Thursday, 30 June 2011

Managing Director of Sovereign Ratings at S&P on Possible US Debt Downgrade to "D" Default if Debt Ceiling Not Raised

John Chambers, managing director of sovereign ratings at Standard & Poor's, talks about the outlook for U.S. lawmakers to reach an agreement to raise the debt limit and avoid an S&P downgrade of the sovereign top-level AAA ranking on the U.S. to D.



Select Quotes

  • If any government doesn�t pay its debt on time, the rating of that government goes to D
  • We are talking about the sovereign rating of the US government
  • If you get to the situation where the government hasn't paid its debt, you will have very serious disruptions throughout the money markets, in the repo markets, the foreign exchange markets and the bond market.
  • It will be much more chaotic than September 2008 [collapse of Lehman].
  • This also supports our view this will not happen. The policy makers will understand that.
  • They [the government] can prioritize payments and that would not be a default by definition. However, you would have to contract payments in a massive way overnight. And that would have a very sharp negative fiscal impulse to the economy
  • Government has raised the debt ceiling 78 times, many times at the 11th hour but later on the month of July, Democrats and Republicans will reach a compromise.

It is interesting to see the statement "policy makers will understand". We are talking about Congress here.

One could equally say "we are talking about the S&P raters here".

Either way I am hoping there will be no compromise. The more government spending is cut, the better off taxpayers will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corn, Soybean, Wheat Futures Plunge on Crop Report; Inflation, Interest Rate Outlook

Grain futures are sharply lower across the board as traders had positioned themselves for shortages because of Midwest flooding and increasing demand from emerging markets and China.

Instead, corn stocks were 11 percent bigger than analysts expected and a bumper crop could be on the way according to the report.

Please consider Grain markets plunge on US acres, stocks
The U.S. corn supply is far larger than thought and a bumper crop could be on the way, the Agriculture Department said on Thursday in a report that shocked traders and shoved grain markets sharply lower.

Farmers defied expectations by planting significantly more corn acres despite rain and floods, and sky-high prices curbed demand which left June 1 stockpiles 11 percent larger than traders had predicted.

The dramatic turnaround from fears of bare-bones supplies could signal comfortable supply levels for the coming year and ease fears about high world food prices.

"American producers stepped up," [USDA's] Vilsack told Reuters Insider.

At the Chicago Board of Trade, corn for July delivery was down 10 percent, or 72 cents per bushel, at $6.26 in morning trade, and deferred contracts were locked down the limit of 30 cents per bushel. The July contract is in its delivery period and trading without limits.

July wheat was down 8 percent, or 49 cents, to $5.92-1/4. July soybeans were down 1 percent, or 19 cents, to $13.15-1/4.

Red-hot demand from corn exporters, livestock feeders and processors had been expected to consume every bushel grown in 2010 and eat into reserves, but the higher stocks number was a sign that demand has been rationed.

"We planted more acres than the trade had thought earlier in the year because we sent the signal to plant," said analyst Don Roose of U.S. Commodities. "The other thing was, we did find a way to slow down usage."

The USDA said the corn stockpile was 3.67 billion bushels on June 1, and it pegged plantings at 92.28 million acres. With normal weather and yields, a record-large crop could be harvested.

The soybean stockpile was 4 percent larger than anticipated by analysts, although plantings were 2 percent smaller. The soybean crop would still be the third-largest on record, but supplies are expected to run tight for another year.

Wheat stocks were 4 percent larger than traders expected and plantings were down marginally.

The USDA reports imply that corn growers would harvest 13.5 billion bushels of corn, which would be a record, and 3.2 billion bushels of soybeans, which would be the third-largest on record. Both estimates are Reuters' calculations and assume normal weather conditions and yields.

A mammoth crop would fatten the corn stockpile to nearly 1 billion bushels, but soybeans would run tight through fall 2012.
Grain Futures



December corn was limit down 30 cents. However, front month contracts are in delivery warning period and there is no limit. Those playing front-month contracts on expectations of a lousy crop report were massacred.

Corn Daily Chart




Inflation Outlook

With crude prices falling and corn hammered, expect the next set of CPI figures to be tame.

Bear in mind I do not consider prices to be a valid measure of inflation. Oil rising because of peak oil has nothing to do with inflation. Nor does rising grain prices based on flooding. Nor does demand from China have anything to do with inflation in the US.

Thus, this plunge has nothing to do with inflation or deflation either.

Inflation and deflation are monetary phenomena. As far as inflation goes, these price movements are noise. However, for those who think price is what matters, prices are headed down.

Interest Rate Outlook

If oil and food prices continue to drop, ECB president Jean-Claude Trichet may change his tune on rate hikes. Of course Trichet will be out of the picture soon as his term expires in October.

In the US, the Bernanke Fed got another signal to keep rates excessively low.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama-Pimco Fear-Mongering Duet Chants More Sour Notes

The Obama-Pimco fear-mongering duet is chanting the same sour notes again today. This time the spotlight is on the president.

Bloomberg reports Obama Assails Republicans as Gulf in U.S. Debt-Limit Talks Remains Wide
President Barack Obama accused Republicans of siding with corporate jet owners over children and the elderly in deficit negotiations and compared Congress�s work ethic unfavorably with that of his pre-teen daughters.

Obama�s comments underscored the distance between the White House and Republicans on talks to cut the deficit and raise the government�s debt limit as Standard & Poor�s warned it would downgrade U.S. debt to junk status in the event of a default and the Senate canceled its July 4 recess to continue talking.

�The yellow light is flashing,� Obama said yesterday during a news conference, warning of dire consequences if Congress doesn�t raise the borrowing limit before Aug. 2, when the Treasury Department projects it will no longer be able to meet all its obligations.

�This is a jobs issue,� he said. �This is not an abstraction. If the United States government, for the first time, cannot pay its bills, if it defaults, then the consequences for the U.S. economy will be significant and unpredictable.�

If the U.S. misses a payment on its debt because Congress doesn�t raise the debt ceiling in time, Standard & Poor�s would cut the U.S. credit rating from its sovereign top-level AAA ranking to D, the last rung on its scale, said John Chambers, chairman of the company�s sovereign rating committee.

Obama cast the differences in moral terms. �Before we ask our seniors to pay more for health care, before we cut our children�s education,� he said, �it�s only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys.�

House Speaker John Boehner rebuffed him, saying in a statement issued soon afterward that Obama �is sorely mistaken if he believes a bill to raise the debt ceiling and raise taxes would pass the House. The votes simply aren�t there, and they aren�t going to be there.�

Senator Tom Coburn, an Oklahoma Republican who last month dropped out of a bipartisan group of senators trying to reach a deficit-reduction deal, said on PBS�s �The Charlie Rose Show� on June 28 that it is increasingly likely House Republicans won�t act on the debt limit by the Aug. 2 deadline.

