Perspectives on the global economic meltdown

shyam · Post by **shyam** » 02 Aug 2009 08:55

IS this very obvious? Can anybody clearly spell this?

Hari Seldon wrote:Now all that is changing as the bills come due on Britain's role in last year's financial meltdown, the rescue of the banks, and the ensuing recession.

Hari Seldon · Post by **Hari Seldon** » 02 Aug 2009 10:24

Experts Warn of New Credit Crunch in German

Europe in general is facing deflation that is all set to worsen in the coming months.

Deflation is often confused for falling prices (neither a sufficient nor a necessary symptom). Deflation == drop in money or credit supply. And for the credit driven khanomies of the G7, be sure that credit supply has crumbled far, far faster than central banks have been able to pump prime the printing presses.

Hari Seldon · Post by **Hari Seldon** » 02 Aug 2009 10:35

A tad alarmist but apocalyptic D&G Ayatollah Sri Dmitri Orlov has been gaining followers lately.

[youtube]<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/NmTBnhOXufg&co ... ram><param name="allowFullScreen" value="true"></param><param name="allowScriptAccess" value="always"></param><embed src="http://www.youtube.com/v/NmTBnhOXufg&co ... edded&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" allowScriptAccess="always" width="425" height="344"></embed></object>[/youtube]

Spicy and worth a watch.

Hari Seldon · Post by **Hari Seldon** » 02 Aug 2009 12:07

Well well...

After $182 billion taxpayer rescue, AIG is again on the verge of collapse

Democrazies have perfected the (f)art of can-kicking down the road. Does anyone seriously believe the new and improved GM will survive n thrive? Chrysler? OK, how about asset qualities at Fannie and Freddie? Or the numerous banks the gubmint has by default taken over?

Take gubmints themselves - does anyone seriously believe that Calif's budget crisis has been 'solved' or in any way fixed? Sure, a deal has been reached but is it not more of a case of can-kicking to next year? Over 30 other states will become californias if the recession drags on into next year (And IMHO, it will) playing havoc with their revenue projections whilst costs continue to bloat thx partly to unemp benefit payouts.

Eventually the can-kicking must stop and the bucket-kicking will begin.

Hari Seldon · Post by **Hari Seldon** » 02 Aug 2009 12:22

This thread has been predicting/talking about a pensions crisis set to implode in the emerged world. Well, the first salvo has already been fired in where else but the Golden state.

public pensions are drawing scrutiny amid its crisis

California's rapid economic decline has prompted Gov. Arnold Schwarzenegger to propose what once was unthinkable — rolling back generous pensions in a state heavily influenced by public employee unions.

{Unthinkable is right. Too many folks have theoir retirements destroyed but are simply not aware of it thinking the gubmint will bailout their retirements/pensions because of legal obligations. Nonsense. When gubmint is in a hole, it will squirm out of any pensions obligations it has, IMO}

The Republican governor said he's motivated by the need to save money. California has at least $63 billion in unfunded pension liabilities, an amount equal to roughly two-thirds of all annual general fund spending.

The concern is shared across the country, as local and state governments wrestle with hundreds of billions of dollars in unfunded public employee pension and retiree health care costs.

New Mexico this year approved longer work requirements — from 25 years to 30 years — for state employees starting in 2010.

New Jersey last year raised the minimum age to qualify for benefits from 60 to 62.

Kentucky now requires new police hires to contribute 1 percent of their pay to help cover retiree health benefits.

And Georgia has started a hybrid plan for new state hires that blends a defined-benefit pension — with set payments based on salaries — and a 401(k).

In California, Schwarzenegger dropped long-term pension reform from negotiations with lawmakers to close the state's $24 billion budget deficit. He said this week that he would press for pension reform now the state has enacted revised spending plan.

"Again, everyone understands we are running out of money," he told reporters. "We cannot continue promising people things that we cannot deliver on."

His proposal would not change the pension system for current workers, but would lower benefits for new employees. His office said such changes would save the state some $95 billion over 30 years.

His administration has estimated that unfunded pension liabilities — money the state has promised to pay without earmarking where the funds will come from — could be as high as $300 billion if current investments fail to generate the projected returns.

But the reform proposal met with quick resistance in a state where large public employee unions contribute heavily to Democrats, the state's majority party.

The potential for reduced retirement benefits adds to concern that California will not be able to attract qualified employees, said Christopher Voight, executive director for the California Association of Professional Scientists.

For example, he said, the state needs microbiologists to test for swine flu, but has a hard time keeping them because they tend to leave for better pay at private labs.

Schwarzenegger wants to start by undoing a retirement package passed by California lawmakers in 1999 and signed by then-Gov. Gray Davis, a Democrat.

Most state workers can retire as early as age 55. Their pension is based on 2 percent of their final salary multiplied by the number of years they worked. The payments rise with inflation.

