Whose Economic Recovery?

By Danny Schechter

September 10, 2009

President Obama’s highly anticipated health care speech started on a totally different subject: The economy.
“When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression,” he told Congress and the people at home. “We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.”

“But,” he went on, “thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.”

Applause. Applause. Applause.

Are we back from the brink? And what brink is that? On Labor Day, HBO featured a powerful documentary about a GM Plant in Ohio that was shutting down. It showed the workers, teary eyed and forlorn, making the last truck on “their” assembly line. Their faces told the rest of the story as they asked themselves and each other, “What do I do now? What happens to my family and my life?”

They had no answers, and neither, alas, does Barack Obama.

A “jobless recovery” will not give these workers the money to buy into even the cheapest health care coverage, public option or not.

Look around Mr. Obama: the unemployment rate in real terms is over 16%. The consumer economy is shattered. The commercial real estate market is imploding, and, yes, more foreclosures are on the way according to the Washington Post:

A new report foresees another wave of foreclosures, as option adjustable-rate mortgages — an entire class of specialized home loans — will soon reset to higher payments. Estimated to jump by 63 percent on average, the higher rates will likely push many of the already-strained loan recipients over the brink. The loans, also called pick-a-pay loans, are a prime example of the risky lending techniques that created the housing crisis: Borrowers were allowed to pay back the loan with as little as they wanted each month, though that meant many paid less than the interest due…the report says the fallout from the loans could be felt for years, especially in states already hit hard by foreclosures.

Just who is back from the brink?

If you listen to the Fed, the glass is more than half full. If you listen to economists like Simon Johnson, it’s way more than half empty, as he wrote on Baseline Scenario:

In the absence of effective financial regulation – i.e., both during the 1920s and again since 1990 – the Fed has operated in a manner that encourages the formation of sequential bubbles. This destabilization of our financial system is not a minor matter; the damage caused – human, financial, social – is already enormous.

And we are very far from being done.

Don’t take my word for it. Lou Jiwei, the chairman of China’s sovereign wealth fund said recently, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Yes, We Can… Lose, that is, Mr. Lou. And Yes We Are, Mr. Obama. The problem is that we are still in some Bernanke fantasyland, thinking that if we keep saying everything is ok, it will be.

Here’s Washington’s blog on real unemployment as opposed to what the Bureau of Labor Statistics is saying:

… Paul Craig Roberts – former Assistant Secretary of the Treasury and former editor of the Wall Street Journal – and economist John Williams both said in December 2008 that – if the unemployment rate was calculated as it was during the Great Depression – the December 2008 unemployment figure would actually have been 17.5%.

Williams says that unemployment figures for July 2009 rose to 20.6% According to an article summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart,… unemployment could rise to 22% within the next 4 years or so.

Hello, Mr. President? Why can’t you bring to the discussion of the economy the same passion and fact-based arguments that you brought to the health care debate?

Why can’t you propose serious reforms on the financial sector? Why can’t we jail the financial criminals?

The answer seems to be that Wall Street will be a far more tenacious and resourceful enemy than the health care industry perhaps because they already own much of the Congress.

Remember Senator Dick Durbin’s comment, ‘the bankers run the place.”

Alan Blinder a former vice-chairman of the Fed fears that pressure for financial reform is losing steam in part because of the power of what he calls “The Mother Of All Lobbies.” He writes, “in the case of financial reform, the money at stake is mind-boggling and one financial industry after another will go to the mat to fight any provision that might hurt it.”

Obama acknowledged we are not out of the woods yet. (What woods?) But what are the likely consequences? How long can people live without anything coming in? How long can we live on upbeat projections?

“There is no doubt class antagonism is stewing,” says the editor of the blog Naked Captalism. He expressed a fear of a reaction that will go way beyond flag-waving tea parties:

… I am concerned this behavior is setting the stage for another sort of extra-legal measure: violence. I have been amazed at the vitriol directed at the banking classes. Suggestions for punishment have included the guillotine (frequent), hanging, pitchforks, even burning at the stake. Tar and feathering appears inadequate, and stoning hasn’t yet surfaced as an idea. And mind you, my readership is educated, older, typically well-off (even if less so than three years ago). The fuse has to be shorter where the suffering is more acute.

One is reminded of the title of that movie, There Will Be Blood. Rather than show contrition or compassion for its own victims, Wall Street is hoping to jack up its salaries and bonuses to pre-2007 levels. The men at the top are oblivious to the pain they helped cause. They are getting away with the crime of our time.

And the people – The People – who potentially can challenge all this by action on the ground are being mesmerized by the false hope that recovery is here or right around the corner. How long before they realize you can’t eat optimistic speeches?

What risk of Deflation?

Neville Bennett

The price level in the UK was the same in 1815 and 1914. This did not mean that prices were stable throughout that 100 year period: they fluctuated in long waves, with periods of inflation followed by deflation. More recently, there was a decade of deflation at the time of the Great Depression, and in Japan prices fell by an average of 0.5% p.a. from 1999-2005.

Deflation may again affect the US and UK, and perhaps spread further through the world economy. Consumer prices slipped by 2.1% in the year to July in the US, and 0.7% in the EU. In the UK the CPI is expected to be 1.8%, despite the Bank of England and Government desperately trying to keep it at above 2% by cutting interest rates to their lowest level in 300 years and pouring ₤150 billion into financial markets, a sum more than 12% of GDP.

The UK’s CPI does not contain housing costs, the Retail Price Index is more inclusive and it indicates that the UK had a -1.6% fall in prices for the July year: its first fall since 1960. I believe deflation is already strong in the UK as goods have declines in price since about 1995, but services have lifted the CPI.

There is widespread fear that the massive pump-priming by Governments globally will be over-inflationary, but I question that because it will result in higher interest rates, higher government spending on debt service and lower spending on welfare, increased taxes and higher costs to business for credit. Japan has tried for 19 years to create inflation but has failed. Moreover, there is a huge ‘output gap” putting pressure on all producers.

I do not intend, however, to gaze into the crystal ball so much as to discuss deflation and explain some its properties.

What is it?

Deflation is simply a fall in prices, and is regarded negatively because it is associated with depressions and with very low interest rates. The UK has not had a full year of deflation since the 1930’s. Indeed, inflation has been the norm, averaging 7%, since 1945.

Conventionally, deflation has virtues: consumers enjoy falling prices creating increases in real wages (the Great Depression was good for people in work). Moreover, it causes low interest rates, yet it is good for savings as their real value increases annually.

Deflation is not so good, therefore, for people in debt. The value of real debt increases each year, which affects people on mortgages as their house or farm may also decrease in value each year. It also discourages spending because the prices will be cheaper next year. Wages fall creating a downward spiral. It damages banks because they end up with a lot of surrendered property. The BNZ was the biggest landowner in New Zealand in the early 1890’s.

Recent Research

A recent Bank of England study by Groth and Westaway [Groth} discusses deflation’s costs in detail. Price adjustments for firms are costly, both for reprinting price lists but more in setting optimal prices in an environment of changing prices. Zero inflation is preferable. Deflation has an effect on taxation. In most cases, tax systems are not inflation indexed, so taxes rise with inflation.

