Put on Your Party Hats - It's Time to Party for Another Decade!

I don't know about you but I am psyched. The prospects of an ongoing party for another decade are extremely good as the following chart shows.

Dow Jones Industrial Average - 1999 to Present



click on chart for sharper image

Market participants put on their party hats and started cheering in 1999 when the DOW crossed 10,000 for the first time. They have been cheering pretty much nonstop ever since.

Admittedly there was a bit of a party lag between early 2005 and late 2008 but the party hats have been working overtime since mid-2008 as shown below.

Dow Jones Industrial Average - October 2010 to Present



click on chart for sharper image

Lost Decades Comparison

Please bear in mind that some pessimists liken the above behavior to a period of stunning underperformance of the Japanese Nikkei Index over the last two decades.

Japan's Two Lost Decades



click on chart for sharper image

The Perpetually Optimistic Mish

Being the ever-optimist that I am, I want to quickly point out that while Japan essentially went straight down over two decades, the US by comparison has put in stunning outperformance by going nowhere.

Indeed, the Dow Jones Index is remarkably sitting exactly where it was in April of 1999, over 10 years ago while the Nikkei over the same timeframe fell by about 50%.

Optimists such as myself have only one thing to say: Hallelujah!

Meanwhile doom and gloomers like Robert Prechter think the Dow will fall to 1,000.

To that I say "Poppycock" (pretty harsh language indeed for those who know me well).

By my optimistic comparison, I think the Dow's downside is 5,000. That is a stunning 400% more optimistic appraisal of the current state of affairs than Prechter.

Furthermore, I freely admit that the DOW, instead of dropping, just may meander around 10,000 for another decade.

Wow. Except for public pension plan assumptions, imagine the parties we can have over that!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Changing Attitudes on the Value of an Education

In response to Teenagers Scared Over Plight of their Parents; Attitudes - Bernanke's Biggest, Most Futile Fight which was based on a comment on my blog by someone using the name "Nancy Drew", please consider this response from "Projammer"

Hello Mish

Regarding your comment "Attitudes towards education and education costs have certainly started to change with some starting to question the value of an education and what they are willing to pay" ...

My daughter is 14. I looked at the cost of the private, church college I attended, in which she has expressed an interest. Four years is $100,000. We cannot cash-flow that. It will be more in 4 years.

My wife and I are programmers. She has mentioned an interest in learning to program. I'm considering teaching her this, teaching her how to run her own business, and skipping college altogether.

If not programming, then I can look for other "sole-proprietor" friendly businesses involving skills that she can learn. I can get her a lot of targeted education in any field she wants for a fraction of $100,000!

I'm putting money aside for college. But my doubts as to its value are growing just as quickly.

Thanks "Projammer" and thanks to "Nancy Drew" as well.

Real Life Attitudes vs. Fed Platitudes

Real life experiences are worth far more that platitudes from Fed-sponsored PHDs on who should be commenting about economics.

I commend both of the above because refusal to pay more than an education is worth. Changing attitudes are a necessary ingredient to bringing down the cost of an education, currently an absurd sum of money, for the sole benefit of overpaid administrators, college professors, and dare I say it, to a lesser yet still significant extent (primarily because of untenable benefit plans), ordinary teachers in many school districts across the country.

This is not a slam against teachers, but rather against public unions, bureaucrats, and politicians who have put many skilled teachers in an unwinnable situation.

Projected Education Costs

It is because of attitude changes by parents and teenagers regarding the value of an education, that I expect costs of education to drop significantly in the years ahead.

If you are a parent considering "locking in" the price of an education for your 8-year old child now, you may wish to reconsider.

My bet is that 10 years from now (if not a lot sooner) education costs will be falling like a rock.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Teenagers Scared Over Plight of their Parents; Attitudes - Bernanke's Biggest, Most Futile Fight

Here is a comment I want to share from someone who posts under the name "Nancy Drew" on this blog. Nancy Drew writes ...

Our daughters are 15 and 17. Most of their friends are very concerned about their parents' financial situations and tell me their parents have too much debt. Whether their parents know it or not, these kids know exactly what is going on and they are scared.

My oldest daughter told me this week that her friend "K"'s mother is jealous of me. I asked her why, and she said her friend's mother thinks I never worry about money and seem carefree. I told my daughter that is only because we don't have debt.

I reminded her of the years when her friend K's family went on cruises while we were tent camping in a state park. I told her that her dad and I made a decision when we first got married that we weren't going to buy anything, not even a car, until we had the cash to buy it.

We previously had a mortgage, but we paid it off in 13 years. I told her we just didn't want the stress. She gave me a hug and walked away without saying anything.

Congratulations Nancy, not only did you make wise decisions you taught your kids well.

Political Will vs. Consumer Psychology

The biggest and most futile fight Bernanke faces is changing attitudes towards debt.

Flashback February 19, 2009: Fiat World Mathematical Model

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

Flashback June 25, 2008: Peak Credit

Lessons Of The Great Depression Forgotten

The lessons of their great grandfathers who lived in the great depression era were forgotten. Over time, everyone learned to ignore the dangers of debt, risk, and leverage. Belief in the Fed and the government to bail out any problem are ingrained. Bank failures are distant memories.

Peak Credit

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

For more on attitudes please see:

• Changing Social Attitudes About Debt - February 25, 2008
• Moral Obligations Of Walking Away - February 7, 2008
  
• Attitudes Lead, The CPI Lags - March 19th, 2008
• A New Phenomenon: Haggling Over Prices - March 23 2008
• Cool to Be Frugal - April 24, 2008
  
• The Future Is Frugality - August 10, 2008
  
• The Age Of Frugality - October 19, 2008

Moreover, students fresh out of college, six-figures deep in debt, face decades of debt slavery.

Both parents and students are wondering what went wrong as noted in Subprime Goes to College; Students Buried in Debt; Who is to Blame

Note the bad policy decision (Pell Grants), that helped fuel the problem of rapidly rising costs of education.

Please see College Grads about to Flood Labor Market; Class of 2009 Still Without Jobs in Deep Trouble for still more details on the plight of students.

Attitudes towards education and education costs have certainly started to change with some starting to question the value of an education and what they are willing to pay, even as the Obama administration tries to keep the education bubble alive by throwing more money at it.

Every place you look, be it housing, education, or public unions, attitudes towards debt, lending, and the role of government are changing. It is precisely those changing social attitudes why Bernanke is losing and will lose the battle against deflation.

The sad irony is Japan has proven it is a stupid battle to be fighting in the first place.

Those fretting over base money supply and foolishly screaming hyperinflation (or even inflation), simply do not understand the dynamics of debt deflation, nor do they understand how small the increase in base money is compared to debt that will be written off, nor do they understand the role of changing social attitudes towards spending.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Policy Errors Cause Depressions (and how "in isolation" some things Krugman says make sense)

It is easy to pick on Paul Krugman. So easy in fact, that it is not even fair sport.

However, if you can separate the wheat from the chaff, sometimes there are nuggets of truth in what Krugman writes.

For example, please consider The Third Depression.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost � to the world economy and, above all, to the millions of lives blighted by the absence of jobs � will nonetheless be immense.

And this third depression will be primarily a failure of policy.

I completely agree with those statements.

Moreover, if I take partial sentences I can find more things to agree with, such as

• "governments are obsessing about inflation when the real threat is deflation"
• "And who will pay the price ..."
• "The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

That last bullet point was a compete sentence, the last sentence in his article. The problem is the rest of the article is loaded with Keynesian claptrap regarding policy errors.

