Out of Balance, Out of Control

The Economist, in a chilling article on gender imbalances in some countries, observes:

Throughout human history, young men have been responsible for the vast preponderance of crime and violence—especially single men in countries where status and social acceptance depend on being married and having children, as it does in China and India. A rising population of frustrated single men spells trouble.

Not a problem in the U.S., but according to The Atlantic, this is:

[T]his era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.

Either way, you have unchecked male hormones ready to wreak havoc. Alienation...

at home, on the streets...

...even in academia.

.

Monday Muse

Carrie Underwood

Quitter

Weekly Wrap

Personal consumption: up 3% since Christmas 2008

The American consumer is back, or so the data would suggest. As the graph above shows, personal consumption expenditures fell back in the fall of 2008 and winter of 2009, but have recovered since then. Rallying for the past year, the stock market believes the recovery is real. But is it sustainable?

Intuitively, it would seem that consumption should be held hostage by persistently high unemployment. So where is the money coming from?

Not here:

Disposable Income: flat for the past year

No new income? No problem. The banks will lend it to us, right?

Nope:

Consumer credit: down sharply in the past year

How about under the mattress?

Bingo:

Personal savings: dwindling again

The takeaways from this little slide show:

(1) as layoffs mounted in 2008, consumers rationally cut spending

(2) and started saving;

(3) with jobs still scarce, consumers must now draw on savings.

Today's headline: retail sales in February rose 0.3% from the month before, according to the Commerce Department. January's figures, however, were revised downward, so we are doing little better than running in place. Less than half of the retail-sales volume lost since the cycle peak has been recovered. Further progress will require a significant infusion of new jobs, and soon.

The Golden Bird Flies Over Rumford

Latin rhythms at the Muskie Auditorium

March 10, 2010

Music player here

Monday Muse

"Mama" Cass Elliot

Dream a Little Dream of Me

Weekly Wrap

It was a race against time, as Christopher Columbus knew all too well. After more than a month at sea, his crew was getting cantankerous, and he was not sure how much longer they would follow him through uncharted waters. He knew the earth was round. What he didn't know was how big around. What if he had miscalculated? Perhaps this voyage to the Orient would take longer, a lot longer, than what he had figured.

A possible mutiny was not his only worry. Embedded in the wooden hulls of his three vessels were shipworms, steadily munching away on the cellulose keeping the crew afloat. Known as "termites of the sea," shipworms are not actually worms, but bivalve mollusks. In their larval stage, they invade submerged wood and, fitted with shell "bits" at their front ends, start drilling. After a while they grow to 2-3 feet long, and the infested wood takes on the appearance of Swiss cheese (above). Not a comfortable thought when you're a thousand miles or more from your home port.

Columbus's fleet was now due for some scheduled maintenance. As often as you might change the oil in your car's engine, sailors back then had to haul their vessel out of the water and refresh the pitch applied to the hull to deter the teredos. Any damage would have to be caulked before setting sail once more. Columbus was in dire need of a pit stop, but there was no beach around. That's when he was approached by a government economist.

"What are you doing here?" Columbus demanded.

"I was appointed by His and Her Majesties to count the gold that you said you would find, remember? Besides, I have some good news. The teredos have stopped eating our ships. What do you say we break out a cask of vino?"

Known for his ill temper, Columbus exploded.

"Have you got rocks in your cabeza? So what if the worms have stopped! We're still taking on water through the holes they already made!"

Columbus needed dry land, not a dimwitted sycophant. He was of half a mind to heave the economist overboard to feed the sharks, but sent him off to clean the heads instead.

Over 500 years later, optimistic economists still find favor in royal courts. They make six figures and primp for CNBC. They stand behind presidents and prime ministers at important press conferences and fly to places like Davos, Switzerland, to hang with their buds. They find jobs for their girlfriends at the World Bank. They rock and they roll.

Here in the U.S. they blithely announce that the recession is over. Any month now, they say, we will stop losing jobs. That's when things will be all better. But stopping the infestation is not the same as fixing the problem. Holding at zero net new jobs means that we are still taking on water. We need to repair the damage by adding 12 million jobs.

