Tuesday, March 30, 2010

Spending Up, Incomes Flat, Savings Down

Some strange and contradictory news on our nation's economy; consumer spending was up in February, even though incomes were stagnant.

Consumer spending increased 0.3%,, and though February marked the fifth straight month with an increase, it was the smallest increase since September.

The February income number was the weakest since July, when incomes actually shrank.

People generally aren't inclined to increase spending when their incomes are flat, especially during a recession. So what gives?

The answer is that Americans tapped into their savings to fuel the spending uptick.

Americans saved 3.1% of their disposable income in February, down from 3.4% in January. That's a difference of 0.3%, exactly the same as the spending increase. It' wasn't a coincidence.

The savings rate dropped to its lowest reading since October 2008, when the financial collapse began.

The resulting fear and panic from the recession lead people to stop spending as much and instead begin paying down debts and saving. Those were both wise and, perhaps, expected choices given the environment.

Since consumer spending accounts for 72% of GDP, it's a good indicator of how the economy is faring. If people aren't spending, the economy is shrinking – unless the government leaps into the void, as it did last year.

Historically, savings rates tend to increase during times of recession.

During the early 1980s, when the economy was in a severe double-dip recession, the annual personal saving rate (effectively, income minus spending) averaged around 10%.

But by the time of the 1990-91 recession, it had fallen to an average of 7%.

And by 2001, the rate had fallen below 2%. As the decade progressed, it even fell below 1% multiple times.

The reality is that rate has been falling steadily for many years. In fact, in 2005, at the height of the American spending and debt binge, the savings rate actually turned negative for the first time since the Great Depression. And it stayed that way for a couple of years.

But when the economy nearly collapsed in 2008, the savings rate started to trend higher. It jumped from 1.3% in January of 2008, all the way to 6.9% in May of 2009 – the highest rate in 15 years.

However, it declined once again, to 4.2% in December of 2009. And now it's on the decline once again.

The previous uptick in savings had been a good sign, indicating that Americans were putting an end to their debt-based spending.

A higher savings rate is critical because it makes more money available for business investment. And it can reduce the need to borrow from overseas.

But it also led to a slow down in the economy.

Last week, the Commerce Department reported that personal income in 42 states fell in 2009. Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation.

If Americans are worried about jobs and wages, then they won't continue to spend. Instead, they remain in retrenchment.

But if the car breaks down, or medical bills need to be paid, they will tap their savings – until there are no savings left to tap.

Friday, March 26, 2010

Social Security Facing It's Long Feared Day Of Reckoning






















Tuesday, March 23, 2010

Global Debt Crisis Reaching Critical Mass

First came the Dubai debt crisis. That was followed by the Greek debt crisis. But they are just the first ripples in what is a global tidal wave of debt.

Despite their relative burdens, both nations have minor debt problems compared to many other nations, even large Western economies.

Greek public debt is about 120% of gross domestic product. And its current deficit is a whopping 13% of GDP. That is twice what the previous government had been admitting prior to last October's election. The difference shocked, and rocked, world markets.

Economists note that a nation's deficit should not exceed 3% of GDP in any given year.

Greece hopes to achieve the Herculean task of reducing its deficit to 3% of GDP in just three short years. That's a tall order, and one that many are betting against.

In fact, Wall St. — which helped Greece hide its debt for years through the use of arcane financial instruments — is indeed betting against the Mediterranean state.

As Greek Prime Mininter George Papandeou noted to Charlie Rose, this is like "taking out insurance your neighbor's house, and if it burns down, then you get the money... That is, you want to bet on the failure of someone, or in this case a whole economy, like Greece."

German Chancellor Angela Merkel also voiced similar concerns. "Institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere," she noted.

It's little surprise. That's just how Wall St. works. It's plainly ruthless.

The trouble for Europe, and the world in general, is that Greece is not an isolated case. It has lots of company; Portugal, Ireland, Italy and Spain also have painful deficits and staggering debts. This group of nations is collectively referred to as the PIIGS, a fitting acronym.

Iceland, another debt-ravaged nation, has already melted down and there’s also concern about the Baltic states, whose balance sheets are a mess.

