Perspectives on the global economic meltdown (Jan 26 2010)

[shyamd]

^^ LOL. The swiss govt had sent warnings to all western intel agencies in Swiss to stop probing Swiss banks for tax info, swiss threatened to expel diplomats involved and create a diplomatic spat. Wonder what they will do to neighbouring Germany. The Swiss banks are under the protection of swiss intel agencies now.

[Chinmayanand]

Hari guru , you want MMS to pay 5 million euros to know the details of Gandhi family's swiss accounts and impose taxes on them ..

[Neshant]

Public sector salaries & pensions are bankrupting states

http://boston.com/bostonglobe/editorial ... employees/

Since December 2007, when the current downturn began, the ranks of federal employees earning $100,000 and up has skyrocketed. According to a recent analysis by USA Today, federal workers making six-figure salaries - not including overtime and bonuses - “jumped from 14 percent to 19 percent of civil servants during the recession’s first 18 months.’’ The surge has been especially pronounced among the highest-paid employees. At the Defense Department, for example, the number of civilian workers making $150,000 or more quintupled from 1,868 to 10,100. At the recession’s start, the Transportation Department was paying only one person a salary of $170,000. Eighteen months later, 1,690 employees were drawing paychecks that size.

All the while, the federal government has been adding jobs at a 10,000-a-month clip. Between December 2007 and June 2009, federal payrolls exploded by nearly 10 percent. “Federal workers are enjoying an extraordinary boom time in pay and hiring,’’ USA Today observes, “during a recession that has cost 7.3 million jobs in the private sector.’’ And to add public-sector insult to private-sector injury, data from the Office of Personnel Management show the average federal salary is now roughly $71,000 - about 76 percent higher than the average private salary.

Moreover, government retirees in Ohio enjoy taxpayer-provided health care, and in many cases can retire at 48.

[joshvajohn]

Swiss bank's ‘Cooperation with criminals' from The Hindu Newspaper

In that case, isn't the Swiss banking industry engaging in “cooperation with a criminal”? Of course, the Swiss will say that once the charges of wrongdoing against an account-holder is accepted by a Swiss court there is no bar to the secretary-veil being lifted. But of course this is easier said than done, as the Bofors saga proved so conclusively.

http://www.thehindubusinessline.com/201 ... 270900.htm

Swiss bank money finds its way into Indian stock market
http://www.merinews.com/article/swiss-b ... 1151.shtml

After scandal, Swiss bank secrecy veil may lift
http://www.neurope.eu/articles/After-sc ... /93486.php

Switzerland: A Parasite Feeding on Poor African and Third World Countries?
http://www.assetrecovery.org/kc/node/6a ... EB29E36521

[Purush]

Public sector salaries & pensions are bankrupting states

hehe

http://www.twincities.com/ci_14358113?s ... ost_viewed

Madison's highest paid city government employee last year wasn't the mayor. It wasn't the police chief. It wasn't even the head of Metro Transit.

It was bus driver John E. Nelson.

Nelson earned $159,258 in 2009, including $109,892 in overtime and other pay.

He and his colleague, driver Greg Tatman, who earned $125,598, were among the city's top 20 earners for 2009, city records show.

They're among the seven bus drivers who made more than $100,000 last year thanks to a union contract that lets the most senior drivers who have the highest base salaries get first crack at overtime.

And there was a lot of overtime — $1.94 million last year, $467,200 more than the bus system budgeted for and the most ever for the system — as employees exhausted sick leave and took advantage of unpaid leave through the federal Family Medical Leave Act, officials said.

[Neshant]

US, Europe Will All Default On Their Debt: Marc Faber

Published: Wednesday, 10 Feb 2010 | 2:38 PM ET Text Size By: CNBC.com

The governments of every developed economy will eventually default on their sovereign debts, including the US, the UK and Western Europe, Marc Faber, editor of the Gloom, Boom & Doom report, told CNBC.

"In the developed world we have huge debt to GDP, in terms of government debt to GDP and unfunded liabilities that will come due," Faber said in a live interview via telephone. "These unfunded liabilities are so huge that eventually these governments will all have to print money before they default."

Faber said that emerging economies are much more financially sound on this basis than the developed world, with the exception of Singapore, which has a limited amount of debt and huge reserves.

His comments come amid talks of a bailout for struggling Euro zone member Greece, which needs to borrow 53 billion euros, or $73 billion, to cover its deficit and refinance debt that is coming due.

Faber added that the global stock markets — which have mostly fallen about 10 to 20 percent from their peaks — have begun a correction phase that he expects to continue.

He said he thinks the new resistance level for the S&P 500 will be 1,100, though an oversold market could cause a relief rally over the next ten days.

Still, he said he is "relatively optimistic" about stocks going up, referring to them and precious metals as two of the best safe havens.

[Hari Seldon]

Hugh Hendry's always been a pleasure to listen to - crisp, crystal clear, non-fuzzy and razor sharp.

Here he zimbly demolishes the compassionate Prof. Stiglitz and some random Spanish Ambassador (Mark I model) on a post Greece world.... recommended watch!



BTW, Hendry does mention the one thing that moi has been alluding to for a while now. "Debt forgiveness" is the only way out for the G7 pretenders, he says.
Its no secret that debt loads (public + pvt) are now so obscenely high that servicing costs have become untenable only. GM bondholders' haircut I thought the opening salvo in a haircut hurricane about to sweep the world, I'd believed. I still believe there's no getting away from all the debt w/o major magic tricks (or as the fidels say, 'miracles')

Coming back to the grand 'debt forgiveness' idea, strange, moi always thought only creditors had the power to voluntarily forgive debt. When debtors do it, its called default, I'm told.

