking the perfectly valid question: How can you possibly suggest that deflation will prevail when commodity prices are likely to rise further as a result of seemingly endless demand from emerging economies? Won’t rising energy prices ensure a healthy dose of inflation, effectively protecting us from the evils of the deflationary spiral?

Good question - counterintuitive answer:

Contrary to common belief, rising commodity prices can in fact be deflationary so long as demand for such commodities is relatively inelastic, which is usually the case for basic necessities such as heating oil, petrol, food, etc. The logic is the following: As commodity prices rise, money earmarked for other items goes towards meeting the higher commodity price and consumers are essentially forced to re-allocate their spending budget. This causes falling demand for discretionary items and can in extreme cases lead to deflation. We only have to go back to 2008 for the latest example of a commodity price induced deflationary cycle.

A price increase on a price inelastic commodity is effectively a tax hike. The only difference is that, in the case of the 2008 spike in energy prices, the money didn’t go towards plugging holes in the public finances but was instead spent on English football clubs (well, not all of it, but I am sure you get the point) which have become the latest ‘must have’ amongst the super-rich in the Middle East.

For all those reasons, I am becoming increasingly convinced that the ultimate outcome of this crisis will turn out to be deflation – not inflation. Inflation may eventually become a problem, but that is something to worry about several years from now. The Japanese have pursued an aggressive monetary and fiscal policy for almost 20 years now, and they are still nowhere.

And no, doubt the Great depression of the 30s is an apt comparison for what we now see. Japan in the 90s is a closer parallel.

So now, two years into this crisis, where do we stand and where do we go from here? History offers limited guidance, as we have never experienced the bursting of a bubble of this magnitude before. The closest thing is the collapse of the Japanese credit bubble around 1990. As the Japanese have since learned, recovering from a deflated credit bubble is a long and very painful affair.

Governments and central banks on both sides of the Atlantic are pursuing a strategy of buying time, hoping that a recovery in economic conditions will allow our banking industry to re-build its capital base. The Japanese pursued a similar strategy back in the early 1990s. It failed miserably and set the country back many years in its recovery effort. Ironically, the Japanese approach was almost universally condemned as hopelessly inadequate. It is funny how you always know better how to fix other people’s problems than your own. A little bit like raising children, I suppose.

link

[vsudhir]

Second attempt

What moves should one make as a "investor" to survive and perhaps prosper if the deflationary prediction is true?

The point I really want to make is that the inflation v. deflation story is the single biggest investment story right now and being on the right side of that trade will effectively secure your investment returns for years to come. If I am wrong and inflation spikes, you want to load your portfolio with index linked government bonds (also known as TIPS for our American readers), gold and other commodities, commodity related stocks as well as property.

If deflation prevails, all you have to do is to look towards Japan and see what has done well over the past 20 years. Not much! You cannot even assume that bonds will do well. Recessions are bullish for long dated government bonds but a collapse of the entire credit system is not. The reason is simple - with the bursting of the credit bubble comes drastic monetary and fiscal action. Central banks print money and governments spend money as if there is no tomorrow, and all bets are off. Equities will do relatively poorly as will property prices. But equities will not go down in a straight line. The market will offer plenty of trading opportunities which must be taken advantage of, if you want to secure a decent return.

All in all, deflation is ugly and not conducive to attractive investment returns. It is also not what governments want and need right now. With a mountain of debt hitting the streets of Europe and America over the next few years, as the cost of fixing the credit and banking crisis is financed, one can make a strong case for rising inflation actually being the favoured outcome if you look at it from the government’s point of view. The problem, as the Japanese can attest to, is that deflation is excruciatingly difficult to get rid of, once it has become entrenched. I am in no doubt which of the two evils I would prefer, but we may not have the luxury of choosing our own destiny.

link

[kmkraoind]

Great. Good for america and for the world. Imagine if the enormous resource and time wasted in the Iraq fiasco had instead been invested in getting off the phoren oil dependence thing....