For example, a civil servant with 30 years in state government who made $70,000 a year could take early retirement at 55 with an annual pension of $42,000. Under Schwarzenegger's proposed reform, they couldn't retire until age 60.

Employees in high-risk jobs — such as firefighters — can receive up to 90 percent of their salaries if they retire at age 50. Under Schwarzenegger's plan, they couldn't retire until age 55.

Retirees also are promised health care coverage for themselves and their families, a benefit that can cost the state $1,100 a month per retiree, according to the California Public Employees' Retirement System. Schwarzenegger's proposal doesn't tackle health care.

To reformers, changing the state's retirement system is as much a matter of fairness as one of cost.

The Center for Retirement Research at Boston College found that while 43 percent of private employers offered some type of retirement plan in 2006, they tended not to be as generous as public employee packages. Private-sector workers also rarely receive retiree health care coverage, meaning most have to work until they can start drawing Social Security and Medicare at age 65. Workers born after 1960 will not be eligible to retire until 67.

"People are upset," said Schwarzenegger's economic adviser, David Crane. "They don't have a defined benefit plan and ask, 'Why am I paying for someone else to have one?'"

Public employees do shoulder a portion of the commitment, contributing to their retirements through payroll deductions.

Ed Hass, 54, said private companies need to do more. He found a job with the Department of Corrections in 2007 in large part because of the guaranteed pension.

"You've heard of Enron, right?" he said. "Not only did (employees) all lose their jobs, they lost all their retirement tied to Enron's stock."

Government workers and their union representatives often say the more generous pensions offset lower pay.

{Seems reasonable, right? However.....}

But the latest U.S. Census survey, from 2007, shows the average annual salary of California state government employees was $53,958, compared with $40,991 for the average private-sector worker.

{Doesn't seem so reasonable now, does it?}

"The pension benefits for public employees in California are extravagant and they are going to bankrupt cities and counties, along with the state," said Keith Richman, a former state assemblyman who said he plans to launch an initiative campaign to change state employee pension benefits.

Read it all. Calif will open the floodgates once its painful changes make it through the legislature and the courts. Look to lotsa other states copying Calif's example.

Paul · Post by **Paul** » 02 Aug 2009 17:04

Parents held for torturing son

Staff Reporter

SANGAREDDY: The police of Narsapur on Saturday registered a case against a couple for humiliating their son for a petty theft. The incident took place at Lingapur village in Narsapur mandal.

According to sources, a few ago, Subhash, 14, son of Shankaraiah and Chandramma, took Rs. 200 from home left the house. He returned home on Friday after spending the money.

Angered by this, his parents got his head tonsured, put marks on it and paraded him in the village. Later he was tied to a tree and his genital was reportedly cut with a blade. One of the relatives who visited the house of the victim on Saturday found the wound of Subhash and immediately shifted him to the hospital at Narasapur.

Police registered a case and took the parents in to the custody.

and Henry Paulson walks away with just a slap on the wrist for making $800B TARP money disappear .

Hari Seldon · Post by **Hari Seldon** » 02 Aug 2009 20:44

At this rate the khanomy is heading for a perfect storm.
Prolonged Aid to Unemployed Is Running Out (NYT)

Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.

Very true. Unemp benefits are exactly what are buying off peace in the street for the establishment elites and buying bread for the long term jobless joe6pack.

Because of emergency extensions already enacted by Congress, laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.

Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.

Unemployment insurance is now a lifeline for nine million Americans, with payments averaging just over $300 per week, varying by state and work history. While many recipients find new jobs before exhausting their benefits, large numbers in the current recession have been unable to find work for a year or more.

However, the silver lining, if you will call it that, is that it is politically unteneble to allow unemp benefits to elapse. They will receive another extension from Congress and then another, IMO. Come 2010, a poll yr for COTUS, no way will benefits of any type be touched, period. Fed can print as much as required.

Hari Seldon · Post by **Hari Seldon** » 03 Aug 2009 12:07

Wall Street profits from trades with Fed

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
...

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

....

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

...

However, another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

Singha · Post by **Singha** » 03 Aug 2009 12:15

wah ustad wah !

NYT op-ed

Op-Ed Contributor
Leave Swiss Banks Alone

By PIERRE BESSARD
Published: August 2, 2009

LAST week, an American client of the Swiss bank UBS admitted to filing a false tax return and concealing millions in Swiss bank accounts. For some people, his plea will just confirm their impression of Switzerland as a haven for criminals or dictators who want to protect their funds from taxes or oversight.

But for us here in Switzerland, our financial privacy laws are a foundation for individual dignity and basic property rights.

Unfortunately, the confidentiality that is the hallmark of Swiss banking is coming under increasing pressure. The global economic crisis has led some governments to intensify efforts to seek tax revenue abroad — and Switzerland, which accounts for nearly 30 percent of all offshore private wealth, is a natural target.