So, Sri Hendry would do well to use the D-word - default post depression - directly than play semantic games here. The creditors are mostly based in Asia (PRC included) and the Gulf. Wonder what they'll say to the 'debt forgiveness' demand onlee...

Am reminded of an old Hindi B&W song... lyrics went something like...
barood ke ek dher pe baithi hai yeh duniya....

[Hari Seldon]

Hari guru , you want MMS to pay 5 million euros to know the details of Gandhi family's swiss accounts and impose taxes on them ..

Durgesh bhai, I'm not that naive, thank you.
Am just hoping that our babus and agencies are not unaware that the swiss bank a/c details of perennial anti-Yindia rabble-rousers of the likes of a Nawaz, a Khaleda or a Prachanda might do wonders to temper their anti-Dilli rhetoric, maybe? Who knows, eh?

[Neshant]

Robert Prechter interview on the start of the 3rd elliot wave down which he claims will be bigger than in 2008. The S&P will go from 5 digits to 4 and then to 3 according to his rather bold prediction.

He gives the timeline of 2014 to 2016 as the ultimate low. He says everything will go down relative to the US dollar including gold as private debt collapses faster than the government can inflate. He says what has been created even with the stimulus is a mountain of credit but relatively few dollars to back that credit.

He's one of the few who predicted the 2008 collapse, gold's rise and the 50% retracement of the stock market since the March, 2009 lows. He says this is the last opportunity you have to get rid of real estate and other assets and move to safety by which he means cash and cash equivalents (short term US Treasuries).

If he's right, there's going to be a massive buying opportunity in a couple of years and only people with cash are going to be ready for that party.

http://www.cliffkule.com/2010/02/robert ... on_09.html

[Satya_anveshi]

Brace up for the interest rate increase and market tanking in the short term.

Fed in Talks With Money Market Funds to Help Drain $1 Trillion

[Neshant]

in his dreams maybe..

banks will be fleeing the UK shortly for greener pastures.

-------------

Britain's Brown says global bank tax near

http://ca.news.finance.yahoo.com/s/1102 ... eport.html

[Suraj]

Neshant: What is Prechter's record of being wrong ? That information would be as interesting as his record at being right.

[Hari Seldon]

The Coming Showdown With The Unions

Simple, refreshingly straightfwd summary of the coming showdown with unions.

Main excerpts:

You thus have the making of a classic political and economic battle. Unions are showing up in force at council meetings or state legislatures to protest cutbacks. Teacher strikes are becoming more common, and police and firefighters who cannot strike can at least protest and issue dire warnings of fire fatalities and jumps in crime if services are reduced.
...
In fact, where the general public often finds itself in these battles is voting down any initiatives to raise taxes in order to meet legal obligations to the unions, the result being that the state has to renege on these obligations in order to balance the budget.

People scorned boor Greece for cheating on its accounting and its numbers - hitherto an area reserved only for disgraced corporations like enron. Turns out local gubmints by the busload have long been doing it in the states.

When it comes to funding the pension plan deficits, one easy accounting gimmick is to change the long term earnings assumptions of the plan. In many cases these plans already have ridiculous assumptions as to asset growth, often using for the stock portion of the plan an assumption that equities will earn 8% p.a. over time. It takes just a stroke of the pen to declare this assumption to be 10% p.a., so that the plan will magically take care of any deficits by itself with superior performance. Another trick is to authorize plan managers to invest in hitherto forbidden financial instruments like derivatives or commodities, on the belief that the returns are greater in these sectors. They are certainly greater, but so is the risk, and inevitably these desperate attempts to reach for risk are bound to fail.

Bottomline?

It is not too difficult to determine the outcome of this fight. States and localities have no choice but to close their deficits, and the taxpayer has no appetite for greater taxes. Therefore the unions will have to accept cutbacks in salaries, wages and benefits; reductions in pension plans (amounting to an outright repudiation of legally-agreed payouts); and the loss of job protection, so that government officials can fire workers much more quickly. There will be nasty strikes over the next few years, and lawsuits aplenty as these cutbacks are enforced, but there simply isn’t the money to continue to pay union workers in government anything like what they have received in the past.

Amen.
Its no secret that unionization in some sense preserved the wealth share of the public workers as oppsoed to their less fortunate pvt peers. Alas, their claim to middle classdom might soon come under globalized fire.

The deflation that has ravaged the pay and benefits of the middle class private sector worker is about to work its damage on the public sector as well. The middle class in the US will shrink even more, as one of the last bastions of protection against rampaging globalization and Republican market orthodoxy succumbs. We can say “one of the last bastions”, but there is still one left, a sector of the economy that isn’t even unionized. That is the pay and benefit programs for the military, especially the officer corps who can retire at 50, slip into a well-paying job in the industrial complex, yet also take home generous retirement benefits. The costs of supporting tens of thousands of these retirees is galloping forward year after year, but this is so far a sacrosanct area that no politician will touch. Even the Department of Defense may not be able to hold out forever, if economic conditions get really bad (and that is likely to be the case).

If so, the concept of retirement with a fixed pension payment will be obliterated in this country, as the US continues on its path of erecting third world standards of pay and benefits for all its workers.

Welcome to the turd world, I guess. If something can't go on forever, it won't.