For example, the government of Latvia recently collapsed in the midst of enormous economic turmoil. Unemployment has now hit 20% and the economy contracted by 18% last year.

The weaker Eurozone nations are looking to the more economically powerful Germany and France to save them. But the dirty little secret is that both of those nations are also wallowing in their own enormous debts.

The burgeoning debt crisis has spread around the globe, like a contagion.

Last fall, The Business Insider ranked "The 10 Countries Most Likely to Default." Here's that list, in order, along with the cumulative probability of default:

1. Venezuela - 60%
2. Ukraine - 55%
3. Argentina - 49%
4. Pakistan - 36%
5. Latvia - 30%
6. Dubai - 29%
7. Iceland - 23%
8. Lithuania - 19%
9. California - 18%
10. Lebanon - 17%

We've already seen the implications of the debt problems in three of these nations; Latvia, Dubai, and Iceland.

Yet, the other nations on the list have barely generated any interest or coverage by the financial news media. Instead, the group of nations known collectively as the PIIGS are getting all the attention.

However, the economies of Argentina (#24 in GDP), Pakistan (#28), Venezuela (#32), and Ukraine (#40) are considerably larger, and their burdensome debts more worrisome, than either Latvia, Dubai, or Iceland.

As noted, Iceland has already gone bust once. Only an emergency $6 billion bail-out from the International Monetary Fund enabled its economy to keep functioning. That's a pittance compared to the debt problems faced by other nations around the globe.

The pressing question for Iceland is whether it could happen again. Iceland's central bank already expects the economy to contract more than 3% this year after a steep fall in 2009. Further loans by the IMF have been held up, and meanwhile Iceland's economy remains in tatters.

The people of Iceland resent being stuck with a bill for the misdeeds of a handful of foreign bankers supposedly under the watch of foreign governments. They want their government to focus on helping its own citizens get through the crisis before repaying foreign obligations that resulted from the malfeasance of bankers.

The citizens of Greece seem to feel similarly; protests and riots have swept the nation. The Greek people are both angry and scared.

It's worth noting that most of the nations getting all the attention for their debt problems have relatively small economies and debts.

According to the CIA World Factbook, Greece has the world's 34th biggest economy, at $339 billion. Portugal is #50, with a $232 billion economy. Ireland, at #56, has a $177 billion economy. And little old Iceland, with its tiny $12 billion economy, is #142.

There are much larger problems on the world stage.

Japan has the world's fourth largest economy, registering $4.1 trillion. It has a staggering debt amounting to 200% of GDP. Think about that for a moment.

The UK, the world's seventh largest economy at $2.1 trillion, is facing a massive debt burden and a depressed currency. Famed investor Jim Rogers has predicted that the British pound could collapse within weeks. The UK faces a deficit that is 12.5% of GDP (similar to Greece), and a national debt equaling 72% of GDP. But when private debt is added, things get a lot worse.

A study by the McKinsey Global Institute found that the UK has the world’s worst private and public debt in comparison to GDP, with a ratio of 470%. Yet, due to artificially low interest rates, the problem may actually be getting worse.

Italy, the 11th biggest economy in the world, has a GDP of nearly $1.8 trillion. It has a troubling debt problem that hasn't fully gotten the world's attention — yet.

And Spain, the world's 13th largest economy, with a GDP of nearly $1.4 trillion, is another debt-saddled country weighing heavily on the EU.

The Maastricht Treaty's Excessive Deficit Procedure sets deficit and debt targets of 3% and 60% respectively for all EU countries. By that measure, many of these nations shouldn't even be allowed in the EU, much less the Euro Zone.

Then there's the US. It currently has a budget deficit that is 10% of GDP, and the 2011 deficit is projected to rise to 11% of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. Imagine that.

This reality scares the foreign governments and pension funds that have long supported US deficit spending. Eventually the market will force higher rates to compel these investors. And higher interest rates will be a drag on the economy, restricting investment and recovery — much less any possible growth. As it stands, China has already begun selling Treasuries, a very bad sign.

The US government and the Federal Reserve are propping up the US economy, but their Atlas-like efforts are bound to eventually fail. The weight of reality is simply too heavy. Rising interest rates will make servicing the utterly massive US debt crippling.