�If we don�t have major changes to entitlements, I don�t see how you get that vote through the House,� Coburn said.
Obama Sings the Pimco "Unpredictable" Note

Obama is singing the same tune as Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian who said "We would be in the land of the unpredictable if lawmakers fail to reach an agreement to raise the $14.3 trillion debt ceiling".

Like the president, El-Erian is singing his book. For details, please see "Land of the Predictable": Pimco CEO Warns U.S. Debt Default Might Have "Catastrophic" Effect

As noted previously, president Obama is a hypocrite.

President Obama's Hypocrisy

Inquiring minds just may be interested in knowing Obama's track record on debt ceilings when he was Senator Obama.
The Obama administration is warning of catastrophic consequences if Congress does not increase the debt ceiling, the legal limit on how much the federal government can borrow, but Barack Obama held a different view on the issue as a senator in 2006.

Five years ago, then-Sen. Obama (D-Ill.) voted against raising the debt ceiling and even spoke about it on the Senate floor before the Republican-controlled Senate voted 52-48 to increase it.

�The fact that we are here today to debate raising America's debt limit is a sign of leadership failure,� Obama said on March 16, 2006. �Leadership means that �the buck stops here.� Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit.�
Failure of Leadership

I remind the president �The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

Expect Duet to Grow to Mormon Tabernacle Choir Size

As we approach the deadline, expect the duet to grow in size. To be fair, there are a more than a handful of fear-mongers already. Ben Bernanke wants Congress to do something about the deficit, just not now. So does the IMF. Other Fed governors have chimed in with similar statements already.

Yellow Light is Flashing

I agree with the president that a "yellow light is flashing". The president however, does not understand the meaning. The light is flashing because the time to do something about the budget deficit is now.

Please disregard the self-serving fear-mongering of president Obama and Pimco CEO El-Erian. Americans deserve better, and the way to do that is to act responsibly on a deficit-reduction package now, not 10 years from now.

Phone your Congressional representative and let them know what you think.

Click Here For Congresional Phone And Fax Numbers

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Unemployment Claims Exceed 400,000 12th Consecutive Week, Exceed 420,000 Nine out of last 10 Weeks

The labor market remains stuck in the mud since April second, the last time seasonally adjusted initial unemployment claims fell below 400,000.

Initial Unemployment Claims For 2011



Please consider the Department of Labor Weekly Claims Report.

In the week ending June 25, the advance figure for seasonally adjusted initial claims was 428,000, a decrease of 1,000 from the previous week's unrevised figure of 429,000. The 4-week moving average was 426,750, an increase of 500 from the previous week's unrevised average of 426,250.



The recovery is now 2 full years old. Yet, the 4-week moving average of weekly claims remains an elevated 426,750.

4-Week Moving Average of Weekly Claims



The 4-week moving average of weekly unemployment claims is at or above recession levels.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wednesday, 29 June 2011

Medicaid Annual Spending in 1965 $1 Billion, Today $450 Billion, Projected $900 Billion by 2019; Three Things to Fix Medicaid

Medicaid was created in 1965 as a supposedly small program with expenditures of $1 billion. It has since ballooned to $450 billion and now the Department of Health and Human Services projects Medicaid will cost $900 billion by 2019.



The solution is simple. Abolish Medicaid and give states block grants so they have the flexibility to figure out how best provide healthcare for their citizens.



Two Perverse Elements of Current System


  1. States have an incentive to spend more money to get matching funds
  2. Consumers do not care about costs with government footing the bill

Three Proposals to Fix Medicaid

  1. Cap Medicaid Spending
  2. Give Block Grants to States
  3. Allow states Full Flexibility to Define Eligibility and Benefits


Congressman Paul Ryan and Alice Rivlin former Director of the White House Office of Management and Budget under President Bill Clinton have teamed up to propose a block grant program. Rivlin was also appointed by President Obama to his National Commission on Fiscal Responsibility and Reform.

Paul Ryan - Alice Rivlin Proposal




If you agree with the approach outlined above, please contact your congressional representative and urge them to cap Medicaid and replace it with block grants.

Click Here For Congresional Phone And Fax Numbers

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Uneven Aging of America; Cultural Shift Coming; Competition for Resources Between Young and Old Will Be Intense

William H. Frey, Senior Fellow, at the Brookings Institution discusses the Uneven Aging and "Younging" of America as noted in the 2010 census.
America is beginning to show its age as the baby boom generation advances toward full-fledged senior-hood. But the pace of this aging will vary widely across the national landscape due to noticeable geographic shifts in the younger population, with implications for health care, transportation, and housing, and possible impacts upon our ability to forge societal consensus.



An analysis of data from the 1990, 2000, and 2010 decennial censuses reveals that:

Due to baby boomers �aging in place,� the population age 45 and over grew 18 times as fast as the population under age 45 between 2000 and 2010.

Although all parts of the nation are aging, there is a growing divide between areas that are experiencing gains or losses in their younger populations.

Suburbs are aging more rapidly than cities with higher growth rates for their age-45-and-above populations and larger shares of seniors. People age 45 and older represent 40 percent of suburban residents, compared to 35 percent of city residents.
There are far more charts, graphs, and analysis, in the Complete PDF The Uneven Aging and �Younging� of America: State and Metropolitan Trends in the 2010 Census. The excerpts above were from a summary.

Cultural Shift Coming

The Washington Post discusses demographic changes in If baby boomers stay in suburbia, analysts predict cultural shift
During the past decade, the ranks of people who are middle-aged and older grew 18 times as fast as the population younger than 45, according to Brookings Institution demographer William Frey, who analyzed the 2010 Census data on age for his report, �The Uneven Aging and �Younging� of America.� For the first time, they represent a majority of the nation�s voting-age population.

The political ramifications could be huge as older voters compete for resources with younger generations.

�When people think of suburban voters, it�s going to be different than it was years ago,� Frey said. �They used to be people worried about schools and kids. Now they�re more concerned about their own well-being.�

The nation�s baby boomers � 76 million people born between 1946 and 1964 � were the first generation to grow up in suburbia, and the suburbs is where many chose to rear their own children. Now, as the oldest boomers turn 65, demographers and local planners predict that most of them will not move to retirement areas such as Florida and Arizona. They will stay put.

�If you ask younger boomers, who are 45-ish, a lot say they expect to move and retire elsewhere,� said John Kenney, chief of aging and disability services with the Montgomery County health department. �But as people get to 65 and 70, whether because of choice or default, they end up staying. We are planning on people being here.�

�Retirement used to be the golden years,� said Kenney. �No more.�

Local governments are starting to grapple with the implications.

�Clearly, the age wave is coming,� said Pat Herrity (R-Springfield), a county supervisor who heads the 50-plus committee.

Although Florida and Arizona remain retirement magnets, 17 of the 25 states with the highest concentrations of senior citizens are cold-weather states.

Older Americans now represent 53 percent of voting-age adults.