[abhischekcc]

I had noted about a year and a half back in my blog that the US will use this crisis to solve two of its largest problems - its high debt and pension obligations.

Things are moving exactly as I surmised. All the talk of a strong dollar is hogwash - Uncle will try to maintain that appearance as long as possible because it has certain benefits.

However, domestic disturbances will give it the excuse to default on international obligations.

Let me make another prognostication here - that before long, liberalism will fall.

[Chinmayanand]

liberalism will fall

Bliss to explain this to this unwashed abdul.

[Dilbu]

Economics gurus of this dhaga pliss to announce the exact moment as and when UQ turns the corner irreversibly to take the road towards turd worlddom, for the benefit of unwashed abduls in torn lungi like me. The popcorn, beer and AK for hawa phyrr are ready at hand.

[rohiths]

Economics gurus of this dhaga pliss to announce the exact moment as and when UQ turns the corner irreversibly to take the road towards turd worlddom, for the benefit of unwashed abduls in torn lungi like me. The popcorn, beer and AK for hawa phyrr are ready at hand.

Turning point has already been crossed. The amount of debt is clearly unsustainable. It is just a matter of time before the house of cards fall. It needs one or two major shocks(Greece?? China??) to hasten the fall. In absence of such shocks economic decline will be slow and painful.
By 2017, India will cross UK in Nominal GDP if present trends continue. UK still has lot of wealth accumulated over the years. Takes time to loose it all. By 2030 UK will largely be forgotten.

[Hari Seldon]

pliss to announce the exact moment as and when UQ turns the corner irreversibly to take the road towards turd worlddom

exact moment, eh? You running a hedge fund on the side or something?

Irreversibly? Well, there could be many grey swans here. But if Sri Gordon Borrow-n or labor in general gets re-elected, then I'll safely call it an irreversible corner-turn only.....

For once I'll be cheering the packee vote consolidating only. Vote labor back to power....!

Heeeyaaaa.

[Hari Seldon]

The automatic earth tweets - concise summary of fast changing events outside, with links. Worth visiting daily only.

http://twitter.com/AutomaticEarth

US Banks Have $176 Billion Exposure To Weak Euro Countries (PIGS) - http://bit.ly/aiU7x0

Ho-hum. Another stat says US states need ~$180 bn bailout to cover deficits this yr alone - same as the AIG bailout (call it a GS-JPM bailout, in truth) back when.

EU leaders reach deal to rescue Greece - http://bit.ly/9EKOB5 (Voluntary loans at each countries discretion)

Hmmm. Dunno why, am somewhat reminded of the original Mrs Gandhi's "vote your conscience" deal to INC MPs, reached on Sri Neelama Sanjeev Reddy presidential candidature only....

Britain's 250Bn pound exposure to the PIIGS (16% of GDP) - http://bit.ly/9ZtYXl , France 30% of GDP,Holland 29% of GDP & Germany 19% of GDP.

Aha. Heroically swimming naked only, eh? Sadly, low tide waits for no one only. Compare that to unkil's exposure - 0.176tn out of $14 tn? Some 1.2% only?
No wonder the oiro-peons were playing coy all along talking the euro down kal tak...recall this, anyone?

EU divided over Greek IMF bailout - http://bit.ly/9WFnL9 (Markets really confused, Is there a Greek bailout? Or is it just a ploy?)

Meanwhile, core issues (like kashmir) don't change only. New issues become core over time (like water). See below:

Greek aid would be no long-term fix for euro zone - http://bit.ly/cT8AWt (Staving off debt with more debt, geniuses! Hoocoodanode?)

Jai Ho.

[shyamd]

Thinking the unthinkable

Stephanie Flanders | 13:32 UK time, Thursday, 11 February 2010

All eyes are on Brussels, as we await more details of the "co-ordinated measures" on offer to help Greece. There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.

Let me explain. Greece has two big problems: a debt problem and a competitiveness one. A "bail-out" won't solve either - at least, not a bail-out that any self-respecting German would be willing to consider.

We may get a bit more clarity today on the support that Germany and others are planning to offer Greece. More likely, as I said yesterday, we will have to wait until the next week's meeting of European finance ministers. That is what today's statement suggests.

But we can be fairly sure that whatever deal is struck, it will not make Greece's debt problems go away.

The best that Greece can expect from its eurozone partners is a promise to underwrite Greek debt, or some form of bilateral loan to tide Greece over. The first would cut the risk premium on Greek debt and make it easier to service. The second would give them cash to get them through the next few months, when nearly 10% of their debt comes up to maturity.

But neither would do much to lower the stock of debt hanging over the economy. Or lessen the need for swingeing cuts in public services and tax rises over the next few years. Indeed, if Berlin has anything to do with it (and we know it will) - Mr Papandreou's government could come out of this with an even tougher schedule for cutting the deficit than it had before.

So, it won't make the debt problem go away. It probably won't make the burdens on the Greek government - or its people - that much easier. It just goes from being 'impossible" to merely "intolerable".

It goes without saying that it won't solve Greece's competitiveness problem either. I promised a post today on the long-term structural problem underlying this eurozone crisis. Happily - or perhaps unhappily - Martin Wolf beat me to it, in a superb column in yesterday's FT. As he says:

"So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output."

As I showed in my piece for yesterday's BBC News at Ten, it's no accident that the countries in the firing line in this crisis are also the ones whose competitiveness has deteriorated the fastest within the eurozone since the single currency began.