With interest rates at artificially low levels, due to the manipulations of its central bank, the US and its citizens — like many of the aforementioned nations — have been able to borrow at interest rates that do not reflect their true financial situation. That has encouraged overspending, indebtedness, and malinvestment.

Typically, the US would expect — or hope — to grow its way out debt. But exports account for just 13% of the US economy. And absent government spending and intervention, the US economy is actually shrinking.

In what can only be viewed as absurd, 71% of the US economy relied on consumer spending in 2009. But American consumers are retrenching as they worry about debts, jobs, the economy and their own financial security. Americans are simply hanging on, not spending. So the economy will only shrink, unless the government keeps on spending. And it will.

Our economy is predicated on growth and nothing else will do in such a system. In the absence of consumer spending, the government will continue jumping into the breach — to our detriment. It may appear well-intended, but such intervention will be political in nature. The politicians are expected to do something. But you can't cure a debt crisis with more debt.

That game can only continue for a limited period, as the federal debt will increase faster than any resulting economic growth. As it is, the federal debt will likely equal, or even exceed, the GDP by the end of this year.

Trying to spend the nation out of its economic malaise presents a problem for a government mired so deeply in debt.

The government could afford massive Keynesian spending policies during the Great Depression because it didn't enter that crisis with the kind of massive debt it has today. Total US debt (both public and private) was 260% of GDP during the 1930s, but has now reached 370%.

Back then, our debts remained relatively fixed in size, while it was the GDP that fell away from under the debts.

But our current debt continues to grow, and it weighs heavily on the economy. In essence, our debt and our GDP are moving in the wrong directions.

The US needs to significantly reduce spending, especially since its economy is contracting. But about two-thirds of the federal budget is comprised of just five things: Medicare/Medicaid, Social Security, military spending, and interest payments on our debt.

Even if deficit spending were to cease immediately (which it won't), as soon as interest rates rise from their record-low levels (which they will), those debt payments will become massive and debilitating.

For decades, the US, like many other nations of the world, hid behind a fallacy of growth by not factoring in all the debt created in the pursuit of that growth. All of this debt has resulted in a lack of savings to fund private investment.

Total US debt, both public and private, doubled from 2000 to present, ballooning from $26 trillion to $53 trillion.

However, the nation's total private net worth is $51.5 trillion, according to the Federal Reserve. By this measure, the US is now officially bankrupt. Since the US cannot possibly pay off its epic debts, its only choice is to inflate and devalue its currency.

But the above figure doesn't even begin to reflect the scope of our nation's true debt problem. As of 2009, the unfunded liabilities of Social Security and Medicare amounted to a staggering $106.8 trillion. Obviously, that's an obligation that can never be paid.

As bad as things are here in the US, we are not alone in facing a growing debt crisis. As noted, the problem is spreading like a global contagion.

According to a recent report by McKinsey Global Institute, the UK debt to GDP is about 470%, Japan 460%, Spain 340%, South Korea 340%, Switzerland 315%, France and Italy about 300%, Germany 275%, and Canada 245%. All are records of debt to GDP.

As a result, the subsequent global deleveraging will be a very painful process and take years to resolve. Unfortunately, what we are going through will rival the Great Depression and is truly historic in nature.

For decades we lived under the illusion that debt was growth. But now that illusion is shattered. As a nation, we spent years living above our means, and now we will spend years living below them.

Saturday, March 20, 2010

Lehman Bros. an Example of Massive Wall St. Fraud

Lehman Brothers' bankruptcy examiner Anton Valukas has issued a damning report revealing just how corrupt the now bankrupt Wall St. institution really was.

Apparently, fraud, cheating, lying and the manipulation of its books were simply a way of life at Lehman. The once-venerable investment bank was institutionally corrupt, and likely an example of just how routine illicit business practices have become on Wall St.

The examiner's exhaustive 2,200-page report illustrates the unethical (perhaps illegal) practices of former Lehman executives, as well as its auditor, Ernst & Young.

The whole affair is entirely reminiscent of the Enron scandal, in which its accounting firm, Arthur Andersen, cooked the books and helped the energy giant cover up its absolutely massive and historic fraud.

The new report reveals a brazenly fraudulent accounting practice, known as Repo 105.