�The political clout of older Americans will be even more magnified if the traditional higher turnout of this group continues, and as the competition for resources between the young and the old becomes more intense,� Frey writes.
Retirement No Longer Golden Years

I have been discussing social trends and changing social attitudes for quite some time. Here is a snip from May 2008 on Demographics Of Jobless Claims
Structural Demographics Poor

Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families.

In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.
One of the many consequences of boomer demographics is the longer the US opus of reform of Medicare, and Social Security, the more difficult it will become because of voting demographics.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, 28 June 2011

China's Top Auditor Warns of Chinese Local Government Defaults

Lost in the worry over Greek debt defaults, China Daily reports on a default story of more significance. Please consider Local governments run up huge debts, risk defaulting
Local governments had an overall debt of 10.7 trillion yuan ($1.65 trillion) by the end of 2010, said China's top auditor on Monday in a report to the National People's Congress.

He warned that some were at risk of defaulting on payments.

It was the first time the world's second-largest economy publicly announced the size of its local governments' debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan.

Concerns are rising that the problem of local government debt could destabilize the financial system of the country if it is not managed properly, especially after the central government's tightening of the housing market, which could affect local fiscal revenue that is highly dependent on land sales and make debt repayment more difficult.

In addition, China's ambitious plan to construct 36 million affordable homes during the coming five years, including 10 million in 2011 and 10 million in 2012, added to worries about increasing capital tension and rising non-performing loans in commercial banks.

About 79 percent of the local government loans were made by banks across the country, according to the NAO.

Lu Zhengwei, chief economist at the Industrial Bank, said the figures released were moderate compared with previous estimates, and risks lying in these loans are quite limited.

"Overdue loans take up only a small proportion of the total lending and local governments didn't pay them in a timely way mainly because deadlines were too concentrated, not because of deteriorated ability to repay."
$1.65 Trillion is a mountain of cash even to the US. How much of that is at risk is the question, but even 10% would be significant.

Moreover, it is certain that what cannot be paid back, won't be paid back. As in the US, once assets backing loans crash, so will willingness and ability to pay back the loans. Thus, efforts by some to downplay the odds should fall on deaf ears.

Speculation in China is as least as rampant as it was in the US. For example, please consider Ponzi Financing Involving Copper Trade Gone Wild In China.

Also consider Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China's Credit Bubble Pops, Exposing Mountains of Fraud

Finally, please consider World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

As long as credit bubbles expand, no one heeds warnings like that issued by China's top auditor. Then when the bubble bursts, everyone cries they were not warned, they were taken advantage of, and they deserve a bailout.

One thing's for certain, when China's credit bubble pops, it will rock the world.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Air Conditioning Afghanistan Troops Costs $20 Billion Per Year; Cost of One Soldier is $1 Million a Year; Hotel California

If people realized how much we were wasting in stupid wars that should never have been fought, there might be far more protests.

Please consider Among The Costs Of War: $20B A Year In Air Conditioning?
The amount the U.S. military spends annually on air conditioning in Iraq and Afghanistan: $20.2 billion, according to a former Pentagon official.

That's more than NASA's budget. It's more than BP has paid so far for damage during the Gulf oil spill. It's what the G-8 has pledged to help foster new democracies in Egypt and Tunisia.

"When you consider the cost to deliver the fuel to some of the most isolated places in the world � escorting, command and control, medevac support � when you throw all that infrastructure in, we're talking over $20 billion," Steven Anderson tells weekends on All Things Considered guest host Rachel Martin. Anderson is a retired brigadier general who served as Gen. David Patreaus' chief logistician in Iraq. He's now in the private sector, selling technologies branded as "energy-efficient" to the Department of Defense.

Why does it cost so much?

To power an air conditioner at a remote outpost in land-locked Afghanistan, a gallon of fuel has to be shipped into Karachi, Pakistan, then driven 800 miles over 18 days to Afghanistan on roads that are sometimes little more than "improved goat trails," Anderson says. "And you've got risks that are associated with moving the fuel almost every mile of the way."

Anderson calculates more than 1,000 troops have died in fuel convoys, which remain prime targets for attack. Free-standing tents equipped with air conditioners in 125-degree heat require a lot of fuel. Anderson says by making those structures more efficient, the military could save lives and dollars.

Still, his $20.2 billion figure raises stark questions about the ongoing war in Afghanistan. In the wake of President Obama's announcement this week that 33,000 American troops will soon return home, how much money does the U.S. stand to save?

Dollars And Cents

The 33,000 troops who will return home by the end of next year match the numbers sent to Afghanistan in 2010, at a cost of about $30 billion. That comes out to about $1 million a soldier.

But the savings of withdrawing those troops won't equal out, experts say.

"What history has told us is that you don't see a proportional decrease in spending based on the number of troops when you draw them down," Chris Hellman, a senior research analyst at the National Priorities Project, tells Martin.

"In Afghanistan that's going to be particularly true because it's a very difficult and austere environment in which to operate," he says.

That means most war expenditures lie not in the troops themselves but in the infrastructure that supports them � infrastructure that in some cases will remain in place long after troops are gone.

"We're building big bases," American University professor Gordon Adams tells Martin. The costs of those bases are, in economic terms, "sunk" costs, he says.

"We're seeing this in Iraq. We're turning over to the Iraqis � mostly either for a small penny or for free � the infrastructure that we built in Iraq. But we won't see back any money from that infrastructure."

And more importantly, Hellman says, "[Afghan President Hamid] Karzai indicated a couple years back that [Afghanistan] wasn't going to be a position to support their own military forces 15, 20 years out. I suspect we're going to be called on to pay a substantial part of that bill going forward."

One outspoken critic is Sen. Joe Manchin (D-WV). He notes the wars in Afghanistan and Iraq have cost hundreds of billions of dollars so far, and he argues a larger troop drawdown isn't a national security risk.

"When you have this many people in a country that doesn't want you there � that has no economy, no infrastructure and a corrupt government � and you're trying to stabilize it and build them into a viable nation? I'm not sure we have enough time, and I definitely know we don't have enough money," Manchin says.
Do the Troops Deserve Air Conditioning?

Some may be asking if US troops deserve air conditioning? The question may sound reasonable, but it poses a false dichotomy. There are more important considerations.

First and foremost, US troops deserve to not be put in harm's way for no reason. The simple fact of the matter is that there is no legitimate reason to be in Afghanistan, in Pakistan, in Iraq, or in 140 other countries at a cost to US taxpayers. Thus, the air conditioning question should never arise in the first place.

If other countries want us there, they should foot the bill. If they don't want us there then we should leave.

The US could cut its military budget by 50% or more with no detriment to actual defense of the United States. In fact, there would probably be a huge improvement in the defense of the United States. The reason is simple - terrorist problems have arisen because we are meddling in countries where we have no business being in the first place.

Iraq vs. Vietnam

For an interesting perspective, please consider Iraq War Deaths Exceed Vietnam War Numbers

However, it is not fair to just look at US deaths. Wikipedia notes "the Vietnamese communist government in 1995 estimated that 2,000,000 Vietnamese civilians on both sides died in the war."