Today's news from the Bureau of Labor Statistics: the teredos are still chewing. According to the Establishment Survey, 36,000 jobs were lost in February. And what do all those unemployed whose benefits are running out think? That maybe it's time to turn the ship around.

Pushing on a String

Trough? Or cliff-drop?

Still believe this is a typical recession? John Mauldin, in his weekly newsletter Thoughts from the Frontline, would like to draw your attention to the graph above. He has this to say:

The money multiplier, as measured by the ratio of M0 to M1 growth, is at its lowest level ever...the normal, accustomed relationships about money supply and inflation are proving to be wrong. We live in extraordinary times. We are coming to the End Game of the debt supercycle that has lasted for 70 years. Everything is changing in front of our eyes.

Here is what he is talking about. M0 (M-zero) is a measure of the monetary base, consisting of all currency plus central-bank credit. This is the supply controlled by the Federal Reserve Bank. M1 refers to the money available to all us poor folks for our day-to-day transactions. It is the sum of currency outside the vaults of depository institutions plus demand and other checkable deposits issued by such financial institutions as your friendly neighborhood bank (or your predatory Wall Street bankster).

In our system of fractional-reserve banking, M1 is some multiple of M0, as commercial banks extending lines of credit to their customers are required to retain in reserve only a fraction of the total dollar amount of their loans. In this way, money created by the Fed gets multiplied by the institutions doing business with the public. If the Fed wants to rev up business activity, it expands M0, intending thereby to lever up M1.

This is what the Fed is (frantically) trying to do now. Problem is, a dollar of M0 does not go as far as it used to. Twenty-five years ago it grew three dollars of M1; now it buys a measly 81 cents. This begs the Morning After question, what happened? Simply put, banks are reluctant to lend, and consumers and businesses are reluctant to borrow. As Mauldin explains:

Bank lending has fallen percentage-wise the most in 67 years. The actual amount of bank loans is falling each and every quarter, with no signs of a bottom. Consumers are reducing their debt and leverage. Bank loans are being written off at staggering rates. Over 700 banks are officially on watch by the FDIC, with more banks being closed each week.

There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off. As more families fall into unemployment or underemployment, there will be more writedowns. Is it any wonder that banks are having to shore up their balance sheets and make fewer loans?

Essentially the multiplier graphed above measures confidence. The low level of confidence permeating our economy makes the Fed helpless. Getting out of this mess is up to you and me.

Monday Muse

Nina Gordon

Tonight and the Rest of My Life

Weekly Wrap

States are scrambling to fill budget gaps stemming from the Greater Depression. Nationwide, revenues for fiscal years 2010 and 2011 are now expected to fall short of budgeted expenditures by a combined $375 billion. That may sound like a big number--heck, it is a big number--but it is only half the amount that Congress set aside in 2008 to rescue banks in the private sector. That was the TARP bill that passed despite a public outcry. First things first.

But Congress did not stop there. Fully trained in spending money it doesn't have, it then went ahead and, a few months later, passed the American Recovery and Reinvestment Act (ARRA), the so-called stimulus bill. For the states, that meant about $140 billion in new federal aid to help balance their budgets. Not as much as the banksters got, but hey, every little bit helps. The only problem is that the money (light blue in the graph above) will run out by July 2011. If we don't hurry up and have a recovery by then, states will have to find other ways to manage their shortfalls.

Lord knows they are trying. Some are biting the bullet and raising taxes. Others are borrowing; most are cutting spending. Maine, looking at a shortfall of $438 million for its biennial budget ending June 30, 2011, is trying every trick in the book to avoid tax increases. First out of the toolbox is the McKernan Maneuver, named after the former governor who balanced budgets by pushing payments from one fiscal year to the next. Unfortunately, that one does not actually remove the obligation. We still need real money. So earlier this week we learned of a proposal to add new games to the state lottery. Now there's a winner!