Nonetheless, Krugman is right on the key point - policy errors cause depressions. We simply disagree as to what those policy errors are.

Krugman Also Correct About Inflation

Interestingly, most of the Austrian types mock Krugman about inflation, but on this point Krugman is essentially correct.

There is no credible inflation threat at this juncture. Hyperinflation is a complete joke. Those who get this wrong simply do not understand the role of credit in a credit-based fiat economy.

The destruction of credit and especially credit marked-to-market on the balance sheet of banks and lending institutions is immense.

By my definition we are back in deflation now. "Deflation is a net contraction of money supply and credit, with credit marked-to-market".

Price watchers are not only missing the boat, they also fail to take housing prices in their calculations.

The Price We Pay For Budgetary Murder

The reason I say Krugman is essentially correct regarding the inflation/deflation debate is that deflation is not a threat, it is a necessity as explained in The Price We Pay For Budgetary Murder.

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

Greenspan and Bernanke combined to stave off paying what was due in 2001-2002. The result was a massive housing bubble that ultimately collapsed.

Congress and the Fed added to the misery by wasting trillions of taxpayer dollars bailing out banks and Wall Street while leaving the private sector in shambles, and millions of homeowners debt slaves to their houses.

Each time the day of reckoning is put off, the bigger the price down the road. Thus, we should all be fearing more Keynesian and Monetarist attempts to forestall the inevitable collapse.

Attempting to stave off further debt writedowns and another recession is like attempting to stave off a hangover by drinking more whiskey.

How Policy Errors Cause Depressions

Let's start at the beginning, something Krugman fails to do.

The Greenspan Fed made countless policy errors in creating an environment of too big to fail, bailing out banks literally every time they got in trouble. The critical mistake was short-circuiting the 2001 dotcom recession.

Greenspan managed to do that by slashing interest rates, holding them too low, too long, and fueling the biggest housing and debt problems the world had ever seen.

At that point, a depression was inevitable. The only question was "how severe?"

Was Krugman a Housing Bubble Proponent?

In a 2002 New York Times editorial Krugman said "To fight this recession the Fed needs�soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Krugman claims "that wasn't a piece of policy advocacy, it was just economic analysis."

For links and further discussion please see Krugman's Intellectual Waterloo

Policy Error #2

No policy decision is so bad that it cannot be made worse. Bernanke failed to see Greenspan's error and could not even see a housing bubble that was obvious to anyone with an ounce of common sense.

When the bubble finally did burst the Fed in cooperation with Congress and the treasury department bailed out the banks, the bondholders, and Wall Street at the expense of taxpayers. That was a second critical mistake, guaranteeing the relapse we see now.

Banks still are capital impaired, banks still are not lending, consumers are still deep in debt and the Fed and Congress did not cure any structural problems (including Fannie Mae and Freddie Mac) with their bailouts.

The waste of bailout capital will without a doubt affect "tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again" just as Krugman says.

Unfortunately, Krugman has the wrong reason. The policy error is not as Krugman thinks (failure to throw more money at the problem), but rather throwing any money at the problem.

Bondholders should have taken their punishment, not taxpayers. Instead, taxpayers were forced to pay for the bailout via higher taxes from the Obama administration.

European Policy Errors

In Europe, the ECB made similar policy errors in attempting to bail out French and German banks in deep slop over poor loans to PIIGS, primarily Greece, Portugal, and Spain.

The correct policy decision in Europe (assuming the foolish loans were already made) was to restructure the bad debts at a pace that could actually be paid back. Instead the ECB insists that Greece, Spain, and Portugal pay back those loans in full, something that I guarantee you will not happen.

Here is a simple point-by-point analysis that shows how that policy error will effect on the entire global economy.

How Policy Errors Cascade

• As long as the ECB's "extend and pretend" policy is in play, Greece, Spain, and Portugal will remain wrecked while burdened by loans they will eventually default on anyway.
  
• In that timeframe, European growth will be anemic at best. Indeed, it is far more likely that Europe will slide back into a deep recession than simply sputter along.
• As long as European growth is weak, China will be weak because Europe is China's largest trading partner.
• If China's exports decline, China will need fewer imports from Australia and Canada.
  
• If China and Europe are weak, there will not be tremendous demand for US exports.
• Global job growth will remain weak.
• Fiscal stimulus measures will fail.
  
• Earnings estimates will surprise to the downside and the global equity markets will be extremely vulnerable to further losses.
• Further equity losses in conjunction with absurd pension benefit assumptions will bankrupt many city, state, and municipal pension funds.
  

This is the insanity of "extend and pretend" measures not only in Europe but in the US as well.

US Public Sector Policy Errors

Obama and the Democrats are doing their best to keep public sector jobs alive. This is a poor policy decision because Firing Public Union Workers Creates Jobs.

Moreover, wasting hundreds of billions of dollars on military spending is another piss poor policy decision. We should declare victory in the war in Afghanistan and pull our troops out, not just in Afghanistan but globally.

Instead of wasting $1 trillion attempting to be the world's policeman, how about cutting military spending by two-thirds, lowering income taxes, and cutting corporate income taxes to zero on profits held in the US?

Instead Obama is raising taxes, placating public unions, and wasting money warmongering.

Policy Errors in Europe

Europe is far ahead of the US in wanting to do something about public sector unions as noted in UK Prime Minister Warns "Years of pain ahead, No Trampoline Recovery"; Time for U.S. Public Unions to Share the Pain Too.

Also see Whistleblower's Account of UK Public Sector Work.

However, the UK is looking to raise the VAT. Increasing taxes is the last thing a recovery needs.

Every one of those bad policy decisions affects the global economy.

The implications of this set of global policy errors is extremely negative, so much so that I have to agree with Krugman "We are now, I fear, in the early stages of a third depression".

The reason however, is absurd measures of Keyensian and Monetarist stimulus, war-mongering, and other Congressional nonsense, not the failure to do more. Thus, Krugman is off by 180 degrees as to why and what to do about it, even if some of his statements in isolation appear to make sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ECB Shuts off Liquidity, Spanish Banks Scream Murder; Spain and Greece Will Both Default

For just under a year, the ECB has offered �442 billion to encourage lending. Instead, and easily predictable, the program did not increase lending and did nothing more than allow weak banks to roll over debts.

The program is now ending and Spanish banks are screaming about the ECB's "obligation to supply liquidity".

The Wall Street Journal has part of the story in ECB Walks a Fine Line Siphoning Off Its Liquidity.

The European Central Bank is scrambling to reassure markets that Thursday's expiration of a �442 billion ($547.46 billion) bank-lending program won't destabilize the financial system, even as banks across the region remain wary of lending to one another.

The ECB introduced the 12-month lending facility last summer to encourage private-sector lending and ensure adequate liquidity within the 16-member currency bloc. Since then, the program, which represents more than half the ECB's liquidity operations, has become a lifeline to banks in Greece, Spain and other countries hit by the region's debt crisis.

The cost of borrowing euros in the interbank market rose to an eight-month high Monday, as banks prepared for the one-year loan's expiration. The euro slid on worries that repayment will expose Europe's financial system to new threats. Yields on German bunds, seen as a haven, fell.

Some investors worry that vulnerable euro-area banks, unable to borrow in the interbank market, could have difficulty replacing that funding, despite repeated assurances from the ECB that it will provide funds on similar terms, albeit for only three months, beginning Wednesday.