Using this scam, assets were shifted off Leman's books at the end of each quarter in exchange for cash. This was done via a clever accounting maneuver that made its leverage levels look lower than they really were. Then Lehman would bring the assets back onto its balance sheet days after issuing its earnings report.

Lehman was determined to make its quarterly reports look more appealing.

To create the appearance that its leverage levels were within reason, Lehman would “sell” assets (typically highly liquid government securities) to another firm in exchange for cash, which it would then use to pay down its debt. The assets were typically worth 105 percent of the cash Lehman received. Several days later, after reporting its earnings, it would subsequently repurchase the assets.

Normally, this would be considered a loan, or repurchase agreement, but instead it was booked as a sale.

Massive sums of money were flowing in and out of Lehman in successive quarters.

According to the examiner’s report, “Lehman reduced its net balance sheet at quarter-end through its Repo 105 practice by approximately $38.6 billion in fourth quarter 2007, $49.1 billion in first quarter 2008, and $50.38 billion in second quarter 2008.”

The latter were the final two quarters before the investment bank's inevitable collapse.

What is now clear is that Lehman was engaged in an institutional practice of deception. The well-crafted ruse was designed to fool investors and creditors about the investment bank's health.

According to Valukas' report, Lehman executives used "materially misleading" accounting gimmicks, and former CEO Richard Fuld was "at least grossly negligent in causing Lehman Brothers to file misleading periodic reports."

But what is most stunning about the report is that a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York had moved into Lehman Brothers' headquarters while this scam was being perpetuated. And they were either so inept as not to notice, or they willingly looked the other way.

How's that for regulation?

At any given moment, there were as many as a dozen government officials inside Lehman’s offices, with access to all of Lehman’s books and records.

And yet they found nothing until June 2008, when a lower-level executive sent a letter to management taking issue with the firm’s practices. Despite being ensconced inside Lehman's headquarters, the S.E.C. and Fed officials found nothing amiss.

If nothing else, this is a reminder of the corruption on Wall St, and why it cannot be trusted. Its valuations seem to be nothing more than pure fantasy.

And the notion of regulation is equally fantastical. After all, Lehman perpetuated this fraud right under the noses of supposed government regulators.

Perhaps these government agencies cannot be trusted either.

It's worth noting that current Treasury Secretary Tim Geithner was heading the New York Reserve Bank at the time. And it was Geithner that sent his "regulators" into Lehman, as well as Goldman Sachs, Morgan Stanley, Merrill Lynch, and others.

Who knows what else we still don't know?

The question is this; were government regulators inept, or complicit? Were these officials useless buffoons, or criminal participants in a massive fraud? Either answer effectively ruins their credibility, as well as any previous faith the public may have had in these regulatory agencies.

With all of this in mind, it's good that the unethical Lehman collapsed, a victim of its own lies and excess.

And the other Wall St. firms, likely equally fraudulent and wracked by their own excess, should have been allowed to collapse along with it, just like Bear Stearns.

Good riddance.

Tuesday, March 16, 2010

Mortgage Delinquencies at All-Time High

The latest report from Lender Processing Services shows that mortgage delinquencies have reached an all-time high.

More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure. And another one million properties are either bank-owned or have been sold out of foreclosure.

But what's truly stunning is that 10% of all U.S. loans are delinquent.

That huge volume of delinquent loans will assure another wave of foreclosures, a terrible sign for the housing market, as well as the overall economy.

As goes housing and employment, so goes the economy. And right now, it's a perfect trifecta of misery.

The difference between now and, say, a year ago is that delinquencies are hitting borrowers with good credit who have regular fixed-rate mortgages.

The other disturbing statistic is that older loans make up a higher percentage of new delinquencies.

All of the resulting foreclosures will result an ever-increasing inventory that will only serve to drive down home prices even further.

It's weird when the good news is that, "The pace of deterioration has slowed," as LPS noted. That sounds kind of hollow at the moment.

The worst-hit areas are the usual suspects: the boom-and-bust states of Florida, Nevada, Arizona and California, plus the economically savaged areas of Michigan and Ohio. However, few states are escaping the problem.

As further evidence of the crippled market, the government reported today that new home construction and building permits fell in February.

And once again, the good news was that the declines were better than some economists had forecast.