The absurd war in Vietnam did not end until US citizens got fed up with it and demanded change. Unfortunately millions of lives were ruined before change came.

Hotel California

How much more will people put up with now before they demand change?

How long will the US remain in Iraq and Afghanistan?

Before answering that last question answer this one: How long has the US been in South Korea and Japan?

As with the Hotel California, the US may check out, it just never leaves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Congratulations to California: State to Pass Budget, Close $9.6B Deficit, Without Tax Hikes

Congratulations to all California legislators willing to tell governor Jerry Brown where to stuff it. Without needing republican votes, California set to pass budget, close $9.6B deficit
California lawmakers and Gov. Jerry Brown are set to achieve something rarely accomplished in California -- getting a budget signed into law by the July 1 start of the fiscal year.

Both houses of the Legislature have scheduled late afternoon sessions Tuesday to vote on a Democratic budget that can be passed with a simple majority vote. That means no Republican support is needed.

Democratic lawmakers and the governor crafted the plan after Brown vetoed a budget approved on the Legislature's constitutional deadline, June 15. The state controller determined that plan was not balanced and used the provisions of a recent ballot initiative to halt lawmakers' pay.

This plan relies on spending cuts, a projected $4 billion rise in tax revenue and fee increases to close a $9.6 billion deficit.
Balanced Budget Mirage

Bear in mind this so-called "balance budget" is a mirage. Tax revenue is not going to be sustainable.

When this plan fails, and it will fail (but only after it passes), Republicans can stand firm again and demand more cuts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Land of the Predictable": Pimco CEO Warns U.S. Debt Default Might Have "Catastrophic" Effect; Obama's Hypocrisy

In yet another of the seemingly endless self-serving fear-mongering exercises, Pimco�s El-Erian Says U.S. Debt Default Might Have �Catastrophic� Effect
Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian said a short-term default by the U.S. on its debt might have �catastrophic� legal consequences.

�We would be in the land of the unpredictable� if lawmakers fail to reach an agreement to raise the $14.3 trillion debt ceiling and the U.S. misses a payment �simply because of the technical linkages,� El-Erian said in an interview on CNN�s �Fareed Zakaria GPS� program, scheduled to air today.

U.S. lawmakers are seeking a path to increasing the debt limit and to cutting at least $1 trillion from the long-term deficit before an Aug. 2 deadline. President Barack Obama plans to hold separate meetings at the White House June 27 with Senate leaders Arizona Democrat Harry Reid and Kentucky Republican Mitch McConnell in an effort to break an impasse that scuttled a seven-week negotiating effort led by Vice President Joe Biden.

�My advice is please try and get together and solve this issue in the context of a medium-term reform package,� El-Erian said. �If you can�t do that and you�re going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered.�

�So when we look at Treasuries, we see the big buyer stepping away from the market, for certain. And we ask the question, who else is going to be buying at these levels, and we can�t identify another buyer of the size of the Fed.�

El-Erian said the U.S. fiscal problems are dwarfed by those of Greece, whose debt reached 143 percent of gross domestic product last year.

�It is inevitable that Greece would have to restructure its debt,� he said. �Greece has two problems: it has too much debt and it cannot grow. And until these problems are solved, more and more of Europe is going to become contaminated.�
"Land of the Predictable"

I mock the lame fear-mongering excuses of government officials, politicians, and in this case buyers of government and agency debt who do not want to see interest rates rise out of fear of what it would do to the short-term value of their portfolios.

Thus it was entirely predictable that Pimco would issue a "Catastrophic" warning. As for who would buy US government debt, that answer is quite easy to explain: China and Japan would as a function of trade-deficit math, and they would add to that total, as would the UK, Canada, and Europe. El-Erian knows just that (as much as anyone knows anything in the land of the unknowable).

The biggest irony in El-Erian's statement is Pimco would be a buyer, and so would millions of others if interest rates rose high enough.

Finally, interest rates would come crashing back down as soon as an agreement was worked out and there is no doubt an agreement will be reached sooner rather than later.

The only thing "unpredictable" is the exact nature of that agreement.

Shutdowns Happened Twice Before

Please note that US government shutdowns have happened twice before, in 1995 and 1996 under president Clinton.
The United States federal government shutdown of 1995 and 1996 was the result of a conflict between Democratic President Clinton and the Republican-controlled Congress over funding for Medicare, education, the environment and public health. It took place after Clinton vetoed the spending bill which Congress sent him. Thereupon, the Federal government of the United States put non-essential government workers on furlough and suspended non-essential services from November 14 through November 19, 1995 and from December 16, 1995 to January 6, 1996. The major players were President Bill Clinton and the Speaker of the U.S. House of Representatives Newt Gingrich.
Nothing Catastrophic Happened

Amidst all this fear-mongering by president Obama, Pimco, and others, I calmly point out that nothing catastrophic happened last time, and there is no reason to believe anything catastrophic would happen this time.

President Obama's Hypocrisy

Inquiring minds just may be interested in knowing Obama's track record on debt ceilings when he was Senator Obama.
The Obama administration is warning of catastrophic consequences if Congress does not increase the debt ceiling, the legal limit on how much the federal government can borrow, but Barack Obama held a different view on the issue as a senator in 2006.

Five years ago, then-Sen. Obama (D-Ill.) voted against raising the debt ceiling and even spoke about it on the Senate floor before the Republican-controlled Senate voted 52-48 to increase it.

�The fact that we are here today to debate raising America's debt limit is a sign of leadership failure,� Obama said on March 16, 2006. �Leadership means that �the buck stops here.� Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit.�
Failure of Leadership

I remind the president �The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

I urge Congress to disregard the self-serving fear-mongering of president Obama and Pimco CEO El-Erian because we have a debt problem and a failure of leadership to do anything about it. Americans deserve better, and the way to do that is to act responsibly on a deficit-reduction package, now, not 10 years from now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monday, 27 June 2011

$18.7 Billion of $20 Billion Bush Sent to Iraq for Reconstruction is Missing

Over $18 billion in US funds the Bush administration sent to Iraq for reconstruction is unaccounted for. The Pentagon claims it could find it if given enough time. Interestingly, they have been saying this for six years.

Apparently $18 billion is such a trivial amount for the Pentagon that it has not bothered to look.

Please consider Missing Iraq cash 'as high as $18bn'.
Osama al-Nujaifi, the Iraqi parliament speaker, has told Al Jazeera that the amount of Iraqi money unaccounted for by the US is $18.7bn - three times more than the reported $6.6bn.

Just before departing for a visit to the US, al-Nujaifi said that he has received a report this week based on information from US and Iraqi auditors that the amount of money withdrawn from a fund from Iraqi oil proceeds, but unaccounted for, is much more than the $6.6bn reported missing last week.