Earlier this year, Switzerland was put on a “gray list” by the Organization for Economic Cooperation and Development and threatened with financial sanctions, leading the government to provisionally renegotiate tax agreements with a dozen countries so far. Most of those agreements would require Switzerland to hand over individuals’ financial information for tax purposes in accordance with the organization’s standards.

The United States Justice Department went even further and filed a lawsuit against UBS, seeking the names of 52,000 account holders suspected of hiding money from the Internal Revenue Service. (The United States and Switzerland agreed in principle on Friday to settle the matter out of court.)

Switzerland, which is home to an impressive number of global corporations, has also come under fire from the European Union for offering too-favorable tax rules, including exemptions for income earned abroad. But what critics forget is that these practices also benefit other countries. Swiss firms alone employ hundreds of thousands of people in the United States and Germany, for example. Subsidiaries of multinational corporations usually pay income taxes where they operate, so having their headquarters in Switzerland can help companies avoid multiple taxation in high-tax countries, thereby safeguarding productive capital for investment.

Until recently, the Swiss government had steadfastly insisted on Swiss sovereignty and refused to provide assistance to other governments in cases of tax evasion — that is, cases in which a taxpayer failed to declare income, either intentionally or unintentionally. While tax fraud is considered a crime here, tax evasion is not (though it can be subject to fines).

This Swiss peculiarity of considering tax evasion as a mere administrative offense has a long history. We think government exists to serve us, not the other way around. We understand that we have to pay taxes — and we do, with numerous studies showing that the Swiss are extraordinarily honest about paying what we owe — but we do not think it is the government’s role to intrude on our privacy and wrench them from us.

This attitude goes back to Switzerland’s founding in the 13th century. The original Swiss communities’ resentment of what they saw as the Hapsburgs’ oppressive taxes helped push them to claim their independence in 1291.

Today, Swiss citizens continue to vote on any tax increases in referendums (and sometimes even accept them). These healthy curbs on government contrast with the Orwellian concept of the “transparent citizen” whose every act is known to government. We see our system as a social pact between citizens and the state.

Swiss privacy laws help preserve basic property rights. Bank secrecy was introduced in 1934, most notably to protect the identities and assets of Jews in Nazi Germany. (Unfortunately, those same rules made it difficult for some heirs to gain access to these accounts without proper documentation, leading to an out-of-court agreement in 1998 by Swiss banks to pay $1.25 billion to settle Holocaust-related lawsuits.) Corruption, expropriation, crime and the persecution of various minorities remain risks in most of the world. For people threatened by such risks, financial privacy can protect their legitimate property.

Some would argue that Swiss bank accounts offer the same protections to criminals, but in fact Swiss provisions against money laundering are tough. Swiss bankers are required to know their clients and the origin of the funds they accept. They must alert the regulators if they suspect criminal behavior.

Banking confidentiality enjoys overwhelming support in Switzerland. According to the latest annual survey by the polling firm M.I.S. Trend, 78 percent favor maintaining the laws as they are, and 91 percent are shown to value their financial privacy. This is especially relevant since Swiss citizens are expected to vote eventually on the renegotiated tax treaties in a referendum.

If the government fails to convince a majority of voters, the treaties won’t enter into force. But if they are ratified as planned, the Swiss government should agree only to an exchange of information in individual cases with reasonable suspicion of tax fraud.

Other governments should see this as a fair compromise. We will not solve the global problem of tax evasion by punishing honest depositors and destroying Swiss traditions.

Pierre Bessard is the president of the Liberales Institut, a research institution.

Hari Seldon · Post by **Hari Seldon** » 03 Aug 2009 16:19

The beginning of the end [of the great recession]

Ekhanomist has summarized trends rather well and I will admit the evidence for a bottoming out of khanomic indicators coming in thus far certainly seems plausible. I do hope the khanomy stabilizes and the freefall stops. A full recovery to 2007 levels is yrs away.

Also hoping the unemp situ there gets a breather thopuigh so far there's no evidence of that happening. This is also the biggest reason why I remain sceptical of the green shoots hopium being peddled on CNBC and other media outlets (including the ekhanomist).

I fully expect debt-burnt consumers across all socioeconomic classes in America to go whole hog into raising savings and retiring their huge debt burdens. Consumption, 70% of the economy, will take a hit consequently.

Tanaji · Post by **Tanaji** » 03 Aug 2009 16:54

http://news.bbc.co.uk/1/hi/business/8180775.stm

Barclays turn a profit of £3B in 6 months...

The BBC's business editor Robert Peston says the most resonant measure of how Barclays has performed can be seen in the average pay of staff at its investment bank, which was almost exactly £100,000 for just the first six months of the year.

but then:

Rising bad debts

Total bad debts, across all parts of Barclays' international businesses, rose from £2.45bn to £4.56bn.