If the energy source is not oil, then it is technology dependent, aka nuclear energy, which is hard to control from proliferating first to Europe, Japan, then to Russia, China and India, and lately rest of the world. In that scenario US would not have much to control things.

If it is a commodity, then Uncle have much chances of controlling it (like in middle east). It is not technical limitations that is prohibiting western nations looking beyond oil, but political aspirations.

[Singha]

amirkhan to get back to sustainable and wise std of spending and living would need a
brain transplant from POTUS right down to the backwoods militia 'freemen' types.

I have full confidence they will continue to get themselves deeper in debt
its the 'American Way' - crap today and let the grandkids deal with the mess, focus on the next quarterly call than 3 yrs down the line...people who say otherwise are labelled with insulting terms like slackers, vegans , commies, tree huggers, anarchists, anti-globalization trolls, urine recyclers and what not.

beneath the thin skin of the white shirt and khakis, it is the most rapacious country on earth and China has picked a good 'teacher' to learn from + added its own Hannovations.

[ldev]

The following reasons are why a positive rate of inflation is targetted by central banks as opposed to no inflation:

1. the effect of nominal price rigidity i.e. over time as the relative importance of prices of various components changes, it is easier to let some increase by 0.5% and others by say 4% in a positive inflation rate environment of say 2%. This is as opposed to asking for a decrease in certain prices in a zero inflation rate environment i.e. those certain prices may be somebody's salaries/wages!!

2. provides a cushion for central banks to manage interest rates, although at the present time most major western central banks have gone through the entire cushion with interest rates close to zero.

3. makes for a more efficient tax regime from a government's standpoint i.e. if tax on interest earned is 30%, do some calculations if the rate of inflation is 0%, 3% and 6% with nominal rates say 2% higher than the inflation rate e.g. 70% after tax in a 0% inflation environment and with a 2% interest rate will get you 1.4% in inflation adjusted post tax income. Contrast that with 70% after tax in a 6% interest rate regime with 4% inflation... the real return is 0.2%.

So inflation is good for the government and for everyone else who profits from an increase in value of financial assets but bad for aam aadmi.

I suspect that one of the reasons that we are hearing this constant drumbeat in the financial press that deflation is bad is because financial asset deflation which is really the issue now is definitely bad for the elitemen of the financial services industry. But for the average Joe, if you are relying on operational cash flow (e.g. your salary) and have conservative investments, this may be the best of times.

[vsudhir]

I suspect that one of the reasons that we are hearing this constant drumbeat in the financial press that deflation is bad is because financial asset deflation which is really the issue now is definitely bad for the elitemen of the financial services industry. But for the average Joe, if you are relying on operational cash flow (e.g. your salary) and have conservative investments, this may be the best of times.

Good point. The top 1% wealthy in the khanate control upwards of 45% of the wealth there, so asset deflation bites them the most.

Sadly, for the aam aadmi / avg joe, things may not be sanguine because of mounting job losses and really no job driver engine is sight anywhere. Thats what makes this meltdown so deadly - declining employmt prospects. I expect protectionism and trade wars to follow mighty soon - within 1-2 yrs max.

[vsudhir]

OK. Resident alarmist Ambrose Evans-Pritchard on a roll, yet again.

{Disclaimer: Pls not to shoot the messenger. Am linking to D&G ayatollahs out there. Don't necessarily agree with everything they spout. Tks for understanding.}

The unemployment timebomb is quietly ticking

One dog has yet to bark in this long winding crisis. Beyond riots in Athens and a Baltic bust-up, we have not seen evidence of bitter political protest as the slump eats away at the legitimacy of governing elites in North America, Europe, and Japan. It may just be a matter of time.

Hopefully, that has sufficiently alarmed you, gentle readers! It hasn't? Read on! {Also pls read disclaimer onlee}

One of my odd experiences covering the US in the early 1990s was visiting militia groups that sprang up in Texas, Idaho, and Ohio in the aftermath of recession. These were mostly blue-collar workers, – early victims of global "labour arbitrage" – angry enough with Washington to spend weekends in fatigues with M16 rifles. Most backed protest candidate Ross Perot, who won 19pc of the presidential vote in 1992 with talk of shutting trade with Mexico.