Feeling optimistic yet?

The fact that new home starts and building permits declined is a natural outcome of a market flooded with inventory. Who wants to buy a brand new house when there are so many foreclosures for sale?

Considering all the government intervention and price supports in the housing market, this may be as good as it gets.

The Fed is scheduled to end its purchases of mortgage-backed securities at the end of the month. That intervention has been artificially holding down interest rates. And the home-buyer's tax credits are set to expire on April 30.

How bad the market will become when those programs end is anybody's guess. But it doesn't take a soothsayer to predict that it won't be good.

Unless and until unemployment makes a significant change for the better, the housing market won't just remain in distress; it will just continue to deteriorate.

Monday, March 15, 2010

Lots of Banks Going Broke, as is FDIC

A total of 30 banks have failed as of March 12, putting 2010 ahead of last year's pace when 140 banking institutions went under.

That was the highest total since 1992, when 181 banks failed at the tail end of the S&L crisis.

As of the end of last year, the FDIC said that 702 banks were at risk of going under, a number that has been steadily growing. And still, that seems to be a very conservative estimate.


Veteran bank analyst Gerard Cassidy of RBC Capital Markets agrees, expecting as many as 1000 banks to ultimately go bust.

Most of the troubled banks are concentrated at the regional and community level, and are weighed down by commercial real estate and construction loans.

The problem is that the $6.4 trillion commercial real estate market is under duress as businesses across the country go under. Stores are closing, mall vacancies are increasing, office space is all too available, and construction projects across the country have halted as builders have gone belly-up.


However, the collateral value underlying many of these loans is depreciating. That means many borrowers will have trouble rolling over their loans, resulting in continued defaults and heavy bank losses.


The report also said that on nearly half of all commercial real estate loans, the borrowers owe more than the property is worth, and the biggest loan losses are expected for 2011 and beyond. In other words, the worst of the problems are just getting started.

And the money to cover this coming tidal wave of losses simply doesn't exist. The FDIC's deposit insurance fund was $20.9 billion in deficit as of December 31, the agency reported.

FDIC Chairman Sheila Bair said the fund is expected to bottom out this year, and that further bank failures are expected to cost the fund around $100 billion through 2013.

So, the FDIC is essentially broke. It will soon have to ask the equally bankrupt Treasury for a bailout. What an absurd proposition.

The true scope of the problems on bank balance sheets has been hidden as the government placated banks by radically changing age-old, sound, and transparent accounting rules.

This much we know; $6.4 billion in commercial real estate investments didn't qualify for refinancing in the first ten months of 2009. And nothing has changed. The problems are only worsening.

Since banks are not required to mark their loans to market prices, no one knows the true values of the loans on their books. But as the commercial real estate market nose dives, many more banks will go down with it.

Banks in jeopardy of failing simply aren't going to take on any risky loans. And in this environment, that means most loans.

When all these commercial loans can't be rolled over, it will only result in a very bitter irony.

The banks are damned if the do loan, and damned if they don't. But ultimately, American taxpayers will be stuck with the bills.

Saturday, March 13, 2010

Decline In Trade Deficit A Bad Sign For The Economy

In years past, word that the US trade deficit had shrunk was generally greeted as good news. Not so today.

This week we learned that the trade deficit shrank unexpectedly, from $39.9 billion in December, down to $37.3 billion in January. This was due to a big drop in the importation of oil and foreign autos.

But here's the strange part; US exports declined as well, yet the gap still shrank. That's how low consumer demand is in the US right now.

Both are very bad signs for the US economy.

With American consumers financially tapped out, the US needs a strong export base to help begin its recovery. Though the US exports have been continually declining for years, the sales of civilian aircraft, machinery, and agricultural products dropped in January, a worrisome sign that the global economy is still on weak legs.

Of equal concern, a decline in oil imports indicates a decline in energy usage. While many may herald that as a positive sign for our oil addicted nation, it portends the continued sluggishness of the US economy. A lack of energy consumption indicates a slackened economic base and a lack of growth.

What's more, the nation's bill for imported petroleum plunged 5.4% in January to $25.4 billion, despite a higher average price for a barrel of oil. So, even as oil got more expensive, Americans spent less on it.