I have given up any hopes of understanding economics.

Tanaji · Post by **Tanaji** » 03 Aug 2009 16:56

Speaking of unemployment

http://news.bbc.co.uk/1/hi/world/americas/8180806.stm

A New York woman who says she cannot find a job is suing the college where she obtained a bachelor's degree, the New York Post reports.

Trina Thompson, 27, filed a lawsuit last week against Monroe College in Bronx Supreme Court.

She is seeking to recover $70,000 (£42,000) she spent on tuition to get her information technology degree.

Hari Seldon · Post by **Hari Seldon** » 03 Aug 2009 20:58

Tanaji,

It is an open secret that tertiary education is a bubble under the classic definition - asset prices jump far ahead of realizable asset lifetime values.

Typically, what univs can charge for edu bears an inherent relation to the NPV of wages post the degree and to the opportunity cost of income lost for the duration of the study.

With jobs vanishing even for college grads, the post degree wage avg takes a hit pulling down the tuition upperbound. But univ cost structures are fixed for the longterm. Lots of dislocation and pain, predict I.

Hari Seldon · Post by **Hari Seldon** » 03 Aug 2009 21:05

Meanwhile old china hand Andy Xie calls its stock rally a bubble, again.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

Liquidity isn’t a constraint yet. Even though loans grew by 24.4% in the first half or Rmb 7.4 trillion, loan-deposit ratio increased only to 66.6% in June 2009 from 65% in December 2008. It means that many loans have not been spent in real economic activities and have merely supplied leverage for asset market transactions. China’s property market is very similar to Hong Kong’s in 1997.

The origin of the asset bubble in China is excess liquidity as reflected in high level of foreign exchange reserves and low loan deposit ratio. The low interbank rate defines how serious excess liquidity s. The massive buildup of liquidity in China was due to weak dollar and strong exports. As dollar entered a bear market in 2002, China’s Rmb followed it down. The appreciation expectation drove liquidity to China. One fourth of China’s foreign exchange reserves could be due to this factor.

OK. So who exactly is andy xie and what are his credentials?

Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential. One can never make an ironclad case to pin down an asset boom as a bubble. An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past. I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in earl 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble.

I want to make myself perfectly clear on China’s asset markets today. They are a big bubble. Its bursting will bring very bad consequences for the country. However, as so many are enjoying what’s going on, I don’t think the government would act preemptively to eliminate the bubble. Indeed, many, if not the majority, in the policy circle argue that the bubble is good for reviving the economy. This sort of thinking seems to work because the dollar is weak, as the bubble can be revived with more liquidity when it cools off. When the dollar revives, China’s asset markets and, probably, the economy would have a hard landing. I hope that the people who advocate the benefits of the bubble would stand up then to accept the responsibilities for the damages.

link

Of course, std disclaimer holds. Take your own call. Caveat emptor.

pgbhat · Post by **pgbhat** » 03 Aug 2009 23:38

where is vsudhir these days??

paramu · Post by **paramu** » 04 Aug 2009 01:36

If you see something walks like a duck and quacks like a duck, it must be a duck.

ramana · Post by **ramana** » 04 Aug 2009 02:35

Hari, You gave us prognosis about UK and PRC. What about US? Can it be also false hope being peddled to get the market going for the sharks to bail out?

Neshant · Post by **Neshant** » 04 Aug 2009 03:44

Now if Harvard university educated economists were so smart, how come harvard university lost 8+ billion dollars in malinvestments in 2008?

This is the same british dude who gave a speech saying the UK colonialism of India was the best thing that happened for the Indian economy. If there's one thing this recession has exposed, its that egghead economists from big name universities are as clueless as everyone else.

http://www.youtube.com/watch?v=XVXXDf6F3EE

Neshant · Post by **Neshant** » 04 Aug 2009 04:53

where is vsudhir these days??

he's been hunted down by the powers that be for revealing too much..

Singha · Post by **Singha** » 04 Aug 2009 06:47

great fighters are nameless and formless. vsudhir lives!

vera_k · Post by **vera_k** » 04 Aug 2009 08:49

What are the constraints if any for governments, corporations and consumers to take on more debt? I wonder if it is possible that the eventual adjustment may be postponed by finding a way for these to take on even more debt.

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 11:07

ramana wrote:What about US? Can it be also false hope being peddled to get the market going for the sharks to bail out?

That is precisely what I think is happening. The govt, media and the big banks are all in it together, to raise false hopes of a recovery-round-the-corner, each for their own reasons. Some speculate that the next bubble the Fed shall attempt to blow will be stocks.