The inchoate protest dissipated once recovery fed through to jobs, although one fringe group blew up the Oklahoma City Federal Building in 1995. Unfortunately, there will be no such jobs this time. Capacity use has fallen to record-low levels (68pc in the US, 71 in the eurozone). A deep purge of labour is yet to come.

The shocker last week was not just that the US lost 467,000 jobs in May, but also that time worked fell 6.9pc from a year earlier, dropping to 33 hours a week. "At no time in the 1990 or 2001 recessions did we ever come close to seeing such a detonating jobs figure," said David Rosenberg from Glukin Sheff. "We have lost a record nine million full-time jobs this cycle."

Earnings have fallen at a 1.6pc annual rate over the last three months. Wage deflation is setting in – like Japan. Interestingly, The International Labour Organisation is worried enough to push for a global pact, fearing countries may set off a ruinous spiral by chipping away at wages try to gain beggar-thy-neighbour advantage.

Uh-oh. This is getting too scary even for battle hardened veterans. Lez hope things never get that bad and a new employment driver is found that will lift up wages and jobs. Hasn't the khanate performed such unlikely turnarounds before in its glorious history, after all? Lets sincerely hope for the best, for all our sakes.

The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way. The reason why this does not "feel" like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution. Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data). Evictions are running at a terrifying pace.

Some 342,000 homes were foreclosed in April, pushing a small army of children into a network of charity shelters. This compares to 273,000 homes lost in the entire year of 1932. Sheriffs in Michigan and Illinois are quietly refusing to toss families on to the streets, like the non-compliance of Catholic police in the Slump.

AEP manages to connect historical perspective in interesting ways. How appropriate they are, I cannot say. Let readers judge for themselves. {More disclaimers!}

Europe is a year or so behind, but catching up fast. Unemployment has reached 18.7pc in Spain (37pc for youths), and 16.3pc in Latvia. Germany has delayed the cliff-edge effect by paying companies to keep furloughed workers through "Kurzarbeit". Germany's "Wise Men" fear that the jobless rate will jump from 3.7m to 5.1m by next year. The OECD expects unemployment to reach 57m in the rich countries by the end of next year.

This is the deadly lag effect. What is so disturbing is that governments have not even begun the spending squeeze that must come to stop their countries spiralling into a debt compound trap.

And pray what is in it for gubmints, really? Germany, already a surplus state is about the only one doing anything serious about spending cuts. The OECD figures an old, essential truth. If one man kills, its murder. If a 1000 kill together, its a riot only.* The hope is to stretch the unsustainable for as long as the system will bear and then default together. La-la. IMVVHO only.

* OK, twas Stalin who said " Kill 1 its murder. Kill a million, its a statistic." So if the entire rich world defaults en masse, it merely becomes a statistic, not a crime. Really.

Meanwhile, Sri Sarkozy's oozes newfound wisdom.

French president Nicolas Sarkozy, with a good nose for popular moods, says: "We must overhaul everything. We cannot have a system of rentiers and social dumping under globalisation. Either we have justice or we will have violence. {Is that a threat or a warning? Against who and why?} It is a chimera to think that this crisis is just a footnote and that we can carry on as before."

The tumultous next decade may well see wars (perhaps, even the use of WMDs somewhere?). Scary onlee. Lez just hope its not in yindian territory.

The message has not reached Wall Street or the City. If bankers know what is good for them, they will take a teacher's salary for a few years until the storm passes. If they proceed with the bonuses now on the table, even as taxpayers pay for the errors of their caste, they must expect a ferocious backlash.

caste? Like the Boston Brahmins, there's a new 'caste' for wall streeters now, eh?

Concluding lines?