The argument that consumers will defer consumption in periods of deflation is challenged by Groth and Westaway. They argue that in most cases low interest rates weaken the case for postponement.

Wages

Groth also discusses the difficulty of business in reducing money wages when this is justified by economic conditions such as the distressed situation of a firm or when all prices are falling. Workers may have a “money illusion”: they might focus on nominal wages rather than real wages. It they have a money illusion; they will resist a wage cut because they think they can buy fewer goods.

Many workers may resist pay cuts, not because they have a money illusion, but because they want to be rewarded for increasing productivity. British workers have raised productivity by about 2% a year over the last 30 years, so even if prices fall, there would not generally be a necessity (in the short-term) to cut in nominal wages. But in some industries, especially those particularly hard-hit, there would be a stronger case for wage cuts. If these are resisted, it can increase unemployment.

What evidence is there for downward rigidity in wages? Certainly there are more raises than cuts. But I believe many employees are prepared to accept cuts when there is a strong case. Most economists believe there is strong resistance, but this is exaggerated by the actions of a few trade unions. Employers find ways of cutting labour costs, moreover, by slashing non-wage benefits and bonuses, avoid customary raises for merit or seniority, or employing new workers at lower wages than those paid to existing workers.

In the UK there are a growing number of wage freezes, while wage cuts are relatively few. But British Chambers of commerce data indicates that about 10% of companies plan nominal cuts in 2009. Workers may be more flexible than they have been in the previous inflationary periods because they perceive growing unemployment: a lower-paid job is better than the dole.

Debt Deflation

Deflation increases the debt burden and recessions are deeper for countries carrying the most debt. The key element is a transfer of wealth from debtors to creditors caused by an unexpected fall in inflation. Many mortgage holders expected benevolent inflation. About 40% of Britons entered fixed-rate contracts and are now suffering from a real rise in interest rates. This effect is magnified by falling employment and a fall in asset values. Defaults will rise and impact on financial institutions.

The authors say many writers have demonized deflation but it is important not to confuse the effects of the credit- crunch shock with the effects of deflation itself. Goth says British workers are flexible about wages. She believes that with a massive monetary policy response, the deflationary episode should be short-lived. My knowledge of the Japanese economy makes me skeptical of that conclusion.

REVENUE BREAKDOWN – Obama’s Spending Spree, August 7, 2009

REVENUE BREAKDOWN – Obama’s Spending Spree

by Stephen Wellman
August 7, 2009

 

This is for the week of August 3, 2009. As an American, do you know where your DEBT is? If not, then click HERE …

Well, the big news this week was the improving jobs market. Less people are losing their jobs according to the July results the BLS published on Friday. My response would be to look at US WITHHOLDING TAX REVENUES and they look really bad for July no matter what the BLS says.

The last work day in July and this is what we see for US Withholding tax Revenues, a complete rout! Over a 17% quarterly growth decline.

But somehow Unemployment benefits keep going up, up another $473MIL USD for the day, August 6^th, bringing the total for FY 2009 to $94.7BIL USD so far. I looked back to this same time last year for FY 2008 and total spent for the year was only $33.5BIL USD, so Obama is spending 2.8 times more than Bush did, so that means the unemployment rate must be 2.8 times more than in 2008 at this time. Back in August 2008 the official unemployment rate was 5.7%, so times that by 2.8 and based on spending alone the unemployment rate right now should be closer to 16%. The official rate of 9.4% does not look accurate when measured against outlays. I doubt benefits have gone up much, if at all, within a one year time span, so the cost of living adjustment(COLA) or inflationary adjustment would be negligible.

While we’re on “labor market” line items I also checked the data for Federal Salaries and Federal Employee Insurance Payments compared to 2008. Both are up as last year Bush spent $135.8BIL USD at this time on Federal Salaries and he spent $48.4BIL USD on Federal Employee Insurance Payments. The Wednesday numbers for those line items found Federal Salaries up about 9% at $148BIL USD and Federal Employee Insurance Payments up about 5.4% at $51BIL USD. No “deflation” there in terms of the number of Federal employees getting paid! So where are all the Obama government spending cuts?

As we found out last week Washington DC’s version of “Pay As You Go” is “GO” and then pay ten years later. I would rename that strategy “Don’t Pay As You Go Broke”! Is there any common sense left in Washington DC any more? How about “integrity”? Any “shame”? What does reside in Washington DC these days is the complete opposite of what this country needs in order to have a “real” recovery and that is fiscal and moral responsibility.

US TREASURY DAILY STATEMENT

July 31, 2009 – In one word … WOW! Massive debt would be an understatement for Friday, July 31, 2009. The biggest numbers were for the US PUBLIC DEBT, which rocketed skywards by $88BIL USD in one day! Let me repeat $88 BILLION! Not $8.8 but $88!! That is HUGE …

Next we get another HUGE number for Medicare, some $17.2BIL USD spent for Friday alone. If we add in Medicaid and Social Security and SSI the one day total is $20BIL USD.

Now look at the US military spending on Friday. If we add Defense Vendors and Military Active Duty Pay along with Veterans Benefits we get a one day outlay of $8.4BIL USD.

Then we can see we had to pay interest on Treasuries (US DEBT) of $3.5BIL USD on Friday.

Add in some $16BIL USD for the two mystery line items “Other” and “Unclassified” and the two line items total up to $2.04TRIL USD for FY 2009, that’s only ten months worth of spending.

August 3, 2009 – On last Friday the US Treasury spent $17.2BIL USD, now on Monday, August 3, its Social Security’s turn. The US Treasury spent $22.4BIL USD on benefits in one day, while Medicare got another $1.1BIL USD.

It seems to be “retirement day” as Civil Service Retirement Fund and the Military Retirement Fund got a combined total of $8.3BIL USD on Monday.

Housing and Urban Development(HUD)got $2.3BIL USD on Monday.

The two mystery line items “Other” and “Unclassified” append a combined total outlay of nearly $13BIL USD.

August 4, 2009 – The big spending was in Defense and the Dept of Education. On Tuesday the US Treasury spent $1.6BIL USD on Defense Vendors like Lockheed and they spent $1,7BIL USD on Education.

August 5, 2009 – More Defense spending for Wednesday, another $1.6BIL USD for the day. It seems Defense stays at the $1.5BIL level every day.

August 6, 2009 – Some $2.7BIL USD in outlays for Social Security, Medicare and Medicaid. Another $1.3BIL USD spent on Defense Vendors. Not much changes in spending.

The Thrift Savings Plan (TSP) sits at $17.5BIL USD in outlays for FY 2009 so far. See this in the line item review below.

There were some huge moves in the US DEBT department in terms of short term US Treasuries like Bills, which have maturities of one year or less. The Bills issued were Regular Series and Cash Management Series, which is where some, not all “sweep accounts” end up. Total issued was $131.788BIL USD and total “redeemed” was $131.790BIL USD, so practically the same amount of Bills were issued as there were redeemed, so which came first? That is not divulged by the US Treasury on the DAILY STATEMENT. Isn’t it interesting that we always hear in the financial media about the auction results but we never hear the stats on “redemptions”. To me that’s like buying a house and never meeting the seller or even the real estate agent! Are we supposed to assume that nobody ever redeems US DEBT or that they constantly roll it over?