I have little confidence that the US stock market is anywhere near free or fair, as it currently stands. Program trading by the big banks (primarily GS and JPM), low volumes, excess activity (relative to historical trends) in the futures mkts, overboard cheerleading by big media owned by corporates whose stock is also being cheered along with the rest of the mkt, continuing slides in the employment scenario, rising savings and dropping consumption, easily detectable inconsistencies in gubmint figures such as unemployment and GDP revisions hitting credibility - are just some of the problems.

IMO, the stock bubble will burst mighty soon, perhaps this month itself as the big boys are just waiting for enough suckers to bite before they short the hell out of the market. Their bonuses are all paid up now, after all.

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 11:16

vera_k wrote:What are the constraints if any for governments, corporations and consumers to take on more debt? I wonder if it is possible that the eventual adjustment may be postponed by finding a way for these to take on even more debt.

The biggest constraint is debt servicing cost. At some point, interest charges on outstanding debt become so large that the gubmint actually borrows to pay )or rather, roll over) interest - known full well as the classic debt trap.

Now, gubmints know or can calculate at what point that event horizon is crossed so they would logically stay away from that at a safe distance, right? Well, yes in theory. After all, Japan has a 200% debt-to-GDP ratio! UK and US have some 100% and 85% respectively, onlee.

One problem is that later debt has interest costs that are some function of existing debt levels. That is why watching bond yields can be useful.

And a credit downgrade can brutally raise interest rates sending seemingly healthy entities plunging into a debt trap overnight. Why else does the UK need to worry about a possible downgrading of its credit rating? It will be well within debt trap territory if the downgrade happens.

And for state and local gubmints in the US, additional constraint is the mandated need to balance budgets. Their declaring bankruptcy is a real possibility.

Ultimately I think the G7 game might just be to take as much debt as the mkt will bear and then, ultimately, default. The panga of course is that if the mkt figures out that that is the strategy, then the crash will come right away. So the delicate dance is to pretend solvency, show rigged figures and all the while suck more debt from lenders. Of course, the TINA factor also plays a major role. Where will savers put their money if not G7 bonds in the current scenario where all asset classes are depressed?

vera_k · Post by **vera_k** » 04 Aug 2009 12:48

Seems to me that the only real constraint is the amount of debt that can be serviced by sovereign governments. Because governments are moving corporate and consumer debt onto their balance sheet using various bailouts.

arnab · Post by **arnab** » 04 Aug 2009 13:07

Hari Seldon wrote:
The biggest constraint is debt servicing cost. At some point, interest charges on outstanding debt become so large that the gubmint actually borrows to pay )or rather, roll over) interest - known full well as the classic debt trap.

Now, gubmints know or can calculate at what point that event horizon is crossed so they would logically stay away from that at a safe distance, right? Well, yes in theory. After all, Japan has a 200% debt-to-GDP ratio! UK and US have some 100% and 85% respectively, onlee.

One problem is that later debt has interest costs that are some function of existing debt levels. That is why watching bond yields can be useful.

And a credit downgrade can brutally raise interest rates sending seemingly healthy entities plunging into a debt trap overnight. Why else does the UK need to worry about a possible downgrading of its credit rating? It will be well within debt trap territory if the downgrade happens.

And for state and local gubmints in the US, additional constraint is the mandated need to balance budgets. Their declaring bankruptcy is a real possibility.

Ultimately I think the G7 game might just be to take as much debt as the mkt will bear and then, ultimately, default. The panga of course is that if the mkt figures out that that is the strategy, then the crash will come right away. So the delicate dance is to pretend solvency, show rigged figures and all the while suck more debt from lenders. Of course, the TINA factor also plays a major role. Where will savers put their money if not G7 bonds in the current scenario where all asset classes are depressed?

'debt-GDP' ratio's are primarily for international comparisons. They have little policy significance. Good old UK is figuring it out the hard way (they had a 'sustainable investment rule' which required the government to keep debt/GDP at < 60 %. They have 'temporarily' abandoned that rule). Now for debt-GDP - it is mostly irrelevant for governments. why? GDP for government is a notional indicator. India's GDP may be $ 1 trillion but GOI does not have access to $1 trillion. So how do we measure 'debt sustainability'? GOI uses a measure of debt-burden which is the ratio of interest payments to government revenue receipts. This provides an indication of how much 'fiscal space' a government has. I think for India IP to RR is about 30 % - meaning 30 per cent of GOI's revenue is pre commited for interest payments (Incidentally for the state of Bihar, administrative expenses and interest payments are > 100 % of Bihar's revenue receipts. So Bihar is totally dependent of Central govt aid for 'development').
Second, another important concept is that of internal vs external debt. Most of GOI's debt is internal. When you invest in NSC or kisan vikas patra, you are basically lending money to GOI (through public accounts) and when Banks pick up GOI treasury bonds because of SLR requirements they are creating public debt. US debt is primarily external. The idea is that 'surplus' countries like China , Japan, Korea needed some 'safe assets' to park their forex in. Unless an alternative asset is created TINA is the factor for the near future. I don't see countries investing in remnebi bonds !! Third, even if there are no 'external buyers' of govt debt, you always have your internal market a la India or California.