"We are confident that this very large financial transaction can take place without disruptions," ECB governing council member Ewald Nowotny said Friday.

Spanish Banks Whine About the "Obligation" to Supply Liquidity

The Financial Time reports Spanish banks rage at end of ECB offer.

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a �442bn ($542bn) funding programme this week, accusing the central bank of �absurd� behaviour in not renewing the scheme.

One senior bank executive said: �Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It�s absurd.�

Another top director said: �The ECB�s policy is that they don�t want to provide maturity of more than three months. But they have to adapt.�

A special offer of six-day liquidity will tide banks over until the following week�s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year.

�The system is just not working,� agrees Simon Samuels, banks analyst at Barclays Capital in London. �We�re approaching the third year of liquidity support and still the market cannot survive unaided.�

Spain and Greece Will Both Default

It should be perfectly obvious that at some point Spain and Greece are going to default. The factors at play are ...

• How much longer the ECB is willing to throw good money after bad
  
• How much longer Germany will put up with ECB policy
  
• How much longer the market will put up with this extend and pretend nonsense
• How much longer Greece and Spain are willing to put up with austerity measures
  

Extend and pretend can go on for years or this can all blow sky high in a month. Regardless, the implications of this setup are extremely negative.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Firing Public Union Workers Creates Jobs

Public unions in New Haven, Connecticut have not yet gotten the message that business-as-usual no longer flies. I am quite happy with that because the city responded by dumping public workers and privatizing services, and that is exactly what needs to happen.

Firing public union workers actually creates jobs.

How so? Let's start with a look at the union position as described in War Is On In Custodian Negotiations

Three hours after school custodians blasted the city for threatening to privatize their jobs, the city released a counterattack: It revealed results of a surprise inspection that found custodians watching TV while they were supposed to be at work.

Negotiations were already �on the verge of disaster� before Thursday, said Local 287 President Robert Montuori. He accused the city of trying to intimidate workers and punish the union for opposing privatization.

As negotiations stall, the city is moving forward toward privatization: It sent out a request for proposals in December, seeking bids on a custodial services contract for the schools. Eight bids came in; the district has identified GCA Services Group, Inc. out of Pennsburg, Penn. as its preferred bidder.

Custodians argue privatization would lead to lower wages, lost jobs, and wasted taxpayer money on costly management contracts. They�ve been showing up regularly at school board meetings to deliver that message.

Clark said the district has found that in the buildings where the city has already privatized custodial work, the district saves at least two-thirds of the cost of using union-only labor, �and the work gets done.�

�I get zero complaints about the cleanliness in those buildings,� Clark said, while he gets complaints every day about the other buildings, where the union workers clean.

Clark said given the efficiency and good results, it makes sense to continue to privatize the custodial work. He said language in the custodian�s current contract allows the district to further privatize after June 30, 2009. His said the district doesn�t need union consent in order to privatize, but it is still negotiating in good faith.

Nothing to Negotiate

At this point there is nothing to negotiate. The union refused to bargain and is being thrown out on its ass, and rightfully so.

Rebuttal to Union Complaints

Public union custodians argue that privatization would lead to lower wages, lost jobs, and wasted taxpayer money on costly management contracts.

Lower Wages: Let's hope so. The union workers are overpaid even if they cleaned the schools like they are supposed to do.

Wasted Taxpayer Money: No, that is a blatant self-serving union lie given the district saves at least two-thirds of the cost of using union-only labor, �and the work gets done.�

Lost Jobs: Not a chance. There will actually be more jobs as a result of getting rid of the unions.

How so? For starters, there will be an equivalent number of private jobs to replace the union jobs. Moreover, given the district saves 67% on cleaning costs, some of the saved money will be used on other school district needs, creating more jobs. Finally, some of the savings can be used to cut back on tax increases putting more money in the pockets of taxpayers who will spend it. That too creates jobs.

Every fired public union worker creates more jobs elsewhere, faster than most can imagine possible, quite possibly immediately.

Thus, a good way to deal with rising unemployment is to fire public union workers.

Addendum

Some people simply cannot look at both sides of the coin. "Jeff in Cleveland" is one of them. Jeff writes "For every fired $20 hour job with benefits - The city/state gets to pay for food stamps."

OK Jeff, fair enough. Yet, as I said above, more private workers will be hired than public workers lost. Thus, food stamps outlays will shrink as a result of firing public workers.

Thanks Jeff, for adding to the reasons for firing public union workers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumer Confidence Dives; Treasury Yields Plunge to April 2009 Levels; An Economic Depression is Here - Congress, the Fed to Blame

Is that a 3-handle I see on the long bond and a 2-handle of the 10-year treasury? Why yes it is.

Treasury Yields - Weekly Close



click on chart for sharper image

The week is not over yet but this looks rather ominous. Treasury yields are back where they were in April of 2009 at the start of the so-called "recovery".

I am not quite sure why the 3-month treasury displays as a flatline at .5. The flatline is closer to 0.

Consumer Sentiment Plunges

Inquiring minds note that the Consumer Conference Board Confidence Index Drops Sharply.

The Conference Board Consumer Confidence Index� which had been on the rise for three consecutive months, declined sharply in June. The Index now stands at 52.9 (1985=100), down from 62.7 in May. The Present Situation Index decreased to 25.5 from 29.8. The Expectations Index declined to 71.2 from 84.6 last month.

Those saying conditions are �good� decreased to 8.0 percent from 9.7 percent, while those saying business conditions are �bad� increased to 42.4 percent from 39.5 percent. Consumers� assessment of the labor market was also less favorable. Those claiming jobs are �hard to get� increased to 44.8 percent from 43.9 percent, while those saying jobs are �plentiful� decreased to 4.3 percent from 4.6 percent.

Consumers� short-term outlook, which had improved significantly last month, turned more pessimistic in June. Those anticipating an improvement in business conditions over the next six months decreased to 17.2 percent from 22.8 percent, while those expecting conditions will worsen rose to 14.9 percent from 11.9 percent.

An Economic Depression is Here

Either the present conditions are about to move back up or the expectations index is about to plunge as well. I expect the latter. Expectations for improvement are way too optimistic, not that a reading of 71 is optimistic at all. It isn't.

Structural problems are immense and the sad fact of the matter is those problems cannot be cured by more deficit spending. Krugman is correct about a depression, just wrong about the cure. Logically the disease and the cure cannot be the same.

By the way, a depression is not coming, we are clearly in one, a deflationary one at that. Once again, those chanting hyperinflation all missed the boat by light-years.

Various safety nets like food stamps, unemployment insurance, and of course people no longer paying their mortgage and living in their houses for free all mask over the depression.

Depression is The Price We Pay For Budgetary Murder and contrary to Krugman's belief, further budgetary murder cannot possibly cure anything.

Understanding The Problem

Before you can fix anything, you have to understand what the problem is and what caused it.

What causes depressions is an unsustainable runup in credit and debt that precedes it, NOT a failure to go deeper in debt.

Anyone who understands 5th grade math should be able to figure that out. Unfortunately, Nobel prize winning economists can't.

Congress, the Fed to Blame

In this case, a spendthrift Congress coupled with loose monetary policy at the Fed, effectively encouraged housing and other speculation. The depression we are in now is a result of massively failed policy. The same policy cannot possibly be the cure.