The Los Angeles Times reported last week that Iraqi officials argue that the US government was supposed to safeguard the stash under a 2004 legal agreement it signed with Iraq, hence making Washington responsible for the cash that has disappeared.

Pentagon officials have contended for the last six years that they could account for the money if given enough time to track down the records.

The US has audited the money three times, but has still not been able to say exactly where it went.

Al Jazeera's Iraq correspondent, Jane Arraf, reporting from Baghdad, said: "It's an absolutely astonishing figure - this goes back to 2003 and 2004.


"Safeguarding the money was up to the Americans ... after the invasion, provisional authority here was run by the American military.

"Piles and piles of shrink-wrapped US dollars came here, but the cash coming in is not the important part - it is what happened to it after [it got here].

"There are no documents to indicate who got it, where it was spent and what was ever built from it."
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Leading German Economist Buys Greek Bonds On Belief in "Boundless Stupidity of German Government", Says Bailout Programs Will Exacerbate Problems

Stefan Homburg, a leading German economist believes the bailout of Greece is exactly that wrong thing to do and will exacerbate bankruptcy problems.

Nonetheless Homburg invested a "considerable sum" in Greek bonds on belief in the "boundless stupidity of the German government to pay up".

Please consider this Der Spiegel Interview with Stefan Homburg.
SPIEGEL: ... the voluntary participation of private creditors, which German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed on, will achieve little or nothing?

Homburg: It was all just a big show which was mainly intended to calm the German public. Merkel wanted mandatory participation, Sarkozy wanted none at all. In effect, Sarkozy has prevailed.

SPIEGEL: But the plumber is not, as they say, too big to fail -- his or her bankruptcy wouldn't cause entire banks to collapse. The European Central Bank has warned of a massive new financial crisis if it comes to the compulsory involvement of private creditors or even a restructuring of Greece's debt.

Homburg: The alleged risk of contagion is a myth that doesn't stand up to closer scrutiny. If you share my conviction that all this talk of Greece being too big to fail is simply nonsense, then there is no reason for bailouts �

SPIEGEL: � yes, but only if you're right.

Homburg: No, it also holds true in the reverse situation. If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn't solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we're finished. Then the problem continuously escalates and leads to a much greater crisis.

SPIEGEL: Europe wants to use the bailouts to buy time. The idea is that during this period the banks can recover and countries like Portugal, Ireland and Spain can get back on an even keel, so the risk of contagion is not so great when the inevitable restructuring takes place in the distant future. That is the strategy.

Homburg: I wouldn't call it a strategy. First, states bailed out their banks, now states themselves are being bailed out. But there is no next level to fall back on beyond this bailout. The bailout packages have merely exacerbated the crisis. Last year, if we had adhered to the Lisbon Treaty, which prohibits assistance payments, Greece would have restructured its debt, just as Uruguay, Argentina, Russia and other countries have done over the past 15 years ...

SPIEGEL: In a monetary union, isn't there a much greater danger that the crisis will spread from one weak member country to another?

Homburg: No. The contagion spreads in precisely the opposite direction, because many banks and hedge funds benefit from the following business model. Step one: They sell the bonds of the country concerned. Step two: They spread negative rumors about the country. Step three: After bond prices have fallen, they buy them back cheaply. And, finally, they take governments for a ride with this nonsense that a default would have devastating consequences. In a zero-sum game, there are not only losers, like us taxpayers, but also winners.

SPIEGEL: And what is the risk of contagion now?

Homburg: After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem.

SPIEGEL: If there were such a business model, a lot of people would be buying Greek government bonds now.

Homburg: In recent days, I myself have invested a considerable sum in Greek bonds. They will mature in one year's time and, if all goes well, produce a 25 percent return on investment. I sleep very soundly at night because I believe in the boundless stupidity of the German government. They will pay up.

SPIEGEL: And what will happen next?

Homburg: Many politicians have also come to the realization that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU.
The bailout is certainly the wrong thing to do for the reasons Homburg suggested. However, as much as I generally agree with the notion of "boundless stupidity" of governments, buying Greek debt is not risk free. There will likely be steep haircuts on long-dated debt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumer Spending, Personal Incomes "Weaker Than Expected", Economists Optimistic for Second Half, I'm Not

Consumer spending numbers are out and economists were surprised to learn that Americans spend at weakest pace in 20 months
Americans spent at the weakest pace in 20 months, a sign that high gas prices are taking a toll on the economy.

Consumer spending was unchanged in May, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010.

Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace. They note that two of the biggest factors slowing the economy are abating.

Gas prices are falling. And U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers.
Economists Optimistic For Second Half

Are economists ever pessimistic? The idea that growth will pick up because of falling gasoline prices is complete silliness. Gasoline prices are falling because growth is slowing.

Moreover, in about 2 months you will be able to toss that "auto parts shortage" theory in the ashcan where it belongs.

Personal Income Weaker Than Expected

Please consider Consumer Spending in U.S. Stagnated in May
Consumer spending unexpectedly stagnated in May as employment prospects dimmed and rising inflation caused Americans to cut back.

Purchases were little changed, the weakest outcome since June 2010, after a revised 0.3 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. The median of economists surveyed by Bloomberg News called for a 0.1 percent gain. Prices excluding food and energy rose more than forecast.

The report showed incomes increased 0.3 percent for a second month. The gain was also less than forecast.

Today�s report also showed that spending adjusted for inflation figures, which are used to calculate gross domestic product, dropped 0.1 percent for a second month. It was the first back-to-back decline in two years.

In May, cars and light trucks sold at an 11.8 million annual rate, the slowest since September and down from a 13.1 million pace a month earlier, according to researcher Autodata Corp. Some of the drop in demand last month reflected a shortage of Japanese-made vehicles after the earthquake and tsunami in March disrupted supplies. With inventories running low, companies offered smaller discounts, deterring buyers.

�The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected,� Fed Chairman Ben S. Bernanke said at a press conference after a meeting of the Federal Open Market Committee on June 22. He said the slowdown is caused in part by �factors that are likely to be temporary,� including more expensive commodities as well as supply chain disruptions associated with Japan�s natural disaster.
Bernanke Latches On To Parts Disruption Theory

Note that Bernanke has latched on to this parts disruption excuse as well. To be fair, the disruption mattered, however, it is complete silliness to believe a parts disruption is the primary source of weakness.

The job market, wages, falling home prices, and exhausted pent-up demand for autos are at the center of things. The entire global economy is slowing and Bernanke has not figured that out, nor does he understand why.

There is no reason to be optimistic about the second half. The recovery, assuming you think we had one, is dead.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Stress Increases in Eurozone; Portuguese, Spanish, Irish, and Italian 10-Year Yields All Make New Highs

Eurozone sovereign debt yields pushed higher across the board today. Irish debt has topped 12% for the first time, Italian debt topped 5% and most Euroland debt yields are at all times high spreads compared to Germany.

Significantly, yields are at fresh new highs for Spain, Italy, Ireland and Portugal.