We are fortunate that the US has a new president enjoying a great reservoir of sympathy, and a clean-broom Congress. Other nations must limp on with carcass governments: Germany's paralysed Left-Right coalition, the burned-out relics of Japan's LDP, and Labour's death march in Britain. Some are taking precautions: Silvio Berlusconi is trying to emasculate Italy's parliament (with little protest) while the Kremlin has activated "anti-crisis" units to nip protest in the bud.
We are moving into Phase II of the Great Unwinding. It may be time to put away our texts of Keynes, Friedman, and Fisher, so useful for Phase 1, and start studying what happened to society when global unemployment went haywire in 1932.

Scary. Then again, AEP has always been a tad alarmist onlee. Take his gloomier predictions with some salt, pls.

ThanQ.

[vsudhir]

A Chinese tribute to the American spirit. The first part of what china thinks the world may look like in 2011.

Change Without Movement

Excerpted from The Dragon Rising, Vol. I of Li
Xian’s The Chinese Century, HarperChina. Translated from the Chinese by Peter Moore.

In the months immediately following the collapse of the world’s financial system, it seemed that the liberal nations might still have the opportunity to regain their hegemony. The United States, first among them, was in the advantageous position of already implementing regime change, however slowly. Within two months, the Bush Administration, discredited by its naive attempt to foist democratic regimes onto nations everywhere in the world, was to be removed from office under the lugubrious workings of the American presidential system. It would be replaced by a dynamic political newcomer.

We are so used to the iconic figure of a tragic, spent Barack Obama that it is difficult to remember just how brightly he first blazed across the international scene. A national consensus grew up around his most ambitious plans for rescuing the nation’s—and the world’s—economy before he was even in office. Proposals that had been considered unimaginably radical just weeks before were now accepted as absolutely necessary. America would, for the first time, provide the universal access to health care that has long been considered the minimal provision of true democracy in people’s states. It would embrace the kind of national economic policy already implemented by China and other world powers, supporting (or “bailing out,” in the somewhat derisive American phrase) its major banks and the remnants of its industrial base in auto manufacturing.

Boldest of all, President Obama declared his intention to free his nation from its dependence upon archaic energy resources and technologies. America would take, if you will, a “great leap forward,” overcoming thirty-five years of directionless energy policy with a vast investment of money and manpower—a project that would at once rebuild its industrial base, solve the problems of global warming, and restore its supremacy over the global economy.

Who was to say that this could not be accomplished? This supremely energetic nation had in the past astonished the world by declaring its intention to achieve an impossible goal and then doing it, against all predictions, most notably in its determination to outproduce the rest of the world during World War II; then again during the race to the moon. Who was to deny it? The sleeping giant, it seemed, had reawakened.

After this lofty testimony, the chinis then weave a fantasy fairytale of US decline.

Today, of course, it is a commonplace that the reasons inveighing against such a dramatic American recovery were inherent in the country’s decline. Contrary to what the chauvinist or racialist schools of thought in our universities contend, this was not due to some sort of national degeneration, or innate failure of character. The people of the United States remained as inventive, as industrious (and as bellicose and avaricious) as ever during the last decades of the twentieth century and the first eight years of the twenty-first.

Nor is it the contention of this work that democracy was never something Americans truly believed in, that it was no more than a “Trojan horse,” in the vivid Western metaphor, used as a cover to smuggle ruinous, American-style capitalism into prostrate, underdeveloped states.

Rather, most Americans actually believed in, even venerated, their traditional, two-party system. It was this very reverence that blinded them when it foundered once and for all on the inherent contradictions of liberal “democracy” soon after Barack Obama took office. The people’s desire for instant gratification, their willingness to elect dangerous demagogues, and the venality and contentions of their leaders all had rendered the American decline inevitable. One might well ask how any system that imbued every faction with such an urgent incentive to see the state fail while its opponent was in power could ever have succeeded. The salient question of American democracy is not why it should have faltered, but why it reigned triumphant for as long as it did.