And the decline in foreign auto imports indicates the lack of demand by US consumers. Though car sales increased by 6%, year-over-year, in January, they were generally sluggish and disappointing since most fell from December levels.

For the most part, even the car companies that reported increases still suffered from declining sales to consumers, a sign of the continuing challenges facing the industry. The increases were due to big jumps in fleet sales to government and businesses, particularly rental car companies.

Though China reported that its exports rose in February by 45.7% from a year earlier, US consumers clearly weren't the reason why. Imports from China fell to the lowest level since June.

As the US manufacturing base has declined in recent decades, and as imports of oil and cheap foreign goods have increased, the trade imbalance skyrocketed. In 2006, the trade deficit rose to a record $817 billion, before coming down during the Great Recession.

In fact, things have been so out of balance that the last time the US had a trade surplus was 1975.

A trade surplus is preferable to a trade deficit since it generally implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it is amassing capital for future investment and economic pursuits.

However, every year that there has been a major reduction in economic growth, it has been followed by a corresponding reduction in the US trade deficit. And, historically, the deficit has shrunk more so during times of recession – like right now.

That's a reason for concern since the trade gap had reached an eight-year low in 2009. In other words, the shrinking trade deficit contradicts any suggestion that a recovery is taking root.

A drop in global oil prices and the deep recession that cut the demand for foreign goods (even as it hurt US exports) has led to the trade deficit's decline.

A weaker dollar has also made US goods cheaper in foreign markets.

However, with exports accounting for just 13% of the US economy, the nation can't expect to export its way out of this recession. And the decline in imports is just further evidence of the retrenchment of US consumers.

The broad view indicates that we're still a long way from recovery.

Wednesday, March 10, 2010

Unemployment's New Normal

While there is presently optimistic talk of "green shoots" and economic recovery, as far as employment goes, we're a long way from recovery. In fact, we're a long way from what has traditionally been viewed as normal.

There is a growing concern – perhaps even sentiment – amongst many economists that the US has entered a new normal in unemployment. Gone, perhaps, are the days of a standard 5-6% unemployment rate, replaced by a new normal of roughly 10% unemployment.

How long will this new "normal" last? By many accounts, perhaps the rest of this decade. There are a number of reasons why.

During the Great Recession, the US has seen almost a doubling in the share of the long term unemployed (meaning those who have been jobless for six months, or longer) to 40%. And the median duration of unemployment has doubled over the past year, according to OMB Director, Peter Orszag.

Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.

When those people are included, a whopping 17% of Americans are currently under-employed or unemployed. According to respected analyst John Williams, the true number is 22%. That's a sobering statistic which gives an indication of just how bad the employment problem is.

Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.


It's a trend that's expected to continue. Many older workers of retirement age are putting off retirement out of necessity. That leaves fewer positions available for younger workers.

As it stands, there are about 1.2 million unemployed college grads in America. The average graduate is carrying $20,000 in student loans. Those loans can't be paid off without jobs.


All of this has negative consequences for our consumer driven economy. Obviously, there is less consumption when fewer people are working, and there is less disposable income directed back into the economy. And it also means that there will be lower government tax receipts at both the state and federal levels.

And if unemployment remains stubbornly high, wages will also remain stagnant. That could create a negative feedback loop that continues to lower consumer spending and economic output.

Between 1989 and 1999, 21.7 million new jobs were generated. But due to the Great Recession, job creation was negative in the last decade, declining by roughly eight million jobs.

It's part of a long trend; job creation has been slowing for decades.




By some estimations, that's a best case scenario.

Many workers were in low-skill jobs that are never coming back. Millions of Americans are unprepared for the 21st Century workforce. The jobs for unskilled and low-skill workers have been permanently off-shored to Third World nations.

We've lost our manufacturing base, so we won't export out way out of this recession and into a job recovery. As it stands, exports make up just 13 percent of our economy.

And the nation doesn't just have to make up the eight million, or so, jobs wiped out during the Great Recession; it needs to keep up with a labor market that requires the creation of about 125,000 new jobs each month. But we've lost jobs in 24 of the last 25 months. Obviously, we're way behind.

To provide some perspective of the hole we're in, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Naturally, that hasn't happened.