If by any chance you are wondering whether to believe EU officials or the bond markets, I suggest you believe the bond markets.

The charts below are delayed, but the quotes are accurate. Stress increases in Eurozone.

Spain 10-Year Government Bond Yield



Portugal 10-Year Government Bond Yield


Italy 10-Year Government Bond Yield



Ireland 10-Year Government Bond Yield



Greece 10-Year Government Bond Yield



Greece 2-Year Government Bond Yield



If EU and ECB officials thought they solved something with their Greek bailout maneuvers, the bond market disagrees and so do I.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday, 26 June 2011

French Bank "Partial" 70% Greek Debt Rollover Proposal is Complete "Voluntary" Insanity

Supposedly we are to believe that a rollover of Greek debt would be voluntary.

Bear in mind that that rating agencies have said such rollovers would constitute default. Nonetheless, and in a preposterous attempt to avoid reality, French Banks Said to Offer 70% Greek Government Debt Rollover
French banks, including BNP Paribas (BNP) SA, have told the French government they are willing to partly roll over maturing Greek government bonds in a bid to avoid a default by the debt-laden nation, three people familiar with the plan said yesterday.

Under the proposal discussed in recent days between the French Banking Federation and the French Treasury, bondholders would re-invest about 70 percent of Greek sovereign debt maturing from mid-2011 to mid-2014, said one of the people directly involved with the talks.

Fifty percent of the redemptions would go into 30-year Greek securities, with the remaining 20 percent invested in a fund made of �very-high quality� securities that would back the 30-year bonds, that person said. The proposal may be altered, he said. All three people spoke on condition of anonymity because the talks are ongoing and private.
The idea of a voluntary rollover of Greek debt is in and of itself ridiculous.

Now, French banks want to roll over 70% of the debt, dumping the rest of it it for whatever prices they can get, and have that rollover be considered voluntary.

Is this preposterous or what?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Geithner Says Taxes on Small Business Must Rise So Government Doesn�t Shrink; Mish's Five Point Alternative Proposal

Sometimes you see a headline so silly you have to wonder if it is really accurate. Please consider this headline of an exchange between first-term Rep. Renee Ellmers (R.-N.C.) and the Secretary of the Treasury: "Geithner: Taxes on Small Business Must Rise So Government Doesn�t Shrink"
Treasury Secretary Timothy Geithner told the House Small Business Committee on Wednesday that the Obama administration believes taxes on small business must increase so the administration does not have to �shrink the overall size of government programs.�

The administration�s plan to raise the tax rate on small businesses is part of its plan to raise taxes on all Americans who make more than $250,000 per year�including businesses that file taxes the same way individuals and families do.

Geithner�s explanation of the administration's small-business tax plan came in an exchange with first-term Rep. Renee Ellmers (R.-N.C.). Ellmers, a nurse, decided to run for the U.S. House of Representatives in 2010 after she became active in the grass-roots opposition to President Barack Obama�s proposed health-care reform plan in 2009.

When Ellmers finally told Geithner that �the point is we need jobs,� he responded that the administration felt it had �no alternative� but to raise taxes on small businesses because otherwise �you have to shrink the overall size of government programs��including federal education spending.
Mr. Secretary, You are Wrong

Ellmers ended the exchange with this statement "Mr. Secretary I would just like to close by saying, On behalf of the business owners in North Carolina and across the country, you are wrong".



Geithner worries we may have to �shrink the overall size of government programs.�

Good grief. The first and foremost thing this country needs to do is dramatically shrink the overall size of government. The way to do that is easy:

  1. Slash military spending by at least 33%
  2. Cut wages and benefits of government employees
  3. Reduce the number of government jobs
  4. Get rid of needless programs including the department of energy, HUD, FHA, and the department of education
  5. Scrap Davis-Bacon and all prevailing wage laws that drive up expenses for federal, state, and local governments

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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China Rebuilds San Francisco-Oakland Bay Bridge, Pledges More Support for European Debt, Fuels Latin-America Debt Rally by Financing Ecuador Budget

China has its fingers in nearly every aspect of global financing as the following articles show.

San Francisco-Oakland Bay Bridge Now Made in China

The New York Times reports Bridge Comes to San Francisco With a Made-in-China Label
At left: The San Francisco-Oakland Bay Bridge. The replacement eastern span is on the right, with the city of San Francisco beyond. Photo by Jim Wilson/The New York Times

SHANGHAI � Talk about outsourcing.

Next month, the last four of more than two dozen giant steel modules � each with a roadbed segment about half the size of a football field � will be loaded onto a huge ship and transported 6,500 miles to Oakland. There, they will be assembled to fit into the eastern span of the new Bay Bridge.

The project is part of China�s continual move up the global economic value chain � from cheap toys to Apple iPads to commercial jetliners � as it aims to become the world�s civil engineer.

The assembly work in California, and the pouring of the concrete road surface, will be done by Americans. But construction of the bridge decks and the materials that went into them are a Made in China affair. California officials say the state saved hundreds of millions of dollars by turning to China.

�They�ve produced a pretty impressive bridge for us,� Tony Anziano, a program manager at the California Department of Transportation, said a few weeks ago.

On the reputation of showcase projects like Beijing�s Olympic-size airport terminal and the mammoth hydroelectric Three Gorges Dam, Chinese companies have been hired to build copper mines in the Congo, high-speed rail lines in Brazil and huge apartment complexes in Saudi Arabia.

In New York City alone, Chinese companies have won contracts to help renovate the subway system, refurbish the Alexander Hamilton Bridge over the Harlem River and build a new Metro-North train platform near Yankee Stadium. As with the Bay Bridge, American union labor would carry out most of the work done on United States soil.

The new Bay Bridge, expected to open to traffic in 2013, will replace a structure that has never been quite the same since the 1989 Bay Area earthquake. At $7.2 billion, it will be one of the most expensive structures ever built. But California officials estimate that they will save at least $400 million by having so much of the work done in China.
There is much more in the 2-page story including protests by US steelworker unions and charges of poor-quality Chinese steel.

As a testament to the the current sad state of US manufacturing, the project director claims �Most U.S. companies don�t have these types of warehouses, equipment or the cash flow. The Chinese load the ships, and it�s their ships that deliver to our piers.�

China Pledges Continued Support for European Debt

The Wall Street Journal reports China Pledges Continued Support for European Debt
Chinese Premier Wen Jiabao on Saturday said China will continue to buy euro-denominated bonds to support Europe, in China's latest public endorsement of the efforts to contain a potential debt crisis in the common currency area.

"China has been a heavy investor in the euro sovereign-debt market," Mr. Wen said at a news briefing. "We have bought a lot of euro bonds over the past years and we will continue to support Europe and the euro."

"China is ready to seize the opportunity together with its European partners, tackling challenges and driving development to support the quickest possible recovery of the global economy and stable growth," he said.