Give Congress the boot and vote in those against bank bailouts, Fannie Mae bailouts, excessive military spending the US simply cannot afford, and other free-lunch policies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The Price We Pay For Budgetary Murder

Inquiring minds are reading an interesting article by Alex Daley at Casey Research. Please consider We Cannot Afford to Double Dip.

For the first time in a long time, developed governments in Europe and the U.S. face the specter of sub-AAA credit ratings and rapidly rising costs of borrowing more. Between rising borrowing costs, the already hefty budgetary burden of paying prior debt interest, and the ever-expanding rolls of government employees, legislators can hardly keep up on the bills these days, let alone inject any more into the economy.

As the walking bankrupt states and cities continue their budget slashing � down from criminally high levels such as Miami, where the average city worker nets $76,000/year compared to the $29,000 average for private citizens of the metropolis � it will only exacerbate the returning slowdown. Fewer households with cash to spend in the private sector. Rising mortgage defaults and foreclosures as the workers face the grim reality that a state paycheck doesn�t come with a 30-year guarantee these days. Declining tax revenues at all levels. And more people on the already busting-at-the-seams federal unemployment files, which remain at all-time highs.

Speaking of the U.S. federal government, their guaranties of Fannie and Freddie Mac loans are now estimated to cost anywhere from $250 billion to $1 trillion to taxpayers in the end, far above the net cost of any of the other bailout measures and potentially more than is possible to pay. The price tag is so steep, many conservatives are starting to call for repealing the institutions� charters altogether and letting the private market have at them. The U.S. federal government is simply buried over its head in obligations.

The government is all tapped out. And yet the economy continues to slow.

If you are among the camp who wished the government would have never stepped in to begin with and called out the seemingly obvious truth that they could only worsen the situation by flailing so wildly to contain it � the double dip is coming, and you are about to be proven right and get your wish at the same time.

It�s the price we are all about to pay for letting our politicians get away with budgetary murder year after year, including letting them try to �save� us the last time around.

Saved to Death

Alex Daley is certainly correct about the cumulative effect of various "saves". Indeed we have been "saved to death".

We Cannot Afford to NOT Double Dip

I certainly agree with the article but ironically not the title which would be better put as We Cannot Afford to NOT Double Dip.

The following Ludwig von Mises quote will explain why.

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

Greenspan and Bernanke combined to stave off paying what was due in 2001-2002. The result was a massive housing bubble that ultimately collapsed.

Congress and the Fed added to the misery by wasting trillions of taxpayer dollars bailing out banks and Wall Street while leaving the private sector in shambles, and millions of homeowners debt slaves to their houses.

Each time the day of reckoning is put off, the bigger the price down the road. Thus, we should all be fearing more Keynesian and Monetarist attempts to forestall the inevitable collapse.

Attempting to stave off further debt writedowns and another recession is like attempting to stave off a hangover by drinking more whiskey.

Yes there will be short term pain and lots of it to do the right thing now, but there will be greater pain down the road if we don't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Yet Another Keynesian Clown Steps Up to the Plate: Leo Kolivakis at Pension Pulse

The Keynesian clown hit parade just keeps on rolling. Leo Kolivakis at Pension Pulse is the latest to put on the clown hat for The Third Depression?

Some economists are worried about the push to slash deficits too early. In his op-ed piece in the NYT, Paul Krugman goes as far as calling for The Third Depression.

I also fear that policymakers are making a major mistake by moving so aggressively to cut deficits at a time when the global economy remains fragile. If you go back in history and look at all the major recessions, they were preceded by major policy mistakes. Either the Fed started raising rates too aggressively, or governments slashed spending too aggressively, or both.

The Cause of Depressions

I am sick of Keynesian clowns who do not know the cart from the horse, who think debt is a free lunch, who think spending and debt are the ways to get out of debt problems and most of all never say how this debt is going to get paid back.

What causes depressions is an unsustainable runup in credit and debt that precedes it, NOT a failure to go deeper in debt.

Anyone who understands 5th grade math should be able to figure that out. Unfortunately, Nobel prize winning economists can't.

"I listen to nonsense from some commentators claiming that if the US is not careful, it will suffer the same fate of Greece. Total rubbish." says Kolivakis.

Three Examples of Total Rubbish

• People who think crack addicts can smoke crack to cure their addiction
• Alcoholics who think they can drink their way out of alcoholism
• Debt junkies (and Keynesian clowns) who think one can spend one's way out of a spending problem

In a sense all of the above ideas will "work".

In the first two cases the result is physical death, nature's way of solving the problem. In the third case, a bond revolt and economic death solves the problem.

Depression is Well Earned

If a depression is coming, and I think we are in one already, then it was well earned. Thanks to Greenspan and Bernanke, we had the biggest debt party and housing boom the world had ever seen, and depression is the unavoidable payback.

Yet parade after parade of Keynesian clowns suggest there should be no payback for that party, that life can go on, that all we have to do is keep spending money no one has, money that cannot possibly be paid back, and all will be fine.

Excuse me for pointing out the obvious Greenspan's attempt to defeat the recession and deflation in 2001-2002 did nothing but ....

1. Put off addressing the problem
2. Made a far bigger problem attempting to do just that

Thus, those same economic clowns will soon be saying "I told you so" when this recovery dies although the reality is there was never any recovery in the first place, only a mirage of unsustainable spending.

Keynesian clowns want to keep spending until the bond market pukes. As I said in More Keynesian Clowns Come Out of Woodwork ... No policy ever performs badly enough to cause its disciples to abandon it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The Economist "Rising Government Debt is a Ponzi Scheme"

I am always pleasantly surprised when I find a mainstream media article that displays a healthy dose of common sense when it comes to fiscal stimulus and debt.

Philip Coggan's special report Repent at Leisure, in The Economist manages to do just that.

Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

The answer to all problems seemed to be more debt. Depressed? Use your credit card for a shopping spree �because you�re worth it�. Want to get rich quick? Work for a private-equity or hedge-fund firm, using borrowed money to enhance returns. Looking for faster growth for your company? Borrow money and make an acquisition.



Debt increased at every level, from consumers to companies to banks to whole countries. The effect varied from country to country, but a survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008 (see chart 1 for a breakdown by country).

There were even more startling rises in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700% respectively. The burdens proved too much for those two countries, plunging them into financial crisis. Such turmoil is a sign that debt is not the instant solution it was made out to be. The market cheer that greeted the EU package for Greece lasted just one day before the doubts resurfaced.



From early 2007 onwards there were signs that economies were reaching the limit of their ability to absorb more borrowing. The growth-boosting potential of debt seemed to peter out. According to Leigh Skene of Lombard Street Research, each additional dollar of debt was associated with less and less growth (see chart 2).

Stopping the debt supercycle

Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden�unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: �Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?�

During the credit boom of the early 1990s and 2000s the conventional view was that it did not matter. Not only were asset prices rising even faster than debt but the use of derivatives was spreading risk across the system and, in particular, away from the banks, which had capital ratios well above the regulatory minimum.

The problem with debt, though, is the need to repay it.

Another reason why debt matters is to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.

If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

There is much more in the article so inquiring minds will want to give it a closer look.

Interactive Map of World Debt

Please click here to see an Interactive Map of World Debt

Interview with Philip Coggan's on the Economist Special Report on Debt



Philip Coggan's arguments regarding the Limits of Debt are similar to the viewpoint I expressed in Peak Credit on June 25, 2008.