I thought up this interesting scenario in my head about “sweep accounts”. These are accounts used for Wells Fargo checking and your ETrade or Charles Schwab accounts when your cash is sitting idly by. The sales pitch says that you should make interest while your money sits in a non-interest bearing account, which most checking accounts are and cash accounts for brokerages. It is a good benefit, but it also benefits the banks as it lowers their reserve requirements since a large portion of the deposit is swept outside the bank. One down side is that not all “sweep funds” are covered by the FDIC in an instance where the sweep bank fails. The FDIC does not cover those funds if they are in a commercial account.

The other side of this equation is the “money market funds” that receive these “sweep account funds” use those sweep funds to buy short terms US Treasuries so that they can pay you interest. Next week I will ascertain what percentage of those “sweep funds” make up the overall US Treasury Bills. I have a feeling it is a significant part, but how much?

.

September is the last month of the third calendar quarter but it is the last month of the fourth quarter of FY 2009, which ends September 30^th. On October 1^st the US Treasury starts FY 2010. We are less than 2 months from the end of FY2009. Perhaps now is a good time to look back to the first year of George Bush in 2001 and compare what Bush spent in his first year compared to the first year of Obama. Granted Bush did not face the monumental crisis that Obama now faces but some items like Medicare and Social Security do not really reflect the financial crisis, so lets look at those line items first.

YEAR	FY 2001	FY2008	FY 2009	%
	in $bil	in $bil	in $bil	INCREASE
	GB 1st YR	GB last full yr	BO 1st YR	2001-2009
Social Security	324.9	491.2	477.8	47.06%
Medicare	237.5	448.9	425.1	78.99%
Medicaid	129.3	198.9	208.5	61.25%
NOTE: Obama outlays as of 08/04/09

Clearly Medicare leads the pack, not so much on purely outlay levels but from an increased percentage basis. If Medicare was a private company it would be bankrupt.

As you can see there has been quite an increase in entitlement outlays from 2001 to 2009. While part of that is the Obama administration another part of the increase is what I call “embedded inflation” over a nine year period. This embedded inflation exists simply because of big government and its decades of promises and guarantees that has created a huge malinvestment in every American family. Now health insurance is like another house payment. What we now pay for car loans used to be a home loan and so it goes as people struggle to create enough income in order to just pay for basics. This means both parents must work, maybe even the kids as well. These DEBT ATTRITION circumstances eat away at the moral fabric and what’s left of the nucleus of the family. Many times the stress is unbearable and one of the two wage earners ends up sick in a hospital or injured or incapacitated in some way, either physical or mental. The root cause of family stress and the malinvestment of DEBT ATTRITION can be directly linked to the massive spending that is the hallmark of big government, crony socialism gone wild …

It is part of our conditioned belief system here in America that “prices always rise”. This has been true for 95% of my life. Look how much real estate has gone up over the last 50 years. Gasoline is up a lot and so is health insurance. Electricity cost more and so does food. Americans have been conditioned to believe prices always rise and they have. Ask any stock broker who works for Morgan Stanley and they will show you a chart of the DOW going back to 1900 and it is UP. In the few times in my life when I have seen prices go down, like they have been lately, people in America go into a panic mode. The government has to PRICE FIX or else they would be out of office on the next election. In essence that is what Obama and the DEMS and REPS are doing now is PRICE FIXING. They are trying to stop the downward spiral by using the only weapon they have and that is inflating the money supply. There really exist only two strategies the US FED will employ to deal with the money supply of America. One is NO BRAKES and the other is MORE GAS! How else could a Lobster Dinner cost me $45USD today when in 1939 it was 85 cents! Any guys here have any idea what it cost for a Filet Mignon Dinner Show at the Los Angeles Playboy Club in 1970, served by Bunnies? A grand total of $3.50USD! How about an oceanfront hotel room at the Outrigger Reef hotel in Waikiki Hawaii in 1970? $18USD per night … I was alive back then and I was 17 years old and if it weren’t for the Vietnam War and the likes of LBJ and Nixon, life would have been even better! Those of you alive back then may want to think back and consider if all this BIGGER government and BIGGER banks we have now is really worth it. I personally do not think it is …

LINE ITEM REVIEW

Last week I started a line item review, where we focus in on specific line items in more detail than just simply reporting the numbers. I selected line items in no particular order. Last week as you recall we started with the GSA line item.

This week we will focus on a reoccurring line item labeled THRIFT SAVINGS PLAN (TSP). This line item has nothing to do with the Savings & Loan crisis of the 1980s. Many of you get these mysterious e-mails from time to time that talk about how government workers do not have the same retirement funds we do, well this is one of those retirement plans. The Thrift Savings Plan website is HERE … The website has this brief description of those who participate in this plan:

“The TSP is a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services. The Federal Retirement Thrift Investment Board, administers the Thrift Savings Plan (TSP).”END

This is the equivalent of a 401k for federal employees …

In my research of the Thrift Savings Plan (TSP) I found out that the plans “asset administrator” who collects around 2% in fees is a foreign bank, Barclays, based in the United Kingdom. HERE is one of the six plans offered. This is “C FUND”, which invests in medium and large US company stock. The 12 month performance return is at a loss of (37%).

How Barclays, a foreign based bank (London, UK) ended up managing US Federal employees and US military retirement accounts is the classic US government story of failure. Prior to Barclays managing these funds the asset manager was Lehman Bros, who are now bankrupt. HERE is Barclay’s information.

As I pointed out previously pointed out US Taxpayers have contributed some $17.5BIL USD to the TSP so far for FY 2009. That is $17.5BIL USD that made some entity a 37% return, only it was a 37% loss for government workers and the US military personnel who invested as well as a 2% gain for Barclays so that they could manage the 37% loss. Who knows maybe Barclay’s shorted the fund?

When you retire from civil service you are paid through an annuity program for your pension. If you recall those of us Americans who were getting Social Security checks with a 2.3% COLA increase, during the October 2008 the following was reported for government retirees.

“The reaction was mixed last week when the government announced the highest cost-of-living increase since 1982 for Civil Service Retirement System annuitants. Margaret Baptiste, president of the National Active and Retired Federal Employees Association, told Government Executive she was concerned that short-term relief for COLA-eligible retirees would come with a hefty price tag down the road. She was worried, she said, that the 5.8 percent boost for CSRS employees and the 4.8 percent increase for Federal Employees Retirement System participants would invite scrutiny of federal employee compensation and sharp cutbacks on future COLAS.” END

Have these government employees forgotten who pays their salaries and for that matter who pays their retirement? Just like the big US Banks the federal employees are concerned about scrutiny of their retirement.

While most of us here subscribe to newsletters and follow certain financial blogs the federal employees have their own blog where they have a forum on issues that concern their well being. HERE is a link to FederalSoup.com …

It is interesting that I mentioned the C FUND and how it has lost 37%, well the G FUND is made up purely of US DEBT investments like US Treasury Bonds. It seems the G FUND is a huge source of the US governments potential IOU for trust funds and the federal employees see that HERE. The entire thread of the forum is about the TRUST FUND and the fears that it will be tapped as a “bridge loan” when the debt ceiling is reached. However what it really boils down to is the same issue I have covered here before under the “non-marketable” Government Account Series, this is the US Treasuries issued as IOUs on incoming TRUST FUND deposits.