Analysts believe about two-thirds of China's reserves is invested in dollar assets, mostly Treasury debt. Chinese officials have said frequently in recent years that they want to diversify their holdings, but there are few other asset classes that can absorb investments on such a huge scale.

In Hungary, Prime Minister Viktor Orban said China will double its trading volume with the country to US$20 billion by 2015. China will also establish a European logistics and transport hub in Hungary, in line with Hungary's earlier hopes to become a European hub for China as a logistics and commercial distribution center.

"Talks today showed that China indeed would like to transport through that hub," Mr. Orban said.
Debt Rally in Latin America Fueled by China

Bloomberg reports China Lifts Latin America�s Best Debt Funding Ecuador Budget
Ecuador�s bonds are rewarding investors with the best performance in Latin America as Chinese loans and higher oil prices boost confidence in the economy two years after the country defaulted on $3.2 billion in debt.

Ecuadorean dollar debt has returned 13 percent this year, compared with 5.2 percent for Latin American sovereigns on average, according to JPMorgan Chase & Co. Yields on bonds due 2015 fell 238 basis points, or 2.38 percentage points, this year to 9.59 percent. Similar maturity Brazilian bonds yield 1.9 percent, down 97 basis points from the end of December.

Loans from China that Ecuador says will reach at least $3 billion in 2011 and the government�s forecast for oil revenue to exceed the budgeted amount by $601 million are reassuring investors that South America�s seventh-biggest economy will keep servicing its debt, said Richard Francis, an analyst at Standard & Poor�s in New York. Government investment and consumption are driving the economy�s 12th straight year of expansion, he said.

�China is providing substantial financing that�s letting the government invest a lot more,� Francis said in a telephone interview. �This year and next year there�s no problem.�
Mike "Mish" Shedlock
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Saturday, 25 June 2011

Public Unions Reject Sweetheart Deal in Connecticut, 7,500 Layoffs Coming Up

I am constantly in awe of the blatant stupidity of rank-and-file public union workers. In Connecticut, AFSCME and other public unions voted down a proposal negotiated over many months that contained a "no layoff" clause for 4 years in return for a pay freeze for 2 years.

That was an amazingly generous offer. The state was silly to offer it. Nonetheless, Union Deal Shot Down; Malloy Pledges To Cut Close To 7,500 State Workers
Gov. Dannel P. Malloy said Friday that he was moving "full steam ahead'' with plans to lay off 7,500 state employees, as leaders of the AFSCME union announced that their members had officially rejected a savings and concession deal that would have given them layoff protection for four years.

The administration has ruled out a renegotiation with the unions because the multi-faceted agreement took months of intense negotiations and compromises to complete. Malloy said he and his budget team intend to release layoff notices "as soon as possible" to balance the budget.

"I have a big job to do, and we're going to do it," Malloy told reporters Friday. "Listen, I don't want to be laying off 7,500 people or more. I think it's bad for the economy. I think it's bad public policy."
Reflections on Good Public Policy

Malloy was elected governor primarily on the back of votes from labor unions. That explains the sweetheart deal offer. Union stupidity explains why the deal was rejected.

A good deal for taxpayers in Connecticut would be to get rid of unions, not guarantee no layoffs for 4 years.

Malloy says "Listen, I don't want to be laying off 7,500 people or more. I think it's bad for the economy. I think it's bad public policy."

Mish says laying off 7,500 public union workers is good public policy and good for the economy. Indeed, firing 100% of them would be the ultimate in good public policy.

There is not a damn thing that public unions workers can do cheaper or better than private industry. Taxpayers foot the bill for the difference.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Biggest Banks Must Hold 2.5 Percentage Points More Capital in Basel Accord; Many banks �Vigorously Lobby� Against Branding as Systemically Important

The first big dream of every bank is to become too-big-to-fail. The second big dream is to avoid capital constraints that now go along with that designation.

Please consider Biggest Banks Must Hold 2.5 Percentage Points More Capital in Basel Accord
Global regulators said banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis.

The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said in a statement today. From 28 to 30 banks, including as many as eight in the U.S., may face surcharges, according to a person familiar with the discussions, who declined to be identified because the negotiations are private.

Many banks are �vigorously lobbying� against being branded as systemically important, Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. told U.S. lawmakers on June 22.

The Basel committee has said internationally active banks should hold core Tier 1 Capital of 7 percent of their risk- weighted assets, and the additional requirements are for banks it considers systemically important financial institutions, or those whose collapse would harm the global economy.
�Denying Credit�

The extra fee must be met by banks building up their core reserves, and not by issuing so-called contingent capital instruments such as CoCo bonds, the committee said today.

�You are looking at a situation here where the capital requirements for the biggest banks have gone from as low as 2 percent before the crisis now to well north of 10 percent,� said Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., a bank consulting firm. �It means the banks are going to have to constrain activities both by reducing risk and denying credit.�

The Basel group said banks should have to meet the extra requirement using common equity, a measure of their core reserves which is made up mainly of ordinary shares and retained earnings. So-called contingent convertible bonds, or CoCos, which convert into ordinary shares when a bank�s reserves fall below a certain level, won�t be eligible, the committee said, adding that national regulators are free to include them in any separate requirements they impose.

The Basel committee will release more details on the capital buffers �around the end of July,� the group said in its statement. That document won�t name banks that could face a surcharge, said a person familiar with the discussions.

While the largest surcharge that banks will initially face will be 2.5 percentage points, this number would rise to 3.5 percentage points if lenders facing the highest buffers increase in size, the Basel committee said. The 3.5 percentage point fee would act as a �disincentive for banks facing the highest charge to increase materially their global systemic importance,� it said.

Banks� systemic importance will be assessed by measuring their size, interconnectedness with other financial institutions, the difficulty for another institution to take over the role they play in the market, complexity and global activity, the Basel group said.

The new requirements will be introduced with other measures from Jan. 1, 2016, through Jan. 1, 2019.
Banks Already Capital Constrained

Banks are already capital constrained. That is the primary reason they are not lending. Nonetheless, this is a small but important step in the right direction, assuming it sticks.

Too-big-to-fail is the same thing as too-big. Moreover, banks should be banks, not trading vehicles.

Bank of America has billions of dollars worth of exposure writing credit default swaps on Greek debt. That trade was a big winner in 2010, but seems to be blowing up in Bank of America's face right now.

Please see Emergency Session Fails; Market Calls Trichet's Bluff; French Banks Under Downgrade Review; ECB Divorced From Reality; What is US Exposure to EU Mess? for details.

Writing credit default swaps may or may not be lucrative, but banks have no business doing it.

Bank of America and Citigroup should be busted apart. Goldman Sachs should not be a bank or a bank holding company at all. So why is Goldman a bank holding company? Because it suits the Fed's manipulative purposes, that's why.

Of course, the proper thing to do is kill fractional reserve banking totally, but any steps in that direction are welcome.