Businesses will first shift some part-time workers to full-time positions before engaging in any new hiring. And many businesses will be happy to maintain part-time workers because they cost less; no benefits and no overtime.

When so many people are out of work, there is no incentive for employers to offer wage increases or high starting salaries. Beggars can't be choosers, and many professionals are working in jobs for which they are considerably over-qualified.

Since the dot-com bubble burst in 2000, workers wages grew by a meager 13 percent over the next 10 years, adjusted for inflation. That was the slowest pace in five decades, according to Moody's Economy.com.

And, also adjusted for inflation, median household income has gone backwards, from a peak of $52,587 in 1999 to $50,303 in 2008, according to the U.S. Census.

In addition, interest rates will eventually rise from their abnormally low levels. When they do, that could also have a dampening effect on job creation and economic expansion.

Ours it a credit-based economy. Yet, banks are reluctant to loan after suffering massive losses, much of it brought on by their own greed and negligence. Last year, 140 banks failed. This year may be worse.

Meanwhile, consumers and companies, scarred by the recession, are likely to restrain borrowing, spending and investing for years to come. Consumers are strapped and burdened by debt. We will not spend our way out of this. Taken as a while, all of this will only perpetuate economic stagnation.

Yet, our government, which is mired so deep in debt, needs a robust economic expansion to climb out of the hole it's in. But that isn't happening. At the same time, millions more Americans are now receiving government support in the form of food stamps and unemployment payments just to stay afloat.

The costs of providing unemployment benefits to all these millions of Americans is enormous requiring states and the federal government to take on even further debt.

The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.

The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010. And the government is now allowing benefits up to 99 weeks.

Unless millions of Americans get more education and new job training, those payments will have to go indefinitely. Many of the old jobs are never coming back. Our economy is simultaneously attempting to recover and restructure.


That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.

Sunday, March 07, 2010

The Goldman Sachs / Government Connection

"AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company." - Fed Chairman, Ben Bernanke

Financial industry giants have taken hold of our government. By becoming "too big to fail," they are living out a calculated, self-fulfilling prophecy.

According to a TIME Magazine story from last year, Goldman Sachs and AIG made huge, irresponsible bets, seemingly with the explicit knowledge that the government would back them if / when they failed.

Goldman entered into a series of highly expensive contracts with AIG, surely knowing how risky they were. Yet they did so anyway. Only the assurance of a government bailout could have compelled such recklessness. The whole thing seemed to be orchestrated to blow up.

As the article pointed out, the government is absolutely littered with former Goldman execs. Obviously, that is a huge conflict of interest.

In a rare interview, former AIG CEO Hank Greenberg told TIME that once the company lost its top credit rating, AIG FP should have stopped writing swaps and hedged, or reinsured, its existing ones.

But AIG FP President Joe Cassano's unit doubled down after the spring of 2005, writing more and more subprime-linked swaps as the ratings plunged. This raised the potential for enormous amounts of collateral being needed in the event that its debt was subsequently downgraded.

Such downgrades eventually occurred in 2008.

Ultimately, AIG — which was bailed out by US taxpayers — ended up bailing out the very same Wall St. banks that had already been rescued by those same taxpayers.

Despite the investment banks having taken such enormous risks with such obvious consequences, the Fed still paid many of them in full. Heads, they win; tails, the taxpayers lose. Gains are private, while losses are public.

Ostensibly, the intention was to keep the financial system fluid. But this moral hazard was perhaps a bigger scandal than the highly controversial bonus payouts.

Many experts wondered why AIG paid 100 cents on the dollar. Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs — the investment-banking house that has been the single largest supplier of financial "talent" to the government.


Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary, in part, by former White House chief of staff and Goldman senior exec Josh Bolten.

Goldman's current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed.

Recent AIG Chairman Edward Liddy is a former Goldman director and an ex-CEO of Allstate.

Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who ran TARP, was a Goldman vice president.


"I am shocked that Goldman had this much exposure [to AIG]," says an analyst at a competing bank. "This was a major failing, but they got bailed."

How was AIG able to live so dangerously for so long? In part because for years Washington has looked the other way.

The company befriended politicians with campaign cash — $9.3 million divided evenly between Democrats and Republicans from 1990 to 2008, according to the Center for Responsive Politics.