Here is what one of the participants had to say …

“I think people misunderstand the various “Trust Funds” associated with entitlements. The government doesn’t have a way to do anything other than spend all the revenue coming into the government each year. People like to think of OASDI being somehow different from pensions because it pools and distributes and because the accounting is a little different. But, if you read the links carefully, you should have picked up on the accounting sheets and realized that all you are seeing is either “money” or “debt” movement. But it is all the same. The government spends the revenue and, if there is a surplus, a Trust Fund is issued bonds and securities to mark the spot on the paperwork. “FERS” is “pre-funded” simply means that the money is sent in the agency budget and then returned as a deduction from salary and from the agency budget, both of which are used to purchase US bonds and securities. The “money” itself is spent either way. That is why a trust fund is not found in a locked safe filled with gold for good keeping. My reading of TITLE 5, PART III, Subpart G, CHAPTER 83, SUBCHAPTER III, § 8348 is that the accounting paperwork creates tracks that show money flowing from the general budget to the agency and paycheck to the Treasury (who issues a government IOU to the sheet using government debt) and finally back to the general fund to be spent the same way all revenue from security purchases are spent. Note that each year Treasury also has to deduct and send to OMB? or someone the funds for current retirees, even if it means selling securities. The funds then accrue interest as a government security of whatever sort is purchased. Something notable, however, is the requirement that each year a status of solvency is required and, if Congress/Whitehouse changes anything that results in a greater liability, they must add this amount to the cash flow paperwork and actuarial solvency I described. (Or if I mis-stepped somewhere in the accounting, to whatever cash flow occurs.) Assuming this part of Title 5 is the most current, the actuarial balance is as accurate as they can make it and all is OK. GAO seemed satisfied as to this point, at least in 2000. It also appears that CSRS, in an accounting sense, may have some of the same legacy debt (pre-80s) similar to the legacy debt that arises from the windfall of early recipients of SS. Let’s not worry about that but just note that this is all future liabilities where the money put in today buys something like a bond that gets interest and must be redeemed tomorrow if the cash flow demands it. Long winded and longer than my reply to your actual post, but necessary. Which is – There is no money there to tap. They spend it in some way and issue bonds as it come in. When you hear that the G-fund or pension funds are being “spent”, it is, yet again, only an accounting gimmick as long as they eventually back issue the government securities. What happens is that, when the debt ceiling is close to being breached and the government needs to continue to operate, they will hold off part of the process and spend the money without increasing the debt by issuing the securities. The issuance of the securities is, after all, just a paperwork exercise. They would never permit this to be done by anyone but themselves. After they vote themselves a new and higher debt ceiling, they issue the securities at the rate the securities would have gotten had they recorded the purchase on the right date. Remember, you feel like “money” was deducted from your paycheck, but what really happens is that somewhere there is paperwork crediting you with that money. Money in the “Main Street” sense never really exists anywhere in these exchanges. Even if they turned it into money by sending it to you first so you could send it back, nothing in the relationship of “your” money as it relates to “your” pension would change. Just like your savings account at the bank it is an IOU until you ask that they give it back to you. Even at the bank, it’s spent as soon as possible as it comes in because the bank gives you 1% interest in exchange for them loaning it to someone else at 5% interest. Would that the government could profit like a properly run bank?” END

Well, is there such a thing as a “properly run bank”? So as we private citizens despair of our situation and how our government keeps taking what we earn and hands us IOUs in return, it seems the Federal employees feel that they are in the same boat.

Really we all hold a paper receipt, a US Dollar (FRN) for our years of hard work, we call accumulated wealth. In a World where everything including our money is “irredeemable” the value of our accumulated wealth is floating like the fiat currency markets (FX) where they trade. The true value of our accumulated wealth as defined by a fiat monetary system is truly esoteric, for if every man knew how valueless their remuneration becomes over time there would be a general uprising not seen since the French Revolution.

DEFENSE VENDORS LINE ITEM UPDATE

Readers of this weekly article already knew that Obama was outspending George Bush by 2 to 1 in military armament. The following chart was widely circulated at this week which verifies what I have been reporting via the US TREASURY DAILY STATEMENTS. What manufacturing the USA has left is mainly military related. Once again I will point out that if we were to eliminate US government contracts by shrinking the size of government, the Forbes Fortune 500 list would become the Fortune 5 list, surely the Defense industry would be eradicated under such circumstances.

What a massive divergence …

Let’s look at some more charts that show more massive divergence …

Here is another chart from the US FED St. Louis that puts the size of the banking crisis in perspective compared to the S&L Crisis.

Yes, 2008 was a bad year for a couple banks, mainly Lehman’s and Bear Stearns. This chart clearly shows the leverage that exists now as compared to the 1980s.

Imagine that Lehman Bros. was first founded in 1850 and it collapsed into bankruptcy in one year after 158 years … Bear Stearns was founded in 1923, so that is 85 years of business down the tubes in one year. Then there is AIG, founded in Shanghai, China back in 1919, now look at it.

Isn’t it amazing how long these banks were in business prior to the advent of derivatives? When does Congress investigate derivatives? As you recall Greenspan repeatedly told Ron Paul in Congress that the derivatives market needed no regulation.

We have all heard the comparisons to the Great Depression in various news articles but here is what the US FED St. Louis says in their very own inflation chart.

While some assets have deflated like real estate and 401ks I have yet to see any price deflation in consumables required for daily survival, like food, water, electricity, gas, telephone, health care, etc … Not even all “real estate” has deflated in price. Farmland for one still retains its value prior to 2007. Not all 401ks have lost value either. Also gold has held up pretty well had you have bought in 2007 prior to the real estate crash. With gold priced at an average of around $700US per ounce you would have had close to a 40% gain on Friday’s (Aug 7, 2009) close of $955USD. A worthy investment considering what many people have lost over that same time period by buying real estate or stocks.

IT IS WHAT IT IS …

“All present-day governments are fanatically committed to an easy money policy.”- Ludwig Von Mises (1940)

Economics in Crisis

Economics in Crisis

Neville Bennett
July

Ben Bernanke told a town-hall-style meeting in Kansas this week that he was not going to “preside over the second Great Depression”. Dr. Bernanke appears to be fighting to save his job and reaching out to the people for understanding and support.

He told the audience that he had not wanted to prop up the big finance companies: indeed, “nothing made me more frustrated, more angry, than having to intervene” when corporates were “taking wild bets that had forced these companies close to bankruptcy”. Although “disgusted”, Bernanke was minded that “when an elephant falls down, all the grass gets crushed”.

This episode is interesting because it reflects a notable former economics professor confronting the possibility of a depression. It comes at a time when world trade and economic production is tracking the Great Depression. It would have appeared an impossibility even four years ago and economists are reeling, especially people like Paul Krugman are saying a macroeconomics education is “a costly waste of time”. He told an LSE audience that most macro was “spectacularly useless at best, and positively harmful at worst”.

Few Crystal balls

Economists did not see the crisis coming and are somewhat divided on how to treat it. When I studied economics at the LSE, it was widely assumed that crises were a thing of the past. Economic growth could be managed, and any small fluctuation in demand could be easily dealt with by adjustments in monetary and/or fiscal policy. We students thought it was not difficult to plan for growth. Paul Samuelson’s “economics”, our textbook dismissed crashes in a few lines.