Secular Attitude Change Underway

There is a secular attitude change happening right now. Boomers close to retirement are now (finally) scared to death as the equity in their houses has been vaporized. School age children are seeing homes foreclosed, and families destroyed over debt. The American consumer, who nearly everyone thinks will be back as soon as the economy picks up are mistaken.

Secular shifts like these come once in a lifetime. Sadly it's too late for many cash strapped boomers counting on equity in their houses for retirement.

Lessons Of The Great Depression Forgotten

The lessons of their great grandfathers who lived in the great depression era were forgotten. Over time, everyone learned to ignore the dangers of debt, risk, and leverage. Belief in the Fed and the government to bail out any problem are ingrained. Bank failures are distant memories.

Anyone and everyone who wanted credit got it, and on the easiest of terms: subprime, pay option arms, reckless leverage, and covenant lite debt and toggle bonds that allowed debt to be paid back with more debt. That's what it takes to hit a peak.

Peak Credit

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

The Lessons of Greece

Keynesian fiscal stimulus is nothing but a Ponzi scheme and all Ponzi schemes come to an end.

Such revelations will not stop the Keynesian fanatics from preaching because No policy ever performs badly enough to cause its disciples to abandon it.

However, the lesson from Greece are ...

1: Deficits do matter.
2: Eventually the market will force austerity whether the Keynesian and Monetarist clowns like it or not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish Debt Maturities Shows Huge Funding Problem

Nearly every day I receive emails from Bran who lives in Spain. Over the weekend I received an interesting article, originally in Spanish, on funding Spanish debt.

The article suggests that the situation for Spain is pretty grim.

Bran writes ...

Hello Mish,

Here is an article on Spanish debt that I thought you might find interesting. It is an overview that I find quite balanced , by a Spanish writer, and maybe gives a little depth to the situation here.

I translated with Google and then corrected it.

All the best, Bran.

Translation from Bran

Debt Maturity

The question of coming Spanish public debt maturities seems lately it is becoming one of the most analyzed themes in estimating the solvency of Spain and the derived consequences for its sovereign risk.

If we focus on the numbers, the Spanish Treasury has maturing, in the remainder of 2010, with interest and principal 25.799 million euros in bonds and obligations, and the sum of 40.071 million euros in Letters. That makes a total of 65 870 million in maturities that need to be renewed between now and year end, to which we would have to add the current deficit financing for this year. At the Central Administration the figures talked of are always relative.

Displaying the maturity by month, the strongest concentration occurs in July (about 23.327 million euros). So, we are therefore very close to the main test to be faced by the Treasury in the remainder of the year.

For 2011, the maturities of short-term instruments total EUR 34.573 million and long-term amount to 62.209 million EUR, ie EUR 96.782 million in total. In 2012 and 2013 maturities (in this case speaking only of bonds and obligations) are 61.268 million euros and 61.224 million euros, respectively.

More than 500,000 million of debt

In short, now to 2013 the total Central Administration debt that matures is EUR 285.144 million. If to this amount we add the debt of the other authorities (Regional and Local) and agencies and public enterprises, the total amount is almost doubled and we would be talking about a figure in excess of 500,000 million euros. To put it in comparison to other countries, this amount represents half of the commitments that Italy will face and four times the equivalent of Greece.

The next question is, is that a lot or little? Or to put it another way, does it justify the current differential of about 200 basis points of Spanish long term titles with respect to the German equivalent? Is that risk premium exaggerated or is our sovereign rating in danger?

Certainly, the answers we give to these questions will depend on the evolution of many other variables, not only Spanish but also international , given that Spain is now a cornerstone for analyzing the mechanism of self-sustainability of the euro and credibility of the whole European project.

Obviously, if the answer was easy or immediate, it would not require this text and many investors would be more clear on many decisions that are now subject to a high degree of uncertainty.

One thing we can say is that after the measures recently announced by the Spanish Government in reducing public expenditure, scrutiny will focus on short-term income. This means that the data for the growth of our economy will be watched very closely in the coming months.

Market Sentiment

If the economic situation has not improved in the coming months, in addition to the VAT hike, markets are likely to understand that it is necessary to further increase taxes, something that has been made known by the Economy Minister possibly for after the summer.

But in addition to the severe scrutiny of the dynamics of growth of our economy, there remains an additional problem is that capital markets are largely closed in terms of daily trading. That is to say, when one looks at the valuation screens of most bonds (not just Spanish) in many of them quotations of purchase or sale do not appear or, if present, within a fork of parameters so wide that it does not serve as a valid reference.

If we add to this negative perception that has installed itself in foreign investors to everything bearing the label peripheral Europe and has made it that they flee risky assets in these countries, it is understood that the issue of solvency is intrinsically linked to a problem of mistrust.

To sum up, perhaps the current differential of the Spanish public debt is more typical of an BBB issuer than to an AA + issuer, but for that to return to the levels that existed until a few months ago, not only will it be needed to stand firm on decisions to cut deficits despite the context of extreme weakness of growth, but also international confidence must return to those countries that have suffered a greater deterioration of public finances. It seems not impossible , but it is something that will be tied to sacrifices and time.

The eyes of the international community are largely placed on Spain and, as in the World Cup, hopefully after a sharp setback we will be able to get up and move on.

Valentin Fernandez, director of Fonditel.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

More Keynesian Clowns Come Out of Woodwork; No policy is ever bad enough to abandon it

Nearly every day, more Keynesian and Monetarist clowns show up trumpeting the benefits of more government spending and more financial debt.

For example, please consider the Telegraph article Ben Bernanke needs fresh monetary blitz as US recovery falters by Ambrose Evans-Pritchard.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (�1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness."

Weekly Leading Indicators

The ECRI weekly leading indicators were at -5.7 at the time Ambrose Evans-Pritchard wrote the above article. They are at -6.9 now.

Please see ECRI Weekly Leading Indicators at Negative 6.9; How Likely is a Double Dip? for details and a chart.

Here is an additional comment I would like to make. ...

The ECRI's much trumped up leading indicators are really not much more than coincident indicators heavily skewed to the performance of the stock market. Housing starts are one of the best leading indicators and the ECRI does not even factor in housing starts.

The ECRI claims to have called every recession in advance and that is a huge distortion of reality. It only seems they can predict recessions because the NBER is even later in calling recessions than they are. By the time the ECRI predicts a recession it is generally clear to everyone but dunderhead economists that we are already in one.

Part of the problem is the ECRI is in dreaded fear of calling a recession that does not happen. The other part of the problem is they are blinded by their own Keynesian claptrap.

Et Tu Whalen?

Chris Whalen, head of Institutional Risk Analystics, normally writes an excellent column.

Thus, I was quite disappointed with his comment "The only default option left is to crank up the printing presses again."

I never realized Whalen was a former Fed official, and that explains the sad state of affairs. It is very difficult to become a Fed official without being a Keynesian or Monetarist clown.

What more does it take to prove Keynesian stimulus is blatant stupidity? For Christ's sake, we threw $trillions of dollars at reflation and it has already failed. But no, Keynesian clowns want to throw another $2 trillion at it, and then another $5 trillion etc., until the bond market pukes as happened in Greece.

The simple fact of the matter is ... There is no recovery to save because there never was a recovery in the first place, only a mirage of reckless spending.

Whalen Borrows Krugman's Magic Mirror

It seems Whalen has borrowed Paul Krugman's Magic Keynesian Mirror.

Throwing money at problems never works in the long run.