Or how about this: on Wednesday the Revenue Forecasting Committee simply revised its revenue projections upward by $51 million. Problem solved, or at least mitigated. You see, the RFC detected a bump in income-tax receipts during December and January and decided to extrapolate that over the remaining sixteen months of the fiscal period. To which I say, Good luck. Those little green shoots are about to get roto-tilled.

What makes me say this? All week the economic news has been dismal. Home sales, both new and existing, were seriously southbound in January, despite the extended First Time Homebuyer's Credit. Auto sales are in the breakdown lane. Durable-goods orders disappointed. Initial unemployment claims are ratcheting back up toward the half-million mark. Bank credit continues to contract (over 10% since the recession began), and "problem" banks, according to the FDIC, are breeding like rabbits.

Option adjustable-rate mortgages are resetting, raising monthly payments for borrowers already struggling to pay the bills. New foreclosure filings are expected on three, four, perhaps even five million homes before the year is out. President Obama is toying with the idea of prohibiting banks from foreclosing on home loans that have not first been screened and rejected by the government’s Home Affordable Modification Program. This will allow borrowers to live rent-free for a few more months, but only delays the inevitable. This shadow inventory of homes in default hangs over the market like the sword of Damocles. Home-builders will not be hiring.

One more thing: at the same time as Maine's revenue estimates for individual and corporate income-tax receipts were revised upward, estimates for sales-tax receipts were revised downward by $30.8 million for the biennium. Someone please explain that one. I remain skeptical that a continued downward spiral in consumer spending, which accounts for 70% of U.S. GDP, will lead to higher incomes.

And it's not just me. Jamie Dimon, CEO of JPMorgan Chase, who makes way more than I do, agrees that the economic outlook is sketchy at best. At his bank's annual Investor Day yesterday, Dimon described his company as "cautious" about the immediate future. "We don't mind holding extra capital right now," he said, "because we don't know what's going to happen. There are huge potential negatives out there." Dimon reiterated that his firm, which currently pays a quarterly dividend to stockholders of a nickel a share, would like to raise it to as much as a dollar, but will do so only when the worst of the global financial crisis is over.

He's still waiting.

Home Loans Tanking

Not since May 1997 has the Mortgage Bankers Association's Purchase Index (updated this morning to reflect last week's lending activity) dropped so low. "Housing demand remains relatively weak,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases.” Mr. Fratantoni does not even address the shadow inventory of homes entering foreclosure, a number variously estimated at between 3 and 5 million before year's end. So, yeah, a super-supply will undoubtedly pressure prices.

But it's not simply a case of cagey consumers waiting for a better deal. Many do not have the means to pull the trigger. With interest rates at historic lows (and about to explode higher?) and the federal government's First Time Homebuyer's Credit about to expire in a few months, now is a good time to buy for those who qualify. But it ain't happening. The inescapable conclusion is that a double-dip recession is at hand.

Need more data? Two hours after the MBA release came this from the Commerce Department: sales of new homes in the U.S. in January were down 11.2% compared to December and down 6.1% year-over-year. New homes sold at an annualized rate of 309,000, the lowest rate since record-keeping began in 1963.

[click to enlarge]

Monday Muse

Janis Joplin

Me and Bobby McGee

Weekly Wrap

One-armed economists are in short supply, as President Harry Truman ruefully observed. When prognosticating, economists typically hedge their bets. On the one hand, they begin, before eventually backtracking. But then, on the other hand....

Drove Truman crazy. Notice in the photo above that Fed Chairman Ben Bernanke is using both hands, and with good reason. He remains unsure which way the U.S. economy is heading. Anticipating a weak, protracted recovery, Bernanke has signalled that interest rates will remain low for "an extended period." On the other hand, the Federal Reserve announced last night that it was raising its discount rate a quarter of a percentage point to 0.75%. The discount rate is the interest charged by the Fed, as lender of last resort, to banks needing quick cash.

Technically, this move does not amount to a tightening. The federal funds rate, the rate at which one bank lends funds deposited at the Fed to another bank, remains at 0.25%. The Fed used to keep the spread between the two rates at a full percentage point, but that spread was compressed during the credit-market turmoil of late 2008. With the spread now widening, does Bernanke think that things are getting back to normal?