But there was a stable environment. Banks were conservative institutions and very reluctant to extend credit. I recall an interview when I was a student, on a good scholarship, where I asked for a loan in order to buy a cheap Vespa scooter( these were much admired in the UK). I was given to understand that the risk was unacceptable. The manager implied that the mighty Midland Bank could come crashing down if I failed to meet my repayments, which I might do if I had an accident. I was in my mid-thirties when all that changed, and credit cards were showered upon me.

The main source of economic instability in my earlier life was foreign exchange. But there were strong management systems. In the UK and NZ foreign transactions were controlled. Tourists had limits on the amount they could spend. A property bubble was inconceivable as mortgages were tightly controlled. Practices were solid, and the theory appeared robust.

Keynes

Classical economists assumed that full employment was usual because supply created its own demand. They thought that income was either spent or saved. Spending stimulated the economy and savings went into investment

The theory did not explain the Great Depression. Keynes explained that uncertainty motivated entrepreneurs and savers alike to stay their hand. Both might develop a liquidity preference. Demand would fall. If private sector activity slowed, the public sector should be involved through low interest rates and public works if necessary.

The theory was avidly adapted in the western world. Keynsian economics worked to get the world out of depression, manage the war effort in the UK and USA without massive inflation, and promote growth though to the 1980’s. But economists were baffled by stag-inflation, and in the US split into two camps.

Freshwater v. Saltwater Schools

The University of Chicago blamed stagflation on central bankers who meddled too much in the economy in order to smooth oscillations. The lake-siders believed in the classical assumption that markets cleared, eventually goods were cleared leaving no inventory or unemployed workers. Their opponents were the coastal universities ( “salt-water school”) who held true to theory that markets could malfunction, justifying state intervention.

The Economist has recently reviewed this debate and said eventually the schools melded into brackish macroeconomics. One product was “inflation targeting’, embraced first by New Zealand, and later by Canada, the UK, Sweden and some emerging countries. Ben Bernanke was a renowned member of brackish economics. From the mid-1980’s until recently it seemed that macroeconomists knew what they were doing. Certainly there was price-stability and that was also the focus of central banks.

Blind spot

Economists and Central Bankers failed to appreciate the risk of financial instability. LSE professor William Buiter now argues that training in macro is a severe handicap. Student worried about the cost of goods and wage rates but did not think of the price of assets. Too much faith had been put in financial markets, and the financial system was under-studied.

In many macroeconomic models, it is assumed that insolvencies cannot occur. It stretches the bounds to credulity to discover that the Bank of England’s model is indifferent to whether business is funded by equity or credit. It does not even incorporate financial intermediaries such as banks. As Buiter observes, the model is useless for issues where financial intermediation is of importance. Pity this crisis is such an issue!

The modelers eventually smooth away many issues because they are too complicated. They find it easier to assume a firm can always borrow as much as it needs at the going rate or sell as much as it desires. This spilled over into financial organizations who made the fatal mistake that they could always sell structured products . but as readers of this column will know, that first casualty of the crisis was “over-the-counter” markets used for selling bundles of sub-prime or similar constructs. There was no exchange for these goods and sellers could not establish a market. Many firms disappeared in a liquidity spiral. It brought back Keynes’s concept of liquidity preference.

The Fed also had models which have not stood up well. In the summer of 2007 it predicted that even if the housing market turned down by 20%, GDP would fall only by 0.25% and there would be negligible unemployment. All the Fed had to do was reduce interest rates by 1%, and the damage would be contained! Fantasy in the Fed!

 

ECONOMICS IN CRISIS 2

NEVILLE BENNETT
AUG 09

On a visit to the London School of Economics in November 2008, H.M. The Queen demanded to know why nobody had anticipated the credit crunch. Predictably the School set up a committee, even co-opting the Bank of England and arch conspirator Goldman Sachs. With lightning speed it replied last week, a mere eight months later.

It blamed “financial wizards” who believed that their plans to protect the financial system were infallible. They were guilty of “.wishful thinking combined with hubris”. This is more charitable than the view put forward in this column recently (NBR 24 July) that the wizards are corrupt. The letter says, moreover, that the crisis was “caused principally by a failure in the collective imagination of many bright people…to understand the risks to the system as a whole”.

As explained last week, this is also the view of Ben Bernanke who is “disgusted” because corporates took “wild bets that forced these companies close to bankruptcy” ( NBR July 21). Nevertheless, at the same time I pointed out that the models used by the Bank of England were absurd in concentrating on price and labour cost movements but having no interest in credit.

Lack of imagination in economics

That brings the discourse focus back to economics, and more discussion of why economists in general have been found wanting. The Economist summed up the charge.. “they helped cause the crisis, that they failed to spot it, and they have no idea how to fix it.”. The charge is comprehensive, and untrue and unfair to all economics and economists, but it appears to have a hard core of substance in the case of macro and financial economics.

The critics have emphasized the flawed assumptions in models. Models assumed market efficiency: a firm could always get credit at the going rate and sell at the going rate. In the crunch the market for derivatives disappeared and many desperate firms could not get credit. Indeed, banks remain reluctant lenders, even to each other, and credit is tight in the US, UK and EU.

I explained last week that the Bank of England model did not include banks, and the Fed assumed away asset bubbles. Both banks focused on price not credit. The Fed also assumed asset booms would be smoothed by efficient markets, but even if they did not, it was more efficient to let them run their course and clean up afterwards. “Efficient markets” doctrine clashed with stopping a bubble forming.

Macroeconomists had imperceptible interests in financial markets. These enjoyed perfect information, competition, and always cleared. Their models assumed an asset would hold its price, even if everyone else was selling. They also though a few years data was enough: it established that house prices never fell and stock markets never lost more than 5%.

They had no interest in fiscal policy because it had few effects, it could be left to others such as political scientists. Paul Krugman says that of the 7000 papers published by the US National Bureau of Economic Research (1985-2000) only five mentioned fiscal policy in the abstract or title. The Bureau is the central clearing-house for macroeconomic research; it also dates recessions.

Nastiness in common rooms

Many economists are uninterested in the real economy, but they are capable of being perturbed when Paul Krugman dismisses their discipline as spectacularly useless and positively harmful. This could affect student numbers and cannot be ignored! Krugman compounds his insults by saying the masters should be re-read, especially Keynes in order to get back to a sound basis. Macro, he says is in a Dark Age having lost the wisdom of the ancients.

Krugman’s Keynesian call for massive spending is not universally supported in common rooms. One issue is the size of the multiplier. Keynesian’s often argue that a dollar spent by government on public works (now called “infrastructure”) resulted in more than a dollar’s worth of stimulus. Economic critics like Professors Lucas and Barro criticize the estimates of Barrack Obama’s economic advisors as absurd, according to the Economist.

Financial Economics

Financial economics is also struggling to restore its reputation. One core doctrine is the efficient market hypothesis (EMH): that the price of a financial asset reflects all available information. It is assumed that if the price was too high, smart investors would make money by shorting it. If it was too low, investors would go long. This was the basis of much hedge fund arbitrage. It was the basis too of many derivatives. The meltdown by Long-Term Capital Management in 1998 made no discernible impact on derivative writers who continued to under-value systemic risk.