This chart tells the story, from Janet Henry at HSBC.

HSBC chart

German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.

This is why there is no decent route of this for the Pigs (Portugal, Italy, Ireland, Greece and Spain). As I've said many times in the context of the UK, it's tricky to cut borrowing as a share of GDP when your GDP is itself shrinking or stagnant. It is more or less unthinkable that Greece would manage to do this and achieve the real cuts in wages and living standards that would be necessary to seriously improve their competitiveness within the eurozone.

Martin Wolf says that higher German domestic demand is the solution (or a big part of it). That would certainly help. So would a weaker euro. But remember, in the current situation, the biggest beneficiaries of a weaker euro would be German exporters.

But imagine you were coming to the situation for the first time. You knew nothing of the Bundesbank. Or the history of the single currency project. Or even the market impact of the failure of Lehman brothers.

If you were such an unworldly creature, you might come up with two, more ambitious proposals for tackling Greece's fiscal and competitiveness problems head-on: debt restructuring for Greek bondholders; and a higher inflation target for the ECB - say, 4%, instead of 2%.

I touched on the first of these, briefly, on the Today programme this morning.

If you could pull it off, restructuring Greece's debt (with some suitable "haircut" for private bondholders) would actually lower the real burden of its debt, making the path out of this more plausible. Of course, Greece would pay a price for it in the markets. For a long time. But it's not as if it's never been done. And it's not as if the alternative path for Greece is much brighter.

"Unthinkable", you may say. "Remember what happened after Lehmans was allowed to go bust - and everyone in the world holding private bank debt started wondering whether they were next?"

The memory of that is indeed one of the many reasons that a debt-restructuring is not being seriously considered.

But the international community has now accepted that there need to be ways to make private bondholders bear some of the burden when banks get into trouble - not just taxpayers. A few years from now, I wonder whether we will be saying the same about sovereign debt problems as well.

So much for unthinkable number one. What about unthinkable number two - a higher inflation target for the ECB?

This post is so long already - and this is so unlikely to happen - that I won't belabour the point. But this is something that was discussed, a little, when the euro began, and especially when the membership extended beyond the European "core".

Arguably, a higher inflation target for the eurozone would help the less developed economies on the periphery grow faster in real terms, not just nominal. It could also make it easier for countries at the periphery to cut labour costs in real terms - without actually lowering people's nominal wages or suffering deflation. And it could weaken the euro, which might help growth as well.

A 4% inflation target for the ECB wouldn't solve the problems at the periphery. You would still need more domestic demand in Germany, and some tough structural reforms in Greece and the rest. For all these reasons, the short-term benefits to the eurozone of slightly higher inflation could easily be frittered away. But it might, just might, move things in the right direction.

Pity that the eurozone members cannot even raise the question. Let along make it happen.

Just delaying the inevitable?? Apparently Britain and Sweden(non Euro) have said NO, they will have nothing to do with a bailout of greece, washing their hands.

[ramana]

Alex Merck of Merck Investments in Palo Alto was saying Greece is 2% of EU economy and eventually they will take care of it. US should worry about California which is 12% of US economy. The fallout of Ca going bankrupt are much more severe than Greece. Yet the pundits are fretting and worrying and dragging US stock markets. Shows they dont know much but controll a lot.

Countries dont get wound up unlike invest ment banks. Greece will stay there but will need debt re-strcuturing and no one wants to lend at 1.3% for the risk of default is too much. So interest rates ahve to go up but then it will jepoardise EU growth due to uniform interest rates all over EU. So some form of adjustment has to be made. So EU has to step in or risk losing it.

[Neshant]

What is Prechter's record of being wrong ? That information would be as interesting as his record at being right.

I'm sure he must have many misses all throughout his career in this rather finicky business of fortune telling. I'm not so interested in his past performance so much as what he's currently saying. I don't know if he's right but he's definately a contrarian in calling for the dollar to soar in value. Some of his hits & misses below.

Hits :

- Predicted a long bull run in stocks during the depths of the 1979 recession and DOW to 4000 (at that time dow was in 3 digits).

- Predicting the 1987 stock market crash.

- Predicting the 2008 real estate crash in 2007.

- Predicting the rise of gold in 2002 when nobody was interested in it.

Misses :

- The guy has been bearish since the 1987 stock market crash missing some of the best years of stock market boom!

- He became ultra bearish since 2002 calling for a major deflationary cycle. I don't think he was wrong on that since all the growth since 2002 has been fake. No productive industry with mass employment has emerged since IT in 2000.

[vera_k]

The trick with all the bearish scenarios is in knowing when policymakers are out of options. The game has always been one of extending the interregnums between economic downturns. What possible options exist today to postpone the inevitable depression?

[paramu]

During the previous depressions, the primary market for US, the Europeans, were controlling many colonies. By exploiting the colonies (like taxing even salt in India) those colonizers could pull themselves out of the crisis.

However, there is no direct control now over such people to be exploited. Currently there are many people who are trying to pull down USA, like Russia and China, who weren't present then. Bottomline is, this time it is different. We have to wait and watch how things unfold.

[Neshant]

the only thing that will result from adding more government employees to the payroll and more pork barrel spending on needless private sector infrastructure projects is an explosion of unpayable debt. Being made to pay the lavish pensions of the public sector is slowly killing off the middle class in the private sector.

---------------
US to create 95,000 jobs per month, says Obama

WASHINGTON: A new White House economic report predicted on Thursday the US economy is set to start producing job growth this year at a rate of 95,000 per month...