Yet the iron laws of logic that foretold its fall were ignored in the enthusiasm of the moment. Barack Obama’s election was originally hailed as a great reversal of that decline. His rhetorical (if vague) insistence upon sweeping “change” in the way the national government conducted its business, his mobilization of many younger voters, and his utilization of advanced communications technology to conduct the campaign allcontributed to the idea that a genuine people’s “movement” had brought the young leader to power. These were, in fact, the most superficial of reforms. The pampered youth of the American bourgeois classes came to believe that their mere attendance at rallies and the symbolic choices they made between factions in the election booths constituted a movement—even a sort of revolution. Sincere though their intentions were, they lacked the historical knowledge of the sustained sacrifice that revolutionary struggle entails. They could not see that their efforts had brought “change” without any real ppolitical movement behind it, and therefore no true change at all.

The new president might have better heeded his predecessor’s first, prudent steps toward silencing political opposition in time of national emergency. Instead, his glasnost-like policies met with that idea’s same ruinous results. A gesture of openness to the frivolous American media was only met with the usual anarchic outcries for still more information.

Overtures of friendship toward leaders of the opposition faction in the Congress, such as Senators McConnell, Bond, and Cornyn, and Representatives Boehner and Hoekstra, were viewed as signs of weakness, and merely solicited further demands for power-sharing. It will seem strange today to many in Asia, or even in the “Failed World” of the West—where nation after nation has of late moved away from the constraints of the multiparty state—that such individuals were not summarily charged with high treason. But such were the logical endpoints of American-style “democracy.”

The perpetrators of chaos, in Congress and in the media, went unpunished. They were thus emboldened to frustrate every reform proposed by the president, no matter how benevolent or obviously required. Health care, green technology, a rescue of the country’s industrial base—all were defeated. Moreover, the Republicans, with the aid of their cavalier allies in the press, were able to accomplish this even though the ruling Democrats held a substantial majority in a system that was supposed to honor “majority rule.” Instead, arcane requirements that demanded the ruling party hold a super-majority in one house (but not
the other!) of the two congressional bodies doomed the whole of President Obama’s program to failure. Yet what else was truly to be expected? The much-vaunted American system of “checks and balances” had checked the assertion of the people’s will once and for all, no matter what boxes they checked off on their repeatedly malfunctioning ballot machines.

The notion of Western democratic liberalism—of the false separation of industry from state, legislature from executive, capital from community, people from government, political parties from one another—had been exposed as hopelessly antiquated. The eternal competition of myriad selfinterested factions for money and for influence had led to a destruction that was neither creative nor patriotic.

Like the fall of a giant idol, the American economy and society collapsed one great block after another. The defeat of all of President Obama’s plans for new green technology, or for a significant investment in people’s transportation forced the United States to fall back upon an “old world” economy fueled solely by oil. In the competition for this resource, it was increasingly outbid by the rising nations that had already been sold America’s industrial base by
the nation’s ownership classes. The bankruptcy of the nation’s system of health care—a service now wholly unaffordable to most American workers—soon followed, leading to the waves of deadly epidemics commonly, and incorrectly, known as the “Seven Plagues.” (In reality, there were thirty-seven.) The rest is a familiar story. Since the exhausted President Obama made his poignant announcement that he would not run for a second term, we have seen the rise of yet more new factions, from the “Bush revival,” to the “Clinton revival,” to the call for “faith-based government” under the rule of the Alaskan demagogue Sarah Palin. The United States, which has long issued warnings in the name of “human rights” to the Chinese state for its curbing of bizarre religious superstitions, may yet have the opportunity to learn what it is like to be governed by such notions.

In any event, it is far too late for any of these cults of personality to restore the nation’s standing in the world. One can only speculate what difference the American military’s recent “Patriotic Intervention” in the government will make, but at least it has led to a welcome withdrawal of that institution from the rest of the world. The traditional martial values of selfdiscipline, delayed gratification, and the sacrifice of the individual on behalf of the group are likely at last to teach Americans that the people may move a mountain, but only if they work together. There can be no change without movement, and no movement without state-enforced harmony.