Behavioral economists have been critical of financial economics for a long time. They insist that prices can get out of line for a long time, and emphasize that investors get too exuberant in booms and too much given to despair in slumps. But although the EMH is dented, it has yet to be replaced.

History Neglected

I personally feel that the lack of imagination admitted by LSE’s wise men owes a lot to the neglect of history, both of economic history and the history of economic ideas. Like Krugman, I have been re-reading classic writers and have found that crises have attracted much study in the past. I have read some great thinkers on a record of events, like Bagehot on the 1885 crisis and Lionel Robbins and J.K.Galbraith on the Great Depression.

There have been so many crises in the past that boom and slump is obviously inherent in capitalism. I have half-written a book making boom and slump the central part of a new interpretation of NZ history but lack the funds to complete it. I have no doubt there is a need for such history. (Gillian Tett’s “Fools Gold” helps explain the recent crisis)

While history can result in convincing explanation, there is also a need for a theory of crises and explanations of their everlasting occurrence. At another time, I hope to show that ideas from Sismondi (died 1842) Aftalion, Speithoff, Cassel and Schumpeter have relevant insights.

What have become of the promising “green shoots” of recovery?

Eric Fry, reporting from Laguna Beach, California….

What have become of the promising “green shoots” of recovery?

Back on March 15, Federal Reserve Chairman, Ben Bernanke, remarked that the “green shoots” of recovery had become evident. Instantly, the phrase captured the hearts and imagination of the investing public. No matter how dismal the actual economic news, green shoots seemed to be spouting up everywhere.

Every economic data point, no matter how horrible, provided yet another opportunity to exclaim, “Aha!…Another green shoot!”

Sure, unemployment continued to soar, home prices continued to slide, and industrial production continued to contract, but things could have been much worse. And since the bad news has not been as awful as it could have been, the economy must be recovering, right?

Ummmm….not exactly. To gain a little insight on this curious case of “green shoots,” let’s consult a 2,000-year-old perspective.

“Listen!” Jesus declared in the Gospel of Mark, “A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants, so that they did not bear grain. Still other seed fell on good soil. It came up, grew and produced a crop, multiplying thirty, sixty, or even a hundred times.”

Although Jesus intended this parable to describe an individual’s receptivity to his message of hope and salvation, the metaphor of sowing seeds could also pertain to the character of economic recoveries. For example, what sorts of seeds are sprouting from the soil of the American economy?

The answer to this question may hold the key to stock market trends over the coming months.

Christ’s parable presents four possibilities:

1) Seeds that the birds consume;

2) Seeds that sprout in shallow soil, then quickly wither

3) Seeds that sprout among thorns, and cannot grow

4) Seeds that take root in fertile soil and flourish

So, to repeat the question, what sort of green shoots have been sprouting from the soil of the U.S. economy?

If you believe that #4 is the correct answer, you will want to be buying stocks tomorrow morning…and for several mornings thereafter. However, if you, like your California editor, believe that America’s green shoots more closely resemble the seeds that sprout among thorns and/or in shallow soil, you will want to hide out in the safest assets you can find.

Your editor would like to trust in the green shoots that so many folks claim to see. But he doesn’t. He can’t. “Less bad” is not good, and it never will be. “Less bad” might throw off a greenish hue for a short while, but it will never grow into an oak tree…or even a daffodil.

Green shoots need roots…and that’s what’s missing. The underlying American economy is still sick; it cannot provide very much nourishment to resurgent economic activity. Almost all essential “root systems” of economic activity remained impaired, diseased or compromised in some way.

Meanwhile, above ground, the economy continues to contract in every imaginable (and unimaginable) way.

Chris Mayer provides the details in a fascinating column below…

————————————-

Depression Then and Now
By Chris Mayer

This is an eye-opener. Whenever I talk about the Great Depression and compare it with what is going on today, I get a lot of skepticism. I hear a lot of people say, definitively, “This isn’t as bad as the Great Depression.”

What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! — bread lines, Hoovervilles and hobos.

Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

Take a look at the next few charts, from economists Barry Eichengreen and Kevin O’Rourke. The first plots world industrial output from June 1929 against industrial output from April 2008:

We’re tracking that path pretty closely.

Then there are world stock markets:

We’re actually worse off right now.

Finally, take a look at the volume of world trade:

Again, here we’re actually ahead of the pace set in the Great Depression.

There are several other charts, but I think you get the point. Eichengreen and O’Rourke conclude:

“To summarize: The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

Even so, there are many differences between now and then. One big difference that doesn’t get much play is the fact that today we have large emerging economies such as China, India, Russia and Brazil.

Investment strategist Murray Stahl, in a recent letter, pointed out “the most important difference between that era and this era…is the robust economic development of China, India, Russia and Brazil. During the Great Depression, those nations were in the opposite condition.”

China was in the midst of a civil war and then had to fend off a Japanese invasion. India wasn’t even on the economic map as anything of any consequence. Russia was backward and militantly communist. And Brazil had all kinds of political problems, including trying to put down a communist movement.

Today, those four countries are in much better shape. They are much larger and are still growing.

There are many more differences, and I don’t expect what we’re going through to play out like the Great Depression, except maybe in some of the broadest outlines. This is, or will be, known as the greatest crisis the world has faced since the Great Depression.

How it is similar is also in some of the valuations in individual stocks and securities. As Stahl writes, we share with the Great Depression the “bizarre valuations on highly liquid securities in the world capital markets [such] that I have never before seen in my 30-plus years of investment practice.” In that, there is opportunity.

As I’ve written before, I think there is room for investing even in a weak economy. There are lessons we can learn from the Great Depression. Some stocks will do better than others. I expect the needed commodities that fuel those big emerging economies will be good places to be.

And these hard assets also provide some protection in a world where paper currencies are not likely to hold their value as cash-strapped governments around the world crank up the printing presses.

REVENUE BREAKDOWN – Obama’s Spending Spree

REVENUE BREAKDOWN – Obama’s Spending Spree

By Stephen Wellman
June 5, 2009

 

This will cover spending and tax revenues for the week starting June 1, 2009. It was a busy week for the US TREASURY and one of the highlights was Tim Geithner’s meeting in China. Laughing students aside, he had a tough act to sell! Yet he kept to the same script the US FED and US TREASURY have been saying for decades now their mantra of STRONG DOLLAR … STRONG DOLLAR. Its their mantra but not their practice.

BLS WAGES

BLS data for wages that was released on June 4th to NO FANFARE … The FANFARE that moved the DOW that day was for the small dip in unemployment claims. Meanwhile if you read the hidden details, like I do, you see that there has been some massive hour cuts for American workers for the Q1 2009. That reflects perfectly with my collapse scenario for the US PAYROLL WITHHOLDING TAX REVENUES. If workers work less hours then there will be less tax revenues. Even here in Hawaii Governor Lingle is making State employees take mandatory three day furloughs(no pay) every month in order to cut costs.