President Barack Obama’s annual economic report to Congress said the economy is on the verge of pulling out of a period of steep job losses stemming from the worst recession in decades.

http://timesofindia.indiatimes.com/biz/ ... 562634.cms

[paramu]

eventually the rise of Eastern Europe especially Poland and Turkey on the South, will ensure that Russia will become a minor state by 2050.

This assumes that these countries will escape from economic crisis unscathed. Very unlikely, IMO.

[Neshant]

what the germans said : we'd like to help you cut spending to pay off your debt
what the greeks thought the germans said : kick back and chill, we got your tab covered bro !!

Spot the difference?

------
Angela Merkel dashes Greek hopes of rescue bid

http://www.guardian.co.uk/theguardian/2 ... ilout-euro

[ramana]

How is Ravi Batra doing nowadays?

[abhischekcc]

Yes liberalism has many meanings, in this context I am thinking of it more in terms of the historical factors that sustained it for the past 1.5 centuries.

Liberalism was born in imperial britain, and that too in the upper classes flush with ill gotten gains from various people of the world. It justifies self centered pursuit of interests (to the complete detriment of the community). This was their way of justifying, in their own eyes, the fact that they had not done genuine work for their fortune.

This class adopted the wishy-washy do-gooder attitude of 'helping the poor', 'individual rights', 'feminism' etc etc because it was useful in deflecting criticism of its narcissism. Of course, later this line of propaganda proved very useful in beating down political challenges from the middle class, which tends to be conservative in politics and morals. And this propaganda had an additional benefit - it attracted the lower classes, whose support was useful in fighting the middle class once mass democracy became popular.

Post WW2, liberalism became popular in the west as the excess wealth trickled down to the masses and they started adopting the ideology of the rich. The idea is that an excess of material wealth is necessary for liberalism to flourish.

If you look at the current financial crisis from the POV of a class conflict, you will find the same contours emerging - the upper, capitalist class has been bailed out, while the middle class has been stuck with the bill. Moreover, this crisis has and will continue to whittle down the number of middle class further.

---------------

Now for why this crisis will lead to the demise of liberalism.

The past decade or so has been remarkable in that it has seen growth in almost all parts of the world simultaneously. Something unique in human history. This has led to a shortage of resources. Recall that excess wealth is necessary for liberalism. The social premise of liberalism - that it promotes individualism cocooned in the safety of prosperity - is now under threat in the west. As the class conflict intensifies in the west, it will lead to questioning of individualism over the community.

The fact remains that the west can no longer impose its dictate over the rest using military force - Iraq and Afghanistan have seen the end of the idea. That is beyond doubt. Which means they can no longer expect us to subsidize their lifestyles.

There is another thing to consider - whether fascism will make a comeback. This is not idle speculation. Before the Nazis rose, the same conditions existed in Germany. Of course, the british played a major role in all that by first refusing to finance the German republic, then funding the Nazi party, and then funding Germany when the Nazis came to power and then winking at their re-armament, but that's another topic.

[Hari Seldon]

(James?) Bond auction news from the land of the phree.

Before going there, pls know the PD or primary dealer system the Treasury operates. PDs are required to submit a bid on all UST auctions. Period. So 'failed' auctions don't happen in the khanate the way they happened in Portugal last week.

30 Year Auction: A Solid "F"

Yield was way over where it was trading at the time...

The more-worrying factor here is that we've got this "mystery" direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail. To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

Remember folks, this sort of issuance isn't a local event. It will continue through the year, as we are on track to run record budget deficits, so the premise that "it will all be ok and this won't start a ratchet up of rates on the long end" is perhaps more than a bit fanciful.

Rick Santelli gave the auction an "F" and I agree - there's simply no possible way to read this as anything positive at all, and that the equity market is ignoring it (other than a quick, small spike downward on the release) likely has more to do with how tightly equities have become coupled to the dollar in the last couple of weeks than anything else.

No, don't get me wrong here. Not suggesting bond yields in the khanate on the long end (which impact mortgage rates pretty sharp) are about to jump. Just that the risk of that happening has jumped only.

[Hari Seldon]

Well, well strong words here only.

Christie to freeze $1.6 billion in NJ spending

Basically:

Governor Christie Declares "New Jersey on Edge of Bankruptcy"

Living on the edge ain't always cool, you say? The khanate by some accounts has been living over the edge a while now.

Anyway, Sri Christie had this to say:

Gov. Christie today declared that New Jersey had veered to the edge of bankruptcy and ordered a broad array of state cuts in an effort to make up a $2.2 billion deficit in the current budget amid falling revenues.

Christie froze aid to more than 500 school districts and public colleges and universities, ordered the end to several state programs and the Office of Public Advocate, and seized unspent money across state government.

"Today, we come to terms with the fact that we cannot spend money on everything we want,'' Christie told a special joint session of the legislature. "The days of Alice in Wonderland budgeting in Trenton are over.''

The state's sales tax revenues are 5.5 percent below projections, corporate business tax receipts are down 8 percent, both below what had been planned under former Gov. Jon Corzine's administration, Christie said.

Christie also announced the state would not contribute $100 million toward pensions costs and signaled that he would push for massive pension restructuring.

Christie highlighted the benefits for unnamed individual teachers as an example: a retired teacher who contributed $62,000 in total toward her pension who would be expected to receive $1.4 million in pension payments and $215,000 in medical benefits over the rest of her life.