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 14:15

Quite right, Arnab.

I should add the rider that the debt service burden is more for debts in external currency than for internal debts. The GDP is a useful proxy to use though govt revenue receipts are a far better measure. Rev receipts are quite closely linked to national GDPs and the latter are more easily available for us armchair observers.

Interesting part is the precious metals markets also appear to be behaving strangely. One would think given the TINA factor commodities will spike like no tomorrow.

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 14:59

BTW, speaking on the subject of gubmint's revenue receipts.....this just in onlee.

Federal Tax Revenues Plummet Most Since 1932

The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

In May the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.

The government's projections included best and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."

{Sure. Except that govts have routinely raided social security and medicare funds for other exigent purposes. And these shortfalls are looming at a time when the govt has to auction record numbers of bonds every few weeks.}

President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.

{Let us wish Sri Obama the best of luck in his noble endeavors. An unbalanced (literally and figuratively) superpower doesn't bode well for the rest of the world.}

Calif is the leading edge (some may say bleeding edge) of the direction the US seems to be taking (with important differences, of course). In Calif, budget woes (given that interest payouts on debt outstanding is non-negotiable) prompted the state to do magic tricks like borrow from future lottery income that was yet to be approved by voters in referendums.

Even when debt is internal, folks do worry about how much the debt burden is. If it is known the govt has no way but to print the difference to payoff creditors or to balance budgets, then interest required off govt debt instruments correspondingly rises.

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 15:09

Calif is the leading edge (some may say bleeding edge) of the direction the US seems to be taking (with important differences, of course).

More on what I was talking about above.

Alabama's Jefferson County makes massive job cuts

Alabama's debt-ridden Jefferson County laid off about two-thirdsof its 3,600 employees on Monday because of plummeting revenues, a move that will sharply curtail services in areas ranging from roads to courthouses.

Jefferson County has been forced to make drastic cuts because of a lawsuit questioning the legality of a county occupational tax, which raised $78 million annually and was vital to the county's operation.

Although the revenue is still being collected, it is being held in escrow under orders from an Alabama Supreme Court justice pending a decision on the tax case. Some members of the state Legislature hope to pass a new tax bill this month to raise revenue for Jefferson County.

2 outta 3 (local) gubmint employees laid off? Yup, me too rubs eyes in disbelief.

One blogger says it best.

Jefferson county should simply declare bankruptcy and get it over with. Instead, it appears the state is going to tax the citizens to death to make up for $4 billion in derivative contacts gone awry.

Every time government raises taxes, small businesses respond by cutting employees, or simply not hiring them in the first place.

Obama's health care plan is going to cost jobs, and no doubt whatever "fix" he comes up with for Social Security is going to cost jobs and raise taxes as well. So if you are looking for more reasons for a "Recoveryless Recovery" you have plenty.

Left alone, it is going to be a long time before federal tax revenues recover. The implications on state spending, services, and taxes on productive members of society are ominous.

ramana · Post by **ramana** » 04 Aug 2009 19:56

Should hedge in money markets for two month period?

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 20:35

Stout defense of Goldman and myth-busting by a Gold man

Aaj ka must read.

Should hedge in money markets for two month period?

Seems like a good idea. Sept could well be stormy. Shorted stocks puts fleeing monies into bonds. So UST auctions should see some support. I expect a stronger dollar this fall. The piece below is a good read:

How to benefit from a jobless recovery

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 20:56

More fuel for vera_k's question about the limits of debt piling. Also, adds to as well as undercuts arnab's explanation in that internal debt limits are explicitly alluded to. Where else but in the most demographically precariously placed G7 rich country - Japan.

Since the global financial crisis hit last year, the Liberal Democratic party-led government has approved stimulus spending amounting to about 4 per cent of GDP. The result, predicts the Organisation for Economic Co-operation and Development, will be a ballooning of the deficit from 3 per cent of GDP in 2007 to about 10 per cent by 2010. By then the ratio of gross government debt to GDP will be approaching 200 per cent – a level that not long ago would have been unimaginable in peacetime.

Doom already seems inevitable to some analysts. Carl Weinberg, chief economist at High Frequency Economics, believes the election on August 30 offers only the prize of presiding over the “biggest financial meltdown in history” when markets balk at new bond issues and interest rates soar.

Such gloom may be premature; for the moment investors appear content to fund the deficit for meagre returns. Yet the situation clearly cannot be sustained forever. Kaoru Yosano, Japan’s finance minister, says that at current debt levels a long-term interest rate of 1.3 per cent is a “strange thing”.