What stuck out was this report on the MANUFACTURING SECTOR:

Manufacturing

Productivity decreased at a 2.7 percent annual rate in the manufacturing sector during the first quarter of 2009, reflecting a 21.7 percent decrease in output and a 19.5 percent decrease in hours (tables A and 3). These were the largest-ever declines in the output and hours series, which begin with data for the second quarter of 1987. Over the last four quarters, manufacturing productivity fell 3.2 percent, the largest four-quarter decline in the series (tables A and 3). This contrasts with the 3.7 percent average annual increase from 2000 to 2007. In the durable goods manufacturing subsector, output declined 31.0 percent and hours fell 23.0 percent, yielding a productivity decline of 10.4 percent. In nondurable goods industries, productivity rose 1.9 percent as the decline in output of 11.6 percent was less than the 13.2 percent decline in hours.

Hourly compensation in manufacturing grew 13.4 percent during the first quarter of 2009, reflecting a 15.8 percent rise in durable goods industries and a 10.1 percent rise in the nondurable goods industries (seasonally-adjusted annual rates). Real hourly compensation, which takes into account changes in consumer prices, increased 16.1 percent for all manufacturing workers. Unit labor costs rose 16.6 percent in manufacturing during the first quarter of 2009, after increasing 17.1 percent in the fourth quarter of 2008. Over the last four quarters total manufacturing unit labor costs increased 12.0 percent, the largest increase in the series.

These moves represent the BIGGEST moves since 1987. So things are falling off a cliff for America’s manufacturing base. I have also reviewed this same info for the State Of California and it is confirmed. The biggest drops in payroll for California are Construction and Manufacturing. The reports don’t really say why, but I imagine it is due to closing doors or moving out! Interesting the two sectors which show the least decline in employment are mining and healthcare. Healthcare in California is stable.

So productivity decreases while wage costs increase. Hummmmm??? NEXT!

US TREASURY DAIIY STATEMENT

Well on June 3rd, 2009, the US TREASURY spent $22.332BIL USD on Social Security benefits in 24 hours. That put our SPEND RATE up to 6.00. The US TREASURY only took in $7.559BIL USD in tax revenues on June 3rd and out of that $7.449BIL was from US PAYROLL TAX REVENUES. How much tax did the US corporations pay? $52mil. Those rich people with their Estate taxes only paid in $3mil USD that day.

Here is the LINK to the US TREASURY DAILY STATEMENT for June 3, 2009.

So how much have we spent on Social Security for FY 2009 so far? Around $385.7BIL USD and how much on TARP? Around $321.4BIL USD … not much difference. But on UNCLASSIFIED we have spent way over what we spend on Social Security at $413.6BIL USD. Between OTHER and UNCLASSIFED we have spent a combined total of $1.777TRIL USD and the media is dead silent. There’s so much money in the system on a daily basis the US TREASURY can’t even line item it!

TRUST FUND IOUS IN LAYMAN’S TERMS

There has been much talk about how the US TREASURY “borrows” from the Social Security Trust Fund. If only that were the only Trust Fund they hand IOUs to!

On every US TREASURY DAILY STATEMENT is a term called GOVERNMENT ACCOUNT SERIES. First TABLE III-B refers you back to TABLE III-A where there is a breakdown of both “marketable”(bills, notes and bonds) and “nonmarketable”(intergovernment debt). As anyone with eyes can plainly see the vast majority of “debt” is in the “Government Account Series” line item in the “non-marketable” section of both TABLES III-A and III-B. Just think of that BIG number as the UNFUNDED LIABILITY number for US CONgress to borrow from the Social Security and Medicare Trust Funds and many other trust funds you probably have never heard of. This is the magic hocus-pocus of IOUs that are suppose to be repaid in our lifetime.

So this stuff is “ON-BUDGET” and “OFF-BUDGET”. The “OFF-BUDGET” debt did not start until 1937 during the Great Depression, under FDR, but it has steadily grown since then just like everything that BIG GOVERNMENT does. Once again both DEMS and REPS have been guilty of growing the gross DEBT; both are experts at fiscal irresponsibility.

Back to the Government Account Series. These are non-marketable securities, implicit debt, guaranteed by the US government. They are mainly TRUST FUNDS. This chart of TRUST FUNDS is from the Financial Management Service, a bureau of the US TREASURY. I think it is important to get a perspective on just how widespread this addiction to SPEND has become. It has infested all manners of solvent entities and turned them into IOU ridden wards of the state.

The following TABLE FD-3 is only reported monthly, so March 2009 is the last data point.

Here is the LINK to the website that publishes these tables. Click on “Federal Debt”.

You can see that the US government owes these Trust Funds a total of trillions.

I found this statement from the FMS … “Government account series (FD-2)—Certain trust fund statutes require the Secretary of the Treasury to apply monies held by these funds toward the issuance of nonmarketable special securities. These securities are sold directly by Treasury to a specific Government agency, trust fund, or account. Their rate is based on an average of market yields on outstanding Treasury obligations, and they may be redeemed at the option of the holder. Roughly 80 percent of these are issued to five holders: the Federal Old-Age and Survivors Insurance Trust Fund; the civil service retirement and disability fund; the Federal Hospital Insurance Trust Fund; the military retirement fund; and the Unemployment Trust Fund.”

The BIG FIVE!!

I’ll bet they are “special”! I just hope we never find out just how “special” they really are!

There are also “marketable bonds” as per Table III-B of the US TREASURY DAILY STATEMENT. Every BOND issued by companies or governments has a “Redemption Value” upon maturity whereby the company, or in this case the government, pays to redeem it.

So in the end should the US TREASURY count these securities or “IOUs” when they borrow from a multitude of Trust Funds? The idea is that these “IOUs” will be made good when they are due or “mature”. So in theory as these IOUs mature the government must print money to pay them if there are no tax revenues to cover them. I personally am not counting on getting any checks from Social Security by time I retire. I also doubt I am going to have Medicare, but instead some Third World version of UNIVERSAL HEALTHCARE that is tantamount to a Medicare default.

Just because all this is listed on the US TREASURY DAILY STATEMENT don’t get the idea that all these numbers add up and make sense … THEY DON’T! Try to add up the OTHER total with the breakdown that is listed for OTHER, it never adds up.

This is the stuff that the GAO has been complaining about for decades now and is the main reason that David Walker(former GAO Chief)quit.

So next time when you hear someone compare the US government to ENRON, you’ll know why. More to the point you’ll know where ENRON got all their ideas from! Yet the S&P gives out their AAA rating … AAA is virtually worthless in my opinion, but then again I am not CHINA or the millions of people out there sitting in cash on the sidelines using Treasuries or FDIC accounts. By the way the US government even borrows from a trust fund entitled “Deposit Insurance Fund”. Hummmmmm??? I wonder if that is related to the FDIC.

All this info is available to the public so feel free to do your own research. When was the last time any of this was discussed in the SITUATION ROOM or on SQUAWK BOX or on OPRAH? Nobody wants to know the real truth and even after going on 60 MINUTES, David Walker walked away completely convinced that the US CONgress is just that … a CON!

None of this data supports a STRONG DOLLAR POLICY. Strangely enough it all comes from the same entity that Tim Geithner heads, the US TREASURY.

Gold is the only durable hedge against this enormous monetary fraud of the irredeemable currency Ponzi scheme.