[enqyoob]

Wonder what happens in Dragonstan when War-Malt and JingChao Penney are unable to sell anything to the Capitarist Impeliarist Papel Tigels and their Lunning Dogs... 200 million factory workers starving in the cities, with pickaxes and wrenches and acetylene torches conveniently at hand...

[vsudhir]

Australia Faces the ‘Full Brunt’ of Global Recession (Bloomberg)

Wow, this is a new one:Latvian Banker Taking Souls as Collateral

Ready to give your soul for a loan in these difficult economic times? In Latvia, where the crisis has raged more than in the rest of the European Union, you can.

Such a deal is being offered by the Kontora loan company, whose public face is Viktor Mirosiichenko, 34.

Clients have to sign a contract, with the words "Agreement" in bold letters at the top. The client agrees to the collateral, "that is, my immortal soul".

Mirosiichenko said his company would not employ debt collectors to get its money back if people refused to repay, and promised no physical violence.

Signatories only have to give their first name and do not show any documents.

"If they don't give it back, what can you do? They won't have a soul, that's all," he told Reuters in a basement office, with one desk, a computer and three chairs.

[Abhijeet]

Wow. That Chinese article is a superb articulation of their national worldview, at least as the government would like it to be. Railing against the "weakness" of democracy, justification for cracking down on "religious cults", the defence of mixing state and private control of the economy - it's all there, almost like a textbook version of the CCP viewpoint.

I wish the GOI could hire someone to express its own point of view on the world as clearly and forcefully as in that article.

Does HarperIndia produce triumphalist Indian literature, as HarperChina seems to do in that country?

[vsudhir]

Too bad its come to this:

[SriniY]

Sudhir garu,

Can you post the link to the China article.

Thanks
S

[SwamyG]

Source: http://marketplace.publicradio.org/disp ... ightstory/

Stacey Vanek-Smith: It's time for the Straight Story. That's where our economics editor Chris Farrell gives us his insights into the economic issues of the day. Hey Chris.

Chris Farrell: How are you doing?

Vanek-Smith: I'm fine, thanks. How are you?

Farrell: I'm doing well.

Vanek-Smith: So it's the Fourth of July weekend and we are celebrating our country's independence.

Farrell: Wonderful weekend. I love it.

Vanek-Smith: Yes. Burgers, beer, fireworks. What's not to like? And the origin of Independence Day is freedom from British taxes, but what about financial independence from the rest of us? What about personal financial independence?

Farrell: Well Stacey, I think that's a great question, because it is Independence Day, Independence Weekend. You know, a lot of people are really stressed out during this great recession. So what would financial independence mean? What would financial independence mean to you?

Vanek-Smith: Well, no more credit card debt would definitely be a good step towards financial independence for me.

Farrell: Well, I think that's for many people. I mean, for a whole generation, personal finance, what it really means is getting out of credit card debt. You know, to my parents' generation, it was burning that mortgage. It was just getting rid of the mortgage. They talked about "Burn the Mortgage" parties.

But I want to take a slight twist here. Getting out of debt is wonderful, but what I want to emphasize is savings. And the reason why I want to emphasize savings is that's the financial independence that allows you to do what you want. If you have savings and you want to take a career risk, you'd like to downsize and spend more time with your family or volunteer in the community. If you have savings, you have freedom of choice. And one of the messages that's coming out of this great recession is the need to save more.

Vanek-Smith: Well, we are saving more.

Farrell: Yes, this is a positive thing. And it's not just positive, because it's good for you. It's positive, because this is how we declare our freedom. We bring about control over our lives. It's not the credit card company that decides, "You go to work, because you have to pay the bill." It's you decide, "You know what I want to do this and I have the savings that gives me the freedom to do that." And that, to me, is financial independence.

Vanek-Smith: Well Chris, thank you so much for your thoughts on financial independence and I hope you're enjoying your weekend.

Farrell: I am and thank you.

Ah, some sense coming to some folks.

SwamyG uvacha: The most dangerous plastic is the credit card.