"Is it fair for all of us and our children to have to pay for this excess?'' Christie said.

Christie said the state would have to pay $7 billion a year to make up unfunded pension and medical liabilities. ""We don't have that money. You know it and I know it,'' Christie said.

Has it begun? Dunno. This tough talk could well be mere posturing by gutless netas only. No? But start it will. Someday. Be very wary.

[Hari Seldon]

Aaj ka must-read from zero hedge.

Just How Ugly Is The Sovereign Default Truth? How Self Delusions Prevent Recognition Of Reality

Uh-oh. Too much material in there to excerpt, highlight or comment on. Read it all only.

[Hari Seldon]

An interesting comment amid the inter-generational sniping seen on ZH comments. Posting in full.

I'm 46 years old, putting me at the very beginning of the GenX generation. I have a teenage daughter who is just now entering both college and the work force, so I have a good perspective of what her life (and her cohort's lives) are like as well.

The boomers lives were marked by positive economic trends from birth - oil was cheap and domestically produced. Five years of war after a decade long depression had left the US fallow for economic growth, and unemployment was nearly non-existent by 1960. Given those trends, pension and social security plans made a great deal of sense (and also provided a handy source of effectively mythical money to be tapped into politically). The likelihood of working for one company for your entire life was high, which meant that you had little chance for economic disruptions in your life, and the real wages were increasing up to about the mid-1970s.

After 1973, the US became a net oil importer. We entered a major economic recession, one which in general affected younger workers far more than it did the mid-level managers that were what the forefront of the boomer generation had become. The corporate friendly 1980s marked the peak earning years for those self-same boomers, meaning that their incomes were often supplanted with bonuses, increased stock options and other non-salaried benefits which could in turn be invested. Meanwhile, those starting out in those years were likely to see 4-5 jobs in their "work lifetime", which meant economic disruption, periodically loss of pensions and similar income, depradations from financial parasites and so forth.

The 1990s saw the dot-com era, in which, at least on paper, young kids (late genXers and Millenials) could become billionaires overnight. In practice, most of them (us) ended up with lots of paper stock options that we could use to wallpaper the den with because they certainly never generated any real money, while the bulk of the money that was generated went to investors (those with high disposable incomes) who cashed in while the getting was good. Most of them were, you guessed it, Boomers.

The 2000s saw massive layoffs in the tech sector, as the money shifted over into real estate, and as senior managers (yup, Boomers) decided to save even more money outsourcing as much of the tech and manufacturing jobs as they could, while at the same time leaving them with the profit.

By this time, someone entering the workforce could expect to see their resume peppered with dozens of companies, especially if they were in tech, since the average job was now of limited duration and usually brokered through an agency that took a major slice off the top (and guess who owned most of those agencies).

Reliable insurance was a thing of the past, pension funds seem like a remarkably transient vehicle for savings (something that I think will be proved out within the next couple of years tops) and even the notion that hard work will get you to the pinnacle of success has been continually disproved in what has increasingly become a casino economy - you became wealthy if you were either friends of the casino boss or were one of the gulls that the casino would let win big occasionally to entice others to come and spend ... certainly talent and perseverance were no longer determining factors.

In the end, most of the Boomers who face a rough retirement will do so because they weren't paying attention and lost money in the recent crash - I can assure you many others will be doing quite well indeed. For the GenXers, the Millenials, the Virtuals (post 2000) its a different story - the well's been drying up for decades.

Most of the late Millenials and Virtuals, despite the laptops and cellphones, which effectively define their preferred mechanism for communication, are coming into the work force with the understanding that the till is gone, that jobs are scarce and will become scarcer still, that working for a single company (or even a handful) is dangerously naive and absurd, and that their world is going to be one defined by resource scarcity, not resource abundance. Tell a sixty-something that we've passed the peak of oil production and are now on a downward slope and they'll think you're insane. You don't have to tell a twenty-something - they know that fact implicitly.

[Hari Seldon]

Kya baat hai bhai, D&G ka season chala hai of late seems like. Time I played contrarian and gushed forth optimistic views on why everything will soon be A-ok.

Here's the latest from the excitable folks at Zero hedge. Again, in moi elaborate CYA opn, kindly don't believe every word uttered below - caveat emptor.

For Greece, with on and off balance sheet liabilities at over 800%, it's game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday's popular post on prevailing delusions as captured by Albert Edwards' colleague Dylan Grice, we present Albert's latest outlook. Please don't read this if you want to keep believing there is any hope left for the (developed) world.

Re the bolded part, what balderdash. Nothing untoward will happen I tell ya. A debt jubilee will be declared, implicitly or explicitly and life will carry on. The so called massive debt burden etc is merely a set of numbers only, no? It can be waived off by the stroke of a pen, just like any other 'bond' emerged gubmints have ever deigned to commit themselves to. And if and when unkil declares all its debts (i.e. debts it owes others) illegit, unka kaun kya ukhaad lega, eh?

So yes, kindly take this D&G overflow with salt only.
Sure, D&G is there in that living standards and job ops will re-adjust downwards, wealth will evaporate that was notional anyway, equities will languish for quite a while, bond yields won't matter post jubilee coz debts would be made illegal only but that's about it. Nothing else need change. The party goes on. Ensoi.

On why the Irish way is doomed to fail - lack of competitiveness is fundamental, even if short term budget busts come and go.