And it spent more than $70 million to lobby them over the past decade, escaping the kind of regulation that might have prevented the current crisis.

So, in essence, our elected leaders were bribed to look the other way and allow these egregious transgressions to take place. And Wall St. was given carte blanche to do whatever it likes. It has essentially written its own rules.

In February 2000, one of Wall Street’s most powerful executives petitioned the Securities and Exchange Commission (SEC) to allow his firm and other investment banks to raise their levels of leverage.

He wanted the commission to alter something called the net-capital rule, which he said was “the single most important factor in driving significant parts of our business offshore.”

That exec was Henry Paulson, then the CEO of Goldman Sachs, and the previous U.S. Treasury Secretary.

So, in 2004, after hard lobbying by Paulson and other Wall Street execs, the SEC complied. It reversed its 1975 rule limiting investment banks to leverage of 15-to-1.

The amended rule allowed banks and other Wall Street firms to borrow even more money to finance their businesses. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.

The most aggressive investment banks gladly took on these absurd leverage ratios. What this meant is that, for every dollar in equity capital a firm had, it could borrow $40.

Now those ratios are being unwound with a vengeance and we taxpayers are being held hostage to the process.

What has been hatched is a public/private partnership – amounting to a good ol' boys network – that is absconding with our tax dollars.

Nothing less than a revolving door exists between Wall St. and Washington DC, and back again, just like the Military-Industrial Complex. The whole scheme is appalling.

It is now abundantly clear that Goldman Sachs is nothing less than a mammoth criminal enterprise, and our government aids and abets them. In fact, our government is under Goldman's spell, if not outright control.

Thursday, March 04, 2010

Alan Greenspan's Gold and Economic Freedom

Ayn Rand and her protégé, Alan Greenspan

Alan Greenspan wrote Gold and Economic Freedom in 1966, when he was 40-years-old. It appeared in Ayn Rand's Objectionist newsletter that year, and later in her non-fiction book, Capitalism, the Unknown Ideal, in 1967.

In it, the middle-aged Greenspan makes a strong and persuasive argument for the gold standard and against central banks.

After reading Gold and Economic Freedom, one can't help but wonder what happened to that Alan Greenspan. It hardly sounds like a man who would eventually go on to head the Federal Reserve.

As a fully formed adult, Greenspan underwent a total conversion as Fed Chairman and became a hypocrite. He completely betrayed his own ideals and abandoned the beliefs he had once argued so articulately.

The selection of Greenspan as head of the Federal Reserve was a curious one. Greenspan was a believer in Ayn Rand, a believer in free markets. That seems incompatible for a central banker, because central banking is nothing less than a massive intervention in the market through the setting of interest rates.

Greenspan recognized this incongruity himself, as he noted in his book, The Age of Turbulence:

"I knew I would have to pledge to uphold not only the Constitution but also the laws of the land, many of which I thought were wrong.

"I had long since decided to engage in efforts to advance free-market capitalism as an insider, rather than as a critical pamphleteer."

Included here, in its entirety, is the full text of Gold and Economic Freedom. It is an excellent read and clearly illustrates why holders of the US debt have good reason to be worried.

It is absolutely full of amazing quotes such as:

"The gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).The welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes."


"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."



Without further adieu, please enjoy....

Gold and Economic Freedom
























During the height of the financial crisis, in October 2008, Greenspan was called to Capitol Hill to testify before Congress. In his testimony, Greenspan clearly seemed to regret his earlier conversion, refuting the views he had professed for 18 years as Fed Chairman. These views had led him to continually inflate the nation's money supply and manipulate its interest rates.

“I made a mistake in presuming that the self-interest of organizations — specifically banks and others — were such as that they were best capable of protecting their own shareholders and their equity in the firms."

Greenspan also said that he was “shocked" and professed, “I still do not fully understand why it happened, and obviously to the extent that I figure out where it happened and I — I will change my views. The facts change; I will change.”

"I found a flaw," said Greenspan. "I don’t know how significant or permanent it is. But I have been very distressed by that fact.


"In other words, you found that your view of the world, your ideology, was not right, was not working," replied Rep. Henry Waxman.

"Precisely. That’s precisely the reason. I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Until suddenly it didn't.