GOVERNMENT IS ONLY AS HONEST AS ITS MONEY …

UK Economic Assessment Grim

Grim forecasts for British economy

By Jean Shaoul
28 May 2009

 Several reports published in the last few days testify to the increasingly serious impact the financial crisis is having on Britain’s financial institutions, the broader economy, public finances and the living conditions of working people. They portend the introduction of sweeping austerity measures, the likes of which have not been seen in the post war era and which the traditional organisations of working people will do nothing to oppose.

Last week, the IMF issued a stark assessment of the UK economy, explicitly criticising the budget and its optimistic assumptions announced by Chancellor of the Exchequer Alistair Darling just last month.

It forecast that the UK economy would shrink by 4.1 percent this year, the biggest peace time contraction since the Great Depression of the 1930s, and 0.4 percent in 2010. It warned that despite the government’s “bold and wide ranging” response to the banking crisis, the banks were still exposed to bad debt from the fallout of the financial crisis and insufficiently capitalised, making it difficult for them to lend on the scale required for economic recovery. Figures just out indicate that business investment has fallen by 8.4 percent in the first quarter of this year from that of a year ago.

Consumers, faced with high levels of household debt, falling house prices, a reduction in the value of their occupational and personal plans due to the fall on the world stock markets, rising unemployment and reduced access to cheap credit, are cutting back on spending.

The Council of Mortgage Lenders announced a 60 percent fall in home loan advances for April compared to last year. The Economist Intelligence Unit in its report noted that “This [the lack of household credit] in turn is aggravating a severe downturn in the housing market, which may not reach bottom until 2010 or 2011. Employment has also started to fall, and we expect the rate of unemployment to rise sharply to close at 11 percent by 2011”.

The IMF cautioned that the UK remained susceptible to shocks, in particular to the banks and financial institutions, and that the government should prepare contingency plans to bail out the banks again. It said that the authorities should “stand ready to provide further support where needed”. But that must lead to a further increase in government borrowing and contingent liabilities—the potential claims on public finances if the banks redeem the government’s guarantees. Standard and Poor’s, the credit ratings agency, believes that such claims will reach £100 to £145billion (between 7 and 10 percent of GDP).

The IMF noted that it was not just the public debt that was rising, but so were its contingent liabilities arising out of its guarantees to the financial institutions. In addition, there are the explicit and implicit support measures for the government’s public private partnerships and bailouts of failed privatisations, all of which are—Enron style—off the balance sheet.

The IMF warned that “the sharp increase in public sector borrowing and contingent government liabilities, together with continued financial sector fragility, are significant vulnerabilities. In these circumstances, a severe shock has the potential to disrupt domestic and external stability”.

It insisted that the key to shoring up the banks’ financial situation was to restore “fiscal sustainability”. Stripped of the bland language of such reports, the IMF was serving notice that the government’s projected debt level is unacceptable, and that the bank bailouts must be paid for through attacks on working people. The Brown government and its successors are being called upon to implement public expenditure cuts and reduce borrowing much faster than the chancellor had planned, i.e., in one five-year electoral term, not two or three.

Standard and Poor’s report expressed similar concerns last week, downgrading its outlook on British sovereign debt from “stable” to “negative”. It said that the UK’s triple-A rating was at risk unless government borrowing was cut sooner rather than later. It reaffirmed the UK’s actual credit rating, but said the outlook had deteriorated “at a faster rate than Standard and Poor’s had previously assumed”, because of the massive borrowing to deal with the banking crisis and the recession, which last month cut tax receipts by £2 billion while increasing benefit payouts by £1 billion, compared to a year ago.

The government may miss its own forecast of £175 billion in debt for 2009-10, itself a massive increase on last year’s £90 billion. Standard and Poor’s expects public debt to reach 100 percent of GDP by 2013. The UK’s gross debt, already 53 percent this year, is expected to breach the European Union’s Stability and Growth Pact limits of 60 percent by next year.

It is the first potential downgrade of UK public debt since the agency began rating government debt in 1978. A credit downgrade could make it more expensive for Britain to borrow. A higher cost of borrowing would increase government expenditure on debt servicing. Bringing down the total level of debt would mean drastic spending curbs and tax rises.

Standard and Poor’s warning is significant because it is not based upon new data but is consistent with all the public finance forecasts.

Much to the government’s annoyance, the Bank of England also confirmed these reports. The Bank has cut its growth forecast over the next two years and raised its estimate for inflation since February. It appears to be projecting a decline of about 3.9 percent this year and growth of about 1 percent in 2010. The Bank believes that inflation will fall to around 0.5 percent by the end of this year before picking up to around 1.2 percent in two years’ time—below the Bank’s target rate of 2 percent.

Mervyn King, the Governor of the Bank of England, said that the economy would take time to recover. “There are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained”, King said. “But in the light of the state of balance sheets particularly in the financial sector, the committee [the Monetary Policy Committee] judges that the risks are weighted towards a relatively slow and protracted recovery”.

Last month, the Bank agreed to expand its programme of “quantitative easing”—in effect printing money—by spending £50 billion of the remaining £75 billion authorised by the government to buy up the banks’ worthless toxic assets. This comes on top of £75 billion in March. The committee wanted the chancellor to increase the £150 billion limit “should economic conditions require it”. But the Bank said it was “too soon” to know whether the quantitative easing was working.

 

While the Labour government has bailed out banks and mortgage lenders on the point of collapse due to their own semi-criminal and reckless policies, it has done and will do nothing to assist the millions of working people struggling with mortgages, rising bills and debt. Instead, they face a catastrophic decline in their living standards.

Prime Minister Gordon Brown has made it clear that public sector workers will see their pay rise by no more than 2 percent even as prices rise. He has encouraged private employers to similarly limit their pay increases.

The Institute of Fiscal Studies concluded on the basis of last month’s budget that working people would have to face 10 years of austerity measures to bring public debt down to 40 percent of GDP.

A report from the financial services company PWC gives an indication of just what such austerity measures might entail if the government is to bring debt below 50 percent of GDP by 2018. It warns that additional tax hikes or public spending cuts building up to £115 and £133 billion a year by 2017-2018 will be needed, equivalent to £5,000 for every family in the country.

John Hawksworth, head of macroeconomics at PWC, says that the Treasury believes that public finances will come under control by 2017-18. But this is just when the impact of an aging population takes effect. He is calling for tax increases or spending cuts “sooner rather than later” in order to “avoid unduly large increases in the tax burden on future generations of workers to pay for the future pensions and healthcare costs of current generations of workers”.

The National Institute of Economic and Social Research estimated that the state pension age would have to be raised to 70 to cut the debt.

Nicholas Timmins, in a Financial Times article, looked at where the axe would have to fall in order to balance the books. Selling off the state’s assets would not provide the cash it yielded in the 1980s. “More controversially, it involves reducing the role of—and burden on—the state and increasing the role the individuals will play, where politicians believe that will be justified. For example, the introduction of university tuition fees, which look set to rise again after the election; the long term rise in the state pension age; or a reduction in the generosity of public sector pensions”.

But as Paul Johnson, a former director of public services at the Treasury, lamented, “Shrinking the state is terribly difficult. [Governments] don’t get far in reducing the size of the state without reducing the numbers working for it or reducing the amount they are paid”. This is a recipe for a slash and burn programme of job losses and real wage cuts.