He suggests the cause “may be that Japanese people are over-saving. But there will be a limit to this saving. Nobody can accurately forecast how long this interest rate situation will continue.”

Addressing a chronic deficit would be politically difficult at the best of times. The added problem for Japan is that budget-balancers will be swimming against an increasingly strong demographic tide. While the total fertility rate – the number of children each woman is expected to have in her lifetime – has stabilised in recent years, it is still just 1.37, far below the 2.07 replacement rate.

Aha. Hits all the points moi has been cassandring about onlee. Bond issuances straining investor willingness leading to soaring yields leading to higher interest rates leading to major chaos. And all exacerbated by a demographic crisis the likes of which the world will see repeated in at least half the rest of the G7.

kink

Hari Seldon · Post by **Hari Seldon** » 04 Aug 2009 23:05

Here's an example of how crucial and valiant a role financial media are playing in keepingaam joe and jane updated on the crisis around them....

Consumer spending rises in June, incomes fall (Reuters)

WASHINGTON (Reuters) - U.S. consumer spending rose slightly more than expected in June, a government report showed on Tuesday, likely pushed up by higher gasoline prices, and incomes saw their biggest drop in four-and-a-half years.

Wow, one would think. How brave and patriotic of aam janta to ratchet up spending to help the wider ekhanomy even when their incomes fell, eh?

Well, not quite, it turns out. Buried deep in the 'story' is this little gem:

However, adjusted for inflation, spending fell 0.1 percent after being flat in May.

Wow, eh? Rally on, o market meherbaan, rally on!

Ameet · Post by **Ameet** » 05 Aug 2009 05:00

Is the FDIC broke and covering it up?

http://market-ticker.denninger.net/arch ... It-Up.html

Highlight:

I believe the FDIC is broke and knows it; that under the law they should have seized these three banks (and many dozens more, including some really big ones) some time ago, but doing so will force them to tap the Treasury "emergency" credit line. They're well-aware that this could instill quite a bit of panic in the public (never mind Congress!); as such they, along with OTS and OCC are conspiring to (once again) hide the truth and pray for an economic recovery before they are forced to act as the law demanded months or even years ago!

This is nothing more than an attempt to keep this graph from looking dramatically worse than it already does and keep the "green shoot" lie alive to pump the stock market so that Americans "feel better." Big banking and other executives are taking advantage of this lie by selling shares into an overheated market (which they have been doing, by the way: Insider sales are at levels last seen just before the top in October of 2007!)

Hari Seldon · Post by **Hari Seldon** » 05 Aug 2009 12:12

GE division fined for accounting fraud

Aug. 4 (Bloomberg) -- General Electric Co., the world’s biggest maker of locomotives and medical imaging equipment, agreed to pay $50 million to settle U.S. regulatory claims it manipulated earnings to meet analysts’ estimates.

The company broke accounting rules four times in 2002 and 2003 to increase earnings or avoid reporting negative financial results, the Securities and Exchange Commission said in a civil lawsuit in federal court in New Haven, Connecticut, today. One violation helped GE continue a nine-year stint of meeting or beating analysts’ quarterly estimates that started in 1995, the SEC said.

Satyam's got company. How's a $50 mn fine, 6 yrs after the fact, expected to prevent/cure such behavior, really?

Chinmayanand · Post by **Chinmayanand** » 05 Aug 2009 15:20

Buffett’s Betrayal

Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee.

Chinmayanand · Post by **Chinmayanand** » 05 Aug 2009 15:23

China Has Become A Giant Ponzi Scheme

Hari Seldon · Post by **Hari Seldon** » 05 Aug 2009 15:28

The US establishment is heavily, and I mean heavily*, pushing for the FED to become super-regulator of the financial sector.

*Reports from WSJ and Reuters claim that Sri Geithner lost his cool at a meeting with regulators, swore repeatedly and demanded that now having aired their concerns, the various regulatory agencies immediately drop their objections to the fed taking final charge of all financial (and particularly, banking) regulation in the USA.

Geithner loses his cool at regulators meeting-WSJ

U.S. Treasury Secretary Timothy Geithner blasted top U.S. regulators in an expletive-laden tirade amid frustration over President Barack Obama's faltering plan to overhaul financial regulation, the Wall Street Journal said on Monday, citing people familiar with the meeting.

Geithner told regulators that 'enough is enough,' the newspaper said, citing one person familiar with the meeting last Friday with Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp Chairman Sheila Bair.

The Treasury Secretary said regulators had been given a chance to air their concerns, but that it was time to stop, the newspaper said, citing the person.

The Treasury Department could not immediately be reached for comment.