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

I remain amused by the complete silliness of statements coming from ECB officials. At best ECB proclamations are laughable, at worst they are completely counterproductive.

With that introduction, please consider ECB's Mersch says Greek default would bring "chaos"
European Central Bank Governing Council member Yves Mersch said on Saturday a Greek sovereign debt default would lead to chaos, adding it was up to the parliament to deliver on its austerity promises.

Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

If the vote next week is lost, international lenders are unlikely to release a 12 billion euros funding tranche, meaning the government will run out of cash within days.

"Now it's up to the Greek parliament. I observe," he told reporters on the sidelines of the Bank for International Settlements annual meeting in Basel.

"The next step will be to observe whether there will be delivery."

When he asked about what would happen if Greece defaulted, Mersch said: "Chaos."
Greece Default Irrelevant

Here is a succinct summation of the current state of Euro-Zone affairs.

  1. Greece will default, but at this point it is irrelevant.
  2. The situation in Spain, Ireland, Portugal, and Italy is now so dire that it is does not matter whether or not Greece defaults.
  3. Expect chaos


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Friday, 24 June 2011

Interactive Map: Job Gains and Losses in the "Recovery" by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc)

This is the second part of a two-part interactive map series on jobs. For part one, please see Interactive Map: Employment History Since 2001 by Job Type (Healthcare, Education, Mining, Construction, Finance, Real Estate, etc)

Part two has a focus on job creation and losses during the economic recovery. Please consider the following interactive map, using Tableau Software, with data courtesy of Economic Modeling Specialists.

This interactive map may take a bit to load. Please give it time on a slow connection.



Note on Economic Modeling Data
�Our data is used by many to research and understand regional employment trends and dynamics. It�s composed of comprehensive information on industries, occupations, demographics � as well as things like occupational skills, education, training, and even the names and size of companies in your region broken down by industry.

To do this we link nearly 90 data sources � from federal sources like the Bureau of Labor Statistics to state and private sources.

If you�ve ever worked with this sort of information, you know it can be hard to collect and present. It�s also often incomplete and outdated. So we organize the data, bring it up to date, and build software and reports around it so you can put it to use more quickly and effectively�

Jobs Gained or Lost Since Dec 31, 2007
Industry2008200920102011
Health Care461,860792,6791,023,9071,278,794
Finance & Insurance323,802629,082490,384444,530
Mining & Oil195,813345,116337,917422,752
Educational Services121,337195,899236,766295,498
Government358,591451,680398,85390,393
Arts & Entertainment92,418108,26377,18165,855
Management60,98525,37116,32326,615
Utilities13,01920,77313,77111,275
Professional203,493-107,607-164,853-39,124
Agriculture & Forestry-18,909-26,033-33,643-71,928
Other Services-30,456-221,109-246,875-82,177
Food & Lodging71,681-242,538-273,658-145,099
Information-30,863-203,185-299,866-331,269
Real Estate-76,068-232,452-335,391-359,874
Transportation-107,538-501,697-559,415-486,346
Admin & Support-389,951-1,226,173-1,097,484-774,404
Retail & Wholesale-428,934-1,759,253-1,977,146-1,854,109
Manufacturing-478,023-2,072,959-2,415,322-2,290,390
Construction-612,184-1,955,402-2,468,184-2,519,538
Totals-269,927-5,979,545-7,276,735-6,318,546


Jobs Gained or Lost vs. Year Ago
Industry2008200920102011
Totals-269,927-5,709,618-1,297,190958,189
Admin & Support-389,951-836,222128,689323,080
Health Care461,860330,819231,228254,887
Other Services-30,456-190,653-25,766164,698
Food & Lodging71,681-314,219-31,120128,559
Professional203,493-311,100-57,246125,729
Manufacturing-478,023-1,594,936-342,363124,932
Retail & Wholesale-428,934-1,330,319-217,893123,037
Mining & Oil195,813149,303-7,19984,835
Transportation-107,538-394,159-57,71873,069
Educational Services121,33774,56240,86758,732
Management60,985-35,614-9,04810,292
Utilities13,0197,754-7,002-2,496
Arts & Entertainment92,41815,845-31,082-11,326
Real Estate-76,068-156,384-102,939-24,483
Information-30,863-172,322-96,681-31,403
Agriculture & Forestry-18,909-7,124-7,610-38,285
Finance & Insurance323,802305,280-138,698-45,854
Construction-612,184-1,343,218-512,782-51,354
Government358,59193,089-52,827-308,460

Job Table Notes

  • Data is as of May 31, 2011
  • 2011 comparison is to December 31, 2010
  • Job gains in 2011 are higher than reported by the BLS. I see no reason to believe the BLS.
  • Since December 2007, the economy has lost 6,318,546 jobs
  • In 2011, the big job gainer is not healthcare but "administration"
  • Healthcare and Education are the two bright spots throughout the recession.

The 6.3 million jobs lost since the beginning of 2008 is deceptively low. The Economy should have been gaining 1.8 milling jobs a year, not losing jobs. In other words, the economy is down 10 to 12 million jobs from where it should be.

Thanks to Ross Perez at Tableau Software and also to Economic Modeling Specialists for this post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Italian Bank Stocks Plunge, Trading Suspended; Juncker Principle in Action

Italy, the big elephant in the room that the EU does not even see yet, may be waking up. Please consider, Italian Banks Plunge on Debt Concern
Italian banks slumped in Milan trading amid concern the European debt crisis may spread just as lenders face scrutiny from regulators over capital levels.

UniCredit SpA (UCG), Italy�s biggest bank, and Intesa Sanpaolo SpA (ISP), the second-largest, led lenders lower, tumbling as much as 8.9 percent and 7.2 percent respectively. Both stocks were briefly suspended after breaching limits on intraday swings. Italian 10-year bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999.

�Contagion fears keep re-emerging as long as credible, lasting solutions in Greece are pending,� said Christian Weber, a Munich-based strategist at UniCredit.

Prime Minister Silvio Berlusconi said today the country�s banks are �well capitalized.� Speaking at a summit of European leaders in Brussels, Berlusconi said he wasn�t worried about Moody�s comments about the country�s banks.

The European Banking Authority yesterday updated its stress tests to take into account extra trading losses that banks may face on their holdings of sovereign debt from crisis-hit European Union countries including Greece.

Italian banks are also seeking to raise money from investors to bolster capital. Unione di Banche Italiane ScpA (UBI), Italy�s fourth-biggest bank, fell as much as 5 percent to 3.628 euros. The lender may struggle to lure buyers to its 1 billion- euro ($1.4 billion) rights offering, which closes today. The bank is offering investors eight new shares at 3.808 euros for every 21 held.
Juncker Principle in Action

Italian Prime Minister Silvio Berlusconi appears to be following the "Juncker Principle".

Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister says "When it becomes serious, you have to lie".

Italian banks are in a scramble to raise capital even though the prime minister assures us that its banks are �well capitalized.�

Actions speak louder than lies.

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