Japan tried that and now has debt to GDP of 200%. Because of its aging demographics, Japan is in serious trouble as soon as interest rates rise. Japan will not be able to finance its monstrous debt nor will it be able to grow its way out of the problem. Such is the nature of compound interest and unsustainable levels of debt.

Likewise, the US tried to spend its way out of the 2000-2001 recession.

Greenspan's policies seemed to work, but it was nothing but an illusion. The real economy was taking a nosedive even as financial assets soared. It was a nice party, as all Keynesian parties are, but in the final analysis all Greenspan and Bernanke accomplished was to dig the deepest debt hole mankind has ever seen. The housing and debt implosion of 2007-2008 was the direct result.

Now Paul Krugman thinks it's too early to shut off stimulus.

Hello Paul!

It will always be too early for you. There is no recovery nor will there ever be a recovery until there is genuine demand for goods and services at prices set by the free market not the government.

When the problem is debt, going deeper in debt cannot possibly be the solution.

Yes, Paul, we lost a decade. Yes, Paul, we are going to lose another, not because we failed to follow your recommendations, but precisely because we did!

We had a chance to write off the debt and to let the insolvent banks go under. Instead we wasted over a trillion dollars bailing out banks that still are not lending (and wisely will not lend) because we never purged the debts that needed to be purged nor did we reduce rampant overcapacity.

We could have and should have forced the bondholders of Citigroup and Fannie Mae to take a hit. Instead, taxpayers who cannot possibly afford it, bailed out wealthy bondholders.

In addition, we tried all sorts of Keynesian nonsense like cash-for-clunkers and an$8,000 tax credits for houses. As soon as the tax credit expired housing went in the gutter. It is about to do so for the second time.

Bernanke will not know what hit him even though it is point blank foolish to stimulate housing when there is an ocean of housing oversupply already.

By the way, how many roads can you pave? We paved roads in our area that did not even need to be paved. Now fooking what?

This is exactly the mistake Japan made. Yet you want to repeat it with more absurd makeshift work.

The stimulus money is nearly out and you want more. You will always want more for the simple reason there is no real demand for goods and services, only an illusion of a recovery that comes from passing out "free money".

When you look in a mirror you see the illusion, what you should see is a Keynesian warthog. Substitute the words "Keynesian Economics" for "Real Economy" on that hag, and the picture is perfect.

As Europe found out, the will and the means to pass out "free money" is 100% guaranteed to end before a lasting recovery can take hold.

That dear Paul, whether you like it or not, is the mechanics of peak debt, compound interest, global wage arbitrage, and something you desperately need to learn: Austrian economics.

By the way, we are not going into deflation, we are in deflation, and a badly needed one at that. It is time to writeoff debt that cannot be paid back rather than pile on still more debt that cannot be paid back.

Here are a couple pertinent, common-sense comments from readers of my blog.

Comment from Black Swan (No Not Nassim Taleb)

Let us for example imagine a secluded island society. We shall call the island Maupiti. The Maupiti economy is based on the division of labour, and cowrie shells are the most marketable means of exchange � and there are exactly 1,000 units available.

One night a tropical thunderstorm destroys a majority of the means of production. However, not only did all cowrie shells remain intact � the storm also washed ashore 1,000 more shells. In the face of the doubled number of cowrie shells in Maupiti, John Maynard Keynes would shout �eureka!� and contend that now, magically, every citizen of Maupiti is twice as rich as before and that the storm was a blessing.

However, if you ask the citizens of Maupiti right after the catastrophe, they will hold a different point of view. As a result of the sudden loss of means of production, they will have to deal with a lower standard of living although the amount of monetary units has doubled. This example is supposed to illustrate that it is absurd to gauge the prosperity of a society in monetary units. We live in a society that is based on the division of labour and barter trade, and our prosperity depends exclusively on the number and quality of consumer and capital goods that we as society own.

Comment from LA-Girl

I think we have to see the bloated government payroll for union workers for what it is: a replacement for private sector jobs that are gone for good. Many of these public sector jobs serve no useful purpose, they are the equivalent of FDR paying one group of guys to dig a hole, and another to fill it in.

Only today, at least some of these workers are the foot soldiers carrying out the trend toward statism: teachers who brainwash children with political correctness, police who act as armed tax collectors, inspectors who shake down property owners for "permit fees", etc.

Interest on Debt the Ultimate Limiting Factor

There will be no genuine recovery with personal, corporate, and governmental debt levels as they are. Moreover, it should be blatantly obvious that adding to government debt as the solution for falling personal consumption cannot possibly work. Eventually, interest on the debt will consume all revenues.

For what? For bridges to nowhere, for the same roads to be repaved a half dozen times, for the benefit of government bureaucrats and public workers who collect huge pensions that no one else gets.

US Citizens Understand Better than Economists

Europe seems to be ahead of the US in figuring out perpetual stimulus cannot possibly work. Us taxpayers seem to have figured that out as well.

Please consider Consumers Get It, Keynesian Clowns Don't - 63% Believe Congress Should Worry More About Deficit than Boosting the Economy

Last Thursday Congress failed to pass legislation extending jobless benefits.

Is Congress finally listing to the US Public? Not quite. It took a GOP filibuster to "Just Say No" in spite of the fact that by a margin of 63% to 34% more citizens are worried about keeping down the deficit than boosting the economy.

Jobs vs. Deficits

Congratulations to the Republicans for doing the right thing. It is also what taxpayers want as the following Wall Street Journal chart shows.



Congratulations also go to US citizens who have had enough of Keynesian economist clowns as wall as Obama administration clowns.

"Priming the Pump" Nonsense

Keynesian clowns think the pump needs to be primed. Well $2 trillion did not "prime the pump", nor would $20 trillion. No amount of government spending (waste) can "prime the pump". The idea is ludicrous. As soon as stimulus stops, so does demand as recent housing starts proved and as Japan has proven over two decades of various nonsensical deflation fighting efforts.

Japan tried both Keynesian public work spending (building bridges to nowhere), and monetarist actions (Quantitative Easing) and neither worked.

Results, no matter how awful, are never bad enough to cause government bureaucrats or Keynesian clowns to abandon their religion. The results of Fannie Mae and Freddie Mac are proof enough.

Japan is in its mess because of Keynesian and Monetarist stimulus, we are in this mess because of Keynesian and Monetarist stimulus, and the UK is in its mess because of Keynesian and Monetarist stimulus. Yet the Keynesian clowns want more Keynesian stimulus and the Monetarist clowns want more Quantitative Easing.

No policy ever performs badly enough to cause its disciples to abandon it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Consumers Get It, Keynesian Clowns Don't - 63% Believe Congress Should Worry More About Deficit than Boosting the Economy

Last Thursday Congress failed to pass legislation extending jobless benefits.

Is Congress finally listing to the US Public? Not quite. It took a GOP filibuster to "Just Say No" in spite of the fact that by a margin of 63% to 34% more citizens are worried about keeping down the deficit than boosting the economy.

Please consider Jobless Bill Dies Amid Deficit Fears

Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.

The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.

Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."

"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said. The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research.

The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.

Jobs vs. Deficits

Congratulations to the Republicans for doing the right thing. It is also what taxpayers want as the following Wall Street Journal chart shows.



Congratulations also go to US citizens who have had enough of Keynesian economist clowns as wall as Obama administration clowns.

How will this Affect the Unemployment Rate?

Assuming the WSJ chart is correct and assuming the legislation is not revived (both reasonably good bets), inquiring minds wonder what 2 million people losing benefits will do to the unemployment rate.