Don't that sound like a man in a hurry? and the fed, that famously missed the crisis coming, then wrongly claimed it was all contained at first, then blundered again and repeatedly in responding (e.g. look at the farce perpetrated in the bank stress tests) now wants to be super regulator?

From yves smith's blog:

Saturday Night Live nailed it in this mock address by Geithner:
Earlier this week, I reported to you the results of the so-called stress tests my department ran on the nation’s 19 largest banks. This was an effort to determine each bank’s fiscal soundness…Tonight, I would like to reveal to you, the American people, the results to part 2 of the stress tests, the written exam taken by all 19 banks’ CEOs…. Initially, my department had planned to give each bank a numerical grade of one to 100, 100 being a perfect score. But then we decided that might unfairly stigmatize banks who scored low on the test because they followed reckless lending practices or were otherwise not good at banking. So we changed to a simple pass/fail system.

However, on reflection, a few of us felt that system was too rigid, so we changed it once again, to pass,/pass*. This seemed less judgmental and more inclusive. Eventually, at the banks’ suggestion, we dropped the asterisk and went with a pass/pass system. Tonight, I am proud to say that after the written tests were examined, every one of the 19 banks scored a “pass”. Congratulations, banks!
So now we are about to institutionalize sham regulation as the real thing. Simon Johnson, and more recently, Michael Lewis, are right. The bankers have captured the state.

Hari Seldon · Post by **Hari Seldon** » 05 Aug 2009 15:51

China’s growth figures fail to add up

China’s gross domestic product figures are among the world’s most closely watched since they can move markets or boost hopes of an imminent recovery.

But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.

GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.

Wow. So first half GDP is some $2.25T -> annual GDP is $4.5T? Its already bigger than japan then. No?

Anyway, am kinda pleasantly surprised that the discrepancy between the national and provincial figures is "only 10%". PRC can always trump an accusing hand at America that front-loaded its GDP some 20% on debt driven consumption alone. That is why folks now warn the US will take yrs to return to its 2007 output.

More from the story:

An editorial on Tuesday in the China Daily, the government’s English-language mouthpiece, quoted another survey that found 91 per cent of respondents sceptical of official data, up from 79 per cent in 2007.

Economists abroad have also questioned the reliability of the data in recent months.

“Despite starkly limited resources and a dynamic, complex economy, the state statistical bureau again needed only 15 days to survey the economic progress of 1.3bn people,” said Derek Scissors, of the Washington-based Heritage Foundation, referring to the time it took for the bureau to produce the figures after the end of the first half this year. “At worst, results are manufactured to suit the Communist party.”

In a lighter vein

The criticism has prompted the NBS to launch a campaign last week, entitled “Statistical Feelings: We have walked together – Celebrating the 60th anniversary of the founding of New China,” to boost confidence among statisticians.

The campaign has already produced works such as: “I’m proud to be a brick in the statistical building of the republic.” In another poem, a contributor writes: “I can rearrange the stars in the sky because I have statistics.”

ramana · Post by **ramana** » 05 Aug 2009 20:23

The bankers always had the state since the Reformation. That is the secret of the West.

svinayak · Post by **svinayak** » 05 Aug 2009 20:38

Lost generation? U.S. grads work for free, look abroad
Tue Aug 4, 2009 1:18pm EDT
http://www.reuters.com/article/GCA-Econ ... 9120090804
By Wendell Marsh - Analysis

WASHINGTON (Reuters) - Americans fresh out of university are discovering their expensive degrees are not the entry ticket to a job they had hoped in the face of high unemployment.

Some young graduates are working for free to enhance their skills and bolster their resumes. Some are looking abroad for work while others are determined to push their way into the U.S. job market.

Jessicalind Ah Kit got off to a great start in her job search. One company flew her abroad and gave her a rental car. After a first day of interviews, the company told her it had a freeze on global hiring.

Ah Kit studied management information systems, economics and Japanese in college. After an 18-month search, she has taken an unpaid internship -- her third.

The National Association of Colleges and Employers says only 19.7 percent of 2009's graduates who applied for jobs had them as of May 2009. During the second quarter this year, unemployment for workers under 25 years of age was 17.3 percent, nearly double the national average.

Economists worry that unless the new graduates get on the job ladder soon, it will leave a void in a country where a wave of retiring Baby Boomers need a healthy young work force to pay for their Social Security government retirement benefits.

The generation -- known as Generation Y or the Millennial Generation typically born in the 1980s and early 1990s -- is made up of the children of Baby Boomers.

The Millennials run the risk of following Japan's lost decade. Years of economic stagnation and a sluggish recovery have had what economists call a hysteretic effect on Japan's economy -- something akin to a spring stretched too far.

Changes in Japan's labor force resulted in a larger portion of the population being employed under contract with few benefits. This lost generation missed out on the opportunity to gain skills, resulting in widespread socioeconomic woe in a country known for its rigid corporate structure.