The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

On why oirozone's liberal, aware, awakened, gentle, compassionate, socially responsible (m)asses won't tolerate deflation:

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political "consensus" within the PIGS to remain in the eurozone could falter in the face of another of Europe's unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone.

Wow, gotta thank our stars the Yindian unions has managed to stumble along despite differential competitiveness across regions on par with anything oirozone has to offer.

The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.

Bottomline:

My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it's payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its "correct" level as this would involve a depression.

So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.

I refuse to believe it. It can't be true. UK-stan hasn't crashed so far. It was fine yesterday. So there's zero reason to believe it'll crash tomorrow. That's it. Hmmph.

[Neshant]

a retired teacher who contributed $62,000 in total toward her pension who would be expected to receive $1.4 million in pension payments and $215,000 in medical benefits over the rest of her life.

Public sector ripoffs have reached such an extent that not only are these parasites demanding higher and higher wages even in a recession, they want gold plated pension plans AND they want the private sector worker to pay for any investment losses incurred by their pension plans! (they'll keep the profits thanks). They even want the government to gurantee 100% inflation protection. It won't be long before they start demanding a Jag with leather interior to go with the job.

The best thing that could happen is if the state governments went bankrupt and the entire public sector ended up being privatized.

[svinayak]

You will love this........ .....

It is the month of August, on the shores of the Black Sea . It is raining, and the little town looks totally deserted. It is tough times, Everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.

He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.
The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.
The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.
The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her services on credit.

The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.... . And that, ladies and gentlemen, is how the world is doing business today.

[shyamd]

Greek Britain?

Stephanie Flanders | 18:12 UK time, Friday, 12 February 2010

How far is Britain from Greece? That's the question lurking behind British headlines in recent days. And the answer isn't 1,400 miles. We're talking finance here, not geography.

Watching the scenes in Athens, people understandably want to know whether there's any chance of the same happening here.

You'll be relieved to hear the answer: however bad things might be here, we really are a long way from being Greece.

Here's what we have in common with Greece: our budget deficit is more than 12% of GDP; our national savings rate is too low; and we've both recently won the chance to host the Olympics.

You may laugh, but for Greece, the cost of hosting the Olympics played a non-negligible part in putting it where it is today. Hopefully it won't play a big role in our financial future.

The low rate of national savings tells you that Britain - like Greece, and Portugal, and Spain, and Ireland - has a current-account deficit. We're a net borrower from the rest of the world, which means, at the margin, we're dependent on the rest of the world to fund a good portion of our government debt.

But if I tell you the magnitudes involved, I promise you'll feel better. Last year, Greece ran a current account deficit of more than 11% of GDP - the highest in the entire OECD. Portugal's was not much better: nearly 10%. Spain's was 5.3% of GDP. Compared to that lot, the UK's roughly 2.5% of GDP current-account gap looks rather small beer. And Ireland's was similar.

What's important about these figures is that the Club Med countries - I'm trying to avoid the word "Piigs" - went into this crisis with even deeper macroeconomic imbalances than we did. That ought to make our path out easier as well.

But of course, there's still our whopping budget deficit. That's not so different from Greece. It's also why we have been somewhat affected by the squalls on the Continent in the past few weeks: the spread on UK sovereign default swaps has been rising for all the "high-borrower" countries recently, even those which, like the UK, have relatively low stocks of debt.

cds.gif

But as the chart above shows, the speculators who bet on these instruments - as Robert Peston points out today, much of it is indeed speculation - these speculators are still distinguishing between the UK and the likes of Portugal and Spain. True, as I pointed out in a post late last year, this market is rating us more as a AA country than a AAA one. We have, to that extent, moved in Greece's direction. But there's a long way to go.

High borrowing matters short-term because you have to ask the bond markets for money more often. It matters medium-term because it pretty quickly adds to your stock of debt. But it is relevant how much debt you had to start off with. Britain started out with much smaller stock of debt as a share of GDP than Greece - it's now about 55% of GDP. In Greece, it's well over 110% (no point getting too precise, given the rate both of those figures are going up.)

But the two most important reasons to sleep more soundly tonight than the Greek prime minister are the average maturity of our debt, and the pound.

According to the Debt Management Office, the average maturity of UK sovereign debt is 14 years. In the US, it's about four years. In France and Germany it's six or seven. In Greece, it's even lower - as I mentioned yesterday, they have about 10% of their debt coming due in the next few months.

That makes an enormous difference to the amount of gilts we need to ask the debt markets to buy in a given year. It also means that even fairly large increases in funding costs will only have a gradual effect on the cost of servicing UK debt. That burden is still lower today, as a share of total spending, than it was for most of the 1980s and 1990s.

For Greece, debt servicing costs now account for just under 12% of GDP. In the UK, it's costing less than 3% of GDP.

You might be surprised to hear that Germany, France and Italy are all going to be issuing more sovereign debt on the markets in 2010 - even though our budget deficit, in absolute terms, is more than double the size of theirs. That is entirely because of the relative maturity of our debt.

Take Germany as an example: its budget deficit in 2010 will be about 140 billion euros, whereas ours will be about 190 billion. But because of the amount of debt it has coming to redemption, Fitch, the ratings agency, reckons that Germany will be looking to issue about 386 billon euros in new sovereign debt this year.

The estimate for France is 454 billion. Whereas the UK will be issuing a "mere" 279 billion. That is one reason why French CDS spreads have crept up a bit as well.