ZeroHedge comes up with the wrong rationale in As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5%

As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week." Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising.... Worst of all, as these people surge back into the labor force, the unemployment rate is about to spike by nearly 1%, up to 10.5%.

Expiring Benefits Will Spike Unemployment? Not Quite

While I agree that the unemployment rate has not yet peaked and will see 10.5% and more likely 11% or more, expiring unemployment benefits is certainly not the reason.

To get unemployment benefits you have to be unemployed. To be unemployed you have to be in the labor force.

Expiring benefits puts downward pressure on the unemployment rate for several reasons.

Three Reasons Expiring Benefits will Help the Unemployment Rate

• Some of those 2 million workers will stop looking for a job. As soon as they stop looking, they will be classified as Marginally Attached Workers or Discouraged Workers and thus drop out of the labor pool. If they do not need a job badly enough to look for one, they should not be collecting benefits.
  
• Some of those at or approaching retirement age will opt to go on Social Security. Poof. They will no longer be part of the labor force.
• Finally, there will be pressure on many of those workers to take a job, any job, to have money coming in.

To understand the actual net effect, one would need to have accurate age demographics of those receiving extended unemployment benefits and also accurately judge how many drop out of the labor force by giving up or better yet, act by taking any job they can get.

All of those pressures act to reduce rather than increase the unemployment rate, and for all those reasons, Republicans did the right thing.

Nonetheless, I expect the unemployment rate has not yet bottomed as many of those fresh out of high school or college looking for jobs will not find them. I also think a double-dip recession is on the way (assuming of course the NBER declares the end of the last one). That is by no means a given.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Whistleblower's Account of UK Public Sector Work

Sheldon a former public sector worker in the UK writes ...

Hi Mish,

I used to work in the UK public sector as agency contractor in the planning department. I can tell you that this article is mostly on the money on how public sector workers are literally wasting tax payer's money: sitting idle.

Take care,

Sheldon

The article Sheldon referred to is The Great Inertia Sector: A whistleblower's account of council work where staff pull six-month sickies

In his emergency Budget this week, Chancellor George Osborne announced he was cutting public sector expenditure by 25 per cent. Unions have declared the cuts irresponsible. But are they? Here, one employee for a large inner London authority lifts the lid on the culture of inertia and incompetence at his workplace.

The Mail knows the true identity of the man - a graduate who has been a planning officer for eight years. But to protect his job, he is writing under an assumed name.

Monday morning, it's 10am and I'm late for work - but there's no point hurrying because even though I should have been at my desk 30 minutes ago, I know I'll be the first to arrive at the office.

Sure enough, the planning department is a ghost town.
Our department has 60 employees and - until last Tuesday - a budget of �22million.

I've been there for two years and in that period the only time I've ever seen every employee present and correct was at the Christmas party.

At least ten people will be off sick on any one day. The departmental record holder is Doreen - she has worked a grand total of eight days in 14 months.

Doreen must be the unluckiest woman in the country.

In the past year and a half she claims she has: fallen victim to frostbite; been hit by a car; and accidentally set herself on fire.

But she's really pulled out all the stops with her latest excuse: witchcraft. That's right, Doreen believes somebody in Nigeria has cast a spell on her and that it would be unprofessional of her to attempt to do the job she is paid �56k a year for while under the influence of the spell.

She has already been off for four months on full pay. I've no idea how long this spell lasts, but my guessing would be six months to the day - the exact amount of time council employees can take off on full pay before their money is reduced.

Of course they have to provide sick-notes from a doctor, but as you can buy fake ones online for �10 it's never proved a problem.

There are procedures in place to address attendance, but nobody ever follows them through - chances are the person whose job it is to monitor sickness is probably signed off himself.

I've been told by colleagues that I don't take enough sick leave - when I protest that it is because I'm in good health they look confused. What's that got to do with anything?

Jerry is 63 and two years from retirement. He is what is known in the civil service and local government as an 'untouchable' - he's been at the council for more than 40 years, does no work, but would cost an absolute fortune to get rid of.

So he's left alone to play online poker, Skype his daughter in Florida and take his two-hour daily snooze at his desk, no doubt dreaming of the day when his gold-plated public sector pension will kick in.

When I first started here at the council, I tried to pass these messages on to the right department, but eventually gave up - nobody answers phones, nobody listens to voicemails, and emails go unread.

There's no point showing any initiative. I once wandered down to the 'Streetcare' department to ask why the hell nobody was answering the phone.

But only two staff had turned up that day and they were both in the prayer room. Yes, you read that correctly, all large council offices now provide prayer rooms, primarily for their Muslim employees whose faith requires them to perform devotional prayers at midday, in the afternoon and at sunset.

Of course, when I tell my friends in the private sector about my working conditions, they can scarcely believe it. As the recession bites, they consider themselves lucky to be holding on to their jobs, and are willing to work extra hours or take a pay freeze to ensure their firm's survival.

In the public sector, though, there is no competitive edge; no incentive to cuts costs or improve efficiency. Few genuinely fear for their job security, protected as they are by threats of union action every time the axe looks likely to fall.

It's the same story across the world: when a nation's public sector is allowed to expand into a bloated behemoth, it is almost impossible to cut it down to size, still less to change the culture of waste and laziness that sets in.

I don't know what the solution is. Even those, like myself, who join with the best of intentions are soon worn down and end up subscribing to the 'if you can't beat them, join them' school of thought.

Of course the real scandal is it's your money that's paying for the jollies, the prayer rooms and the never- ending workshops.

In my authority's borough, the average householder pays �1,330 a year in council tax. I'm sure they'd be thrilled to know that they're funding Jerry's internet gambling and Doreen's never-ending sick pay.

Good luck Mr Osborne - you're going to need it.

There are many more examples in the article so it is worth a closer look. No doubt public unions in the US deny this kind of thing happens here, but it does. Department of Energy employees have said essentially the same thing.

Regardless, union control is so strong there is no way to do anything about these problems when they do crop up. The key point however is "In the public sector, though, there is no competitive edge; no incentive to cuts costs or improve efficiency."

Indeed there is every incentive to NOT cuts costs or improve efficiency. That is because the union rakes in more union dues the more public workers there are. Managerial pay is based on how many employees a manager has rather than how much work actually gets done.

The ultimate solution is to abolish all public unions and fire every public worker. Any work that genuinely needs to be done can be handled by the private sector in a competitive bidding process.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies 2010-06-27 Leading Indicators

Mike "Mish" Shedlock
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Lame Ducks vs. Democrat and Republican Gubernatorial Wimps

In Oregon, Governor Ted Kulongoski is admitting the truth - Pension promises and public union contracts have bankrupted the state.

Sadly, that revelation does not matter much now as Kulongoski is a lame duck governor finally willing to tell some of the truth.

Please consider Gov. Ted Kulongoski says recession forces Oregon state government to rethink how it operates.

In what may be his last major speech as Oregon's top executive, Gov. Ted Kulongoski on Friday called for reducing state worker benefits, shortening some mandatory sentences for criminals and making schools more accountable for the state money they spend.

"The current structure of state government is simply not sustainable anymore," Kulongoski told members of the City Club of Portland.

Friday's speech and an 85-page list of recommendations released by the governor's office come as Oregon is struggling to emerge from what Kulongoski repeatedly called the "Great Recession." Earlier this week he ordered state agencies to cut spending by 9 percent over the next year to close a $577 million budget hole. State government is short at least $2 billion needed to continue services in 2011-2013, and experts warn of budget shortfalls for years to come.