And then there's the final reason to feel a bit more cheerful: the pound. We may be talking about a currency crisis in the eurozone. But, arguably, a big part of the problem for Greece - at least from the standpoint of international investors - is that it can't have one. Its currency can't devalue independent of the rest of the eurozone.

As Michael Dicks pointed out in his recent contribution to the IFS Green Budget, if you're thinking only about the currency, we've already had our crisis. The pound fell further in 2008-9 than during any of the sterling "crises" of the 1960s and 1970s. Or the ERM.

We could face an uphill struggle exporting our way out of recession, especially when most of the rest of the world is trying to do the same thing. But a 25% devaluation is a good way to start.

We're facing some enormous challenges coming out of this crisis - fiscal and economic. Given the rate at which our debt is climbing, the clarity of politicians' commitment to bring down borrowing will be crucial to how we fare in the markets over the next year or two. But, you will be relieved to hear, the government - any government - will really have to work hard to turn us into Greece.

Greece's liquidity problem needs to be sorted first

Robert Peston | 13:09 UK time, Friday, 12 February 2010

Comments (64)

The pathology of banking crises and sovereign debt crises are very different.

They may stem from a similar fundamental cause: excessive debt or leverage.

But banks go kaput overnight, while countries go bust in a malaise that tends to be long and drawn out.

So although the erosion of investors' confidence in the ability of Greece to pay its debts may turn out to be as significant as the collapse of Lehman Brothers in the autumn of 2008 or the wholesale run on the likes of HBOS and Royal Bank of Scotland, they are very different phenomena.

The most important distinction is that once confidence in a bank has been lost, that's it - fat lady sings, curtains, goodnight.

How so?

Well all banks suffer from the endemic vulnerability that they borrow short and lend long. So if too many of a bank's creditors and depositors want their money back at the same time, that's a disaster - because most of creditors' money will have been lent out to the likes of homeowners or companies, which don't have to pay it back for years.

By contrast, if you happen to have lent money to the Greek government by buying a Greek government bond, you have no right to demand your money back until the redemption date on the bond (although you should be able to sell the bond to another investor).

So the moments of painful truth for governments perceived to be in financial crisis are those contractual dates when the debts they've incurred years ago have to be repaid.

According to Laurence Mutkin at Morgan Stanley, the "pressure point" for Greece will be April and May, when 20bn euros of debt and interest falls due.

In particular, one bond of 8.22bn euros has to be redeemed on 20 April.

And another one of 8.1bn euros is supposed to be repaid on 19 May.

Looking at projections of Greece's tax revenues, expenditures and cash in its central bank, it will struggle to find the 20bn euros.

However all is not lost.

In normal circumstances it would simply borrow a further 20bn euros from investors to pay off the old debt - although to state the obvious, circumstances are anything but normal.

The significant issue - which seems to have been lost in politicians' rhetoric - is that Greece faces two distinct (though related) problems.

The first is a liquidity challenge. Can it find 20bn euros to get through April and May?

If it can, then it may well be able to finance itself through the rest of 2010, since there are no other big spikes in debt payments for the rest of the year.

And, by the way, on this analysis, Ireland looks in very good shape for 2010, says Morgan Stanley, in spite of its big deficit and debt - because it has more than enough cash to cover forthcoming debt redemptions.

By contrast, the borrowing and repayment profiles for Spain, Portugal and the UK are rather more like Greece's - with some substantial financing challenges ahead.

All that said, it seems pretty clear that if the eurozone's members were prepared to underwrite Greece's 20bn euros of imminent refinancing need, that would buy the Greek's a good deal of time to sort its second challenge - how to remain solvent by cutting its public expenditure so that it comes into balance with revenues.

That is a task for heroes: it requires persuading Greek citizens to accept cuts in public services and living standards for a prolonged period.

Meanwhile the world's regulators might perhaps rebalance risk and reward a bit more in the direction of the Greek people and away from banks, hedge funds and assorted financial speculators by revisiting whether naked trading in credit default swaps should be permitted.

This morning's FT contains a searing indictment of the powerful financial motives to destabilise Greece - or Portugal, or Spain, or the UK - of those who would profit if it were to default, thanks to the bets they've made on default in the CDS market.

The author may be seen as an intriguing authority: he is James Rickards the former general counsel of Long-Term Capital Management.

For those with short memories, LTCM was once the world's biggest hedge fund, whose insane leverage and indebtedness took the global financial system to the edge of the precipice.

What's that cliche about the joy at one sinner's repentance?

[Hari Seldon]

China - The Mother of All Black Swan

Its a slideshow.

Well argued, logical, (almost) persuasive only.

Recommended read. Have a go at it folks!

Greek Britain?

The article is right, sadly. UKstan is a long way from greece style collapse. 'long' shortens every year, of course. Perhaps, the 2012 olympix will cook their karmic goose. A guy can always dream, can't he?

[Neshant]

We could face an uphill struggle exporting our way out of recession, especially when most of the rest of the world is trying to do the same thing. But a 25% devaluation is a good way to start.

woah...

Better get out of the pound while the going is good.

No way they are going to work their way out of debt. Its going to be scammed away for sure.

[shravan]

From CNNMoney:States to Senate: Send more federal aid

States are looking to the federal government for more help balancing their budgets, but the Senate is not heeding their call. ...

States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.

To close this gap, governors and lawmakers will be forced to lay off state employees, cut services and postpone capital projects ... Already, states laid off 44,000 workers in the 12 months ending in January, according to federal labor statistics.

If Zandi is correct the vast majority of state layoffs are still to come.