"I'm just going to rip the Band-Aid off this one and say it: Increasing labor costs will be a big contributor to future deficits if we do not change the way we budget and provide compensation for public employees.

"Add health care costs to retirement costs and we will soon be looking at benefit increases for public employees that far exceed the increases in pay and benefits projected for their private sector counterparts," he said.

Democrat John Kitzhaber said Kulongoski identified the "scope, depth and urgency of the financial crisis," and indicated he would be willing to look at labor reforms.

"I believe that by bringing (public employees) to the table, we can find ways to lower health care and pension costs," Kitzhaber said.

Republican Chris Dudley said he can't support all the proposals, but he does back change.

"From asking state employees to pay a portion of their health care costs to recognizing the need to refocus the scope of government," he said, "the report and the governor's remarks showed an understanding of the drastic change that is needed to put Oregon on a sustainable course."

Democrat candidate John Kitzhaber completely wimped out and did not say a damn thing other than "bring unions to the table".

However, unions have no table. They always want more, more, more and they do not give a damn about what it costs to anyone else. If you want your taxes raised to support union members who make more than you do with far better benefits than you will ever see, then go ahead and vote for Kitzhaber.

If you want to vote for a total wimp who will no doubt raise your taxes and be more beholden to the unions regardless of taxpayer expense, then by all means vote Democratic.

If you think Oregon needs change and it is time to put an end to absurd union benefits and public salaries, then I suggest you roll the dice with Republican Chris Dudley.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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State Governments Face Greek-Style Deficits; Day of Reckoning for State Budgets Arrives

State budget gaps accompanied by forced austerity measures will act as a huge economic drag in the second half of the year unless Congress plays sugar daddy once again.

Bloomberg reports States of Crisis for 46 Governments Facing Greek-Style Deficits

Californians don�t see much evidence that the worst economic contraction since the Great Depression is coming to an end.

Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.

Far from rebounding, the Golden State, with a $1.8 trillion economy that�s larger than Russia�s, is sinking deeper into its financial funk. And it�s not alone.

Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

�States are going to have to cut back spending and raise taxes the same way Greece and Spain are,� says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. �That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.�

State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.

State leaders won�t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.

Lawmakers need to overhaul tax policy, underfunded public pensions and entitlement spending programs such as Medicaid if they want to establish long-term plans that will foster growth, says former New Jersey Governor Christine Todd Whitman.

�States don�t have a choice anymore,� Whitman says. �These problems are going to require major surgery.�

On May 20, New Jersey Governor Chris Christie vetoed a Democratic bill that would have raised income taxes for residents earning at least $1 million a year to help close an $11 billion deficit. Christie, a Republican, wants to cut spending for school districts and cap property tax increases.

�At some point, the people�s ability to pay runs out,� Christie said in a speech in New York on May 25.

Day of Reckoning Arrives

The Bloomberg article is nothing new. I have been harping about this for years. However, the arrival of the day of reckoning is new. Yet, the only state governor actively doing anything that makes much sense is New Jersey governor Chris Christie. The rest are limping along waiting for the mid-term elections.

However, it is increasingly apparent the next Congress will look a lot different than this one as a Midterm Disaster Looms for Democrats as Confidence in Obama Wanes.

Tenuous Passage

Just to show you how tenuous things are already, financial reform is back up in the air because Massachusetts Senator Scott Brown is having second thoughts about last minute changes rammed in by Democrats.

Reuters reports Senator's concern may complicate Wall Street bill vote

"I was surprised and extremely disappointed to hear that $18 billion in new assessments and fees were added in the wee hours of the morning by the conference committee," Massachusetts Senator Scott Brown said.

He issued the statement after negotiators from the Senate and House of Representatives emerged from a marathon session early Friday morning with a final compromise on a bill that would bring about the most sweeping financial rules revamp since the 1930s.

The legislation would set up a new financial consumer watchdog, create a protocol for dismantling troubled financial firms and mandate higher bank capital standards -- all in an effort to avoid a repeat of the 2007-2009 credit crisis that hammered the economy and triggered taxpayer bailouts of floundering firms.

In May Brown was only one of four Republicans who voted for the Senate's financial regulatory reform package, which was approved, 59-39, with two members not voting.

Before that vote, Democrats had to overcome a Republican filibuster aimed at killing the bill and did that by the narrowest margin possible, 60-40.

Brown's possible defection from the bill increases the chance of a successful Republican filibuster this time unless Democratic leaders can find another vote.

Democrats control 57 seats in the Senate and Republicans 41. Two independents usually vote with the Democrats. It takes 60 votes to end a filibuster.

"While I'm still reviewing the bill's details, these provisions were not in the Senate version of the bill which I previously supported ... I've said repeatedly that I cannot support any bill that raises tax," Brown said.

Much Ado About Nothing

Financial reform will pass of course, but barely. Would it pass after the upcoming election? Doubtful.

Moreover the reform that did pass will not accomplish a damn thing. Barry Ritholtz writes Stop the Next Crisis? This wouldn�t have stopped the last one . . .

I cannot help but be struck by one thing in this reform bill:

If it were law since the year 2000, the only part of it that might have prevented, or at least slowed down the crisis, was the new minimum underwriting standards for mortgages. No more �No Doc, NINJA, or Liar loans.� That Lenders must verify income, credit history and job status certainly would have prevented the worst vintages of sub-prime and exotic mortgages from ever being written, or subsequently securitized.

Other than that, there is not a single element of the reform that would have prevented the last crisis. I strongly doubt that anything else in this reform package is going to prevent the next one, either.

Ritholtz is spot on with those comments.

The key take away is it took months of time and energy to accomplish nothing, while barely garnering enough votes for passage (assuming it does pass).

Unemployment Extension Fails To Pass After Three Tries

As further proof Congress is fed up with deficit spending please consider Senate Dems fail to advance tax extenders bill for the third time

Senate Democrats on Thursday failed for a third time to advance legislation to extend unemployment benefits through November.

The 57-41 vote rejected ending debate on the legislation, which would have sent the bill to a final vote.

After the vote, Senate Majority Leader Harry Reid (D-Nev.) repeated comments he made earlier Thursday that the Senate will now move to a small-business bill. Reid said the unemployment benefits would not be added to that bill, but others have speculated that the provisions could still be attached to the small-business measure.

The failure to move the tax extenders package, which also would have renewed scores of individual and business tax breaks, illustrates the extent to which fears about the deficit are dominating the legislative process five months before a midterm election in which Democratic control of Congress will be on the line.

The legislation cost about $100 billion and would have added roughly $33 billion to the deficit by extending unemployment benefits for six months. The cost of the added unemployment insurance was not offset with other tax hikes or spending cuts.

Republicans unanimously voted against the motion, arguing it would add to the country�s ballooning deficit.

�We just can�t keep kicking the can down the street and say, �Oh, we�ll take care of it later on. It�ll be offset later,� � Sen. George Voinovich, a centrist Republican from Ohio, told The Hill. �That�s all we�ve been doing these last couple of years, and I�m fed up with it.�

I do not know if the extension passes this session or not. However, I offer the point of view that it is increasingly harder to pass such measures and it may be impossible after the next election.

These signs make it a lock that the financial day of reckoning for states has arrived. It's about time. Now all we need are a lot more governors like Chris Christie willing to tell the public unions where to shove it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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