If he does, hit-and-run trader Jeff Cooper thinks the opposite. The recent tranquillity in the financial markets may be just the calm before the storm. "If the 2008 global meltdown was not just bad subprime loans going belly up," says Coops, "but [instead] a warning sign that the entire world financial structure was overextended and about to unravel, then this is the eye of the hurricane." The widespread concern this week about the sovereign debts of the so-called PIGS may be the first freshening breezes of the back side of the storm.

Whether or not he himself sees the storm coming, Bernanke may be responding to public pressure to rein in the big banks on Wall Street. "Remember," Cooper reminds us, "the Fed isn't a federal agency at all but a cartel of big banks that does the bidding of big banks." And those big banks have been coining money under the Fed's Zero Interest Rate Policy (ZIRP), borrowing low and lending high. But continued high unemployment and credit contraction show that the "flow" is not making it to the real economy. As Christopher Whalen of Institutional Risk Analytics explains, "to date the entire focus of Fed policy efforts [including quantitative easing] has been to temporarily spare the largest dealer banks from losses on securities and not helping the real economy."

Whalen believes that gradually rising interest rates will actually help the economy. "In a fiat money system, ZIRP implies that paper assets have no value. If the Fed wants to break the deflationary cycle that now threatens the global economy and truly restore investor confidence, then it is time to let interest rates start to rise." But there will be losers. The price discovery accompanying higher rates will negatively impact the holders of all those toxic mortgage-backed securities, including the Fed itself, which brought a trillion or two dollars worth of said MBS onto its own balance sheet.

Maybe, in that picture above, Bernanke is weighing his choices. On the one hand, he could save the banksters. Or, on the other hand, he could take the shackles off the broad economy. Let's hope he makes the right choice.

The Total Package

Lindsey Vonn victorious at Vancouver

Mainer Two-peats at Winter Olympics

Seth Wescott

two-time gold medalist from Carrabassett Valley

Monday Muse

Ann Wilson

Stairway to Heaven

Weekly Wrap

Judge Still Not Satisfied

Regulators lectured;
Bank execs sweating bullets.

Lawyers, the ones who get all the flak for adding costly friction to the system, will end up the heroes once the Global Financial Crisis runs its course. That's because they are taking names and assigning blame. Foremost among them is Federal District Judge Jed Rakoff (above), who is being petitioned to approve a settlement between the Securities Exchange Commission and the Bank of America over claims that the company withheld material information prior to a shareholder vote in December 2008 to corral the wounded bull, Merrill Lynch. In the weeks after the merger vote, Merrill reported a disastrous fourth-quarter loss while handing out hefty year-end bonuses to top-tier executives. BofA shareholders felt ripped off. After settling their stomachs with meds, they reached for their phones and speed-dialed their attorneys.

The SEC, established after the Crash of '29 to supervise the rascals playing in the Wall Street sandbox, swung into action. O.K., you got me--it slept through the alarm, rolling out of bed only after the New York State Attorney General had started his own investigation and only after a House panel told it to wake the hell up. The Commission puttered around for a few months, then offered Bank of America a $33 million wrist-slap, payable to the federal government. That was less than the janitor's bonus.

Rakoff was outraged. He found two things wrong with the settlement: one, it punished the wrong party (i.e. the shareholders, who were, like, the VICTIMS?!) and two, it failed to identify the perpetrators of the fraud. Other than that, it was a slick piece of work by the gub'mint. Rakoff threw out the settlement and told the commission to do the job right this time.

Five months later the SEC is back with a new settlement. The price tag has been increased to $150 million, and the proceeds now go to the shareholders. The Judge is still not happy. He thinks the payout should be doubled--and maybe doubled again--and should come out of the hides of the over-compensated executives who were so lax with due diligence and disclosure in the first place. Otherwise, shareholders would simply be paying themselves. In an order issued yesterday, Rakoff insisted that "the entire distribution be made to Bank of America shareholders who were harmed by the alleged non-disclosures, and that no distribution be made to to so-called 'legacy Merrill Lynch' shareholders of Bank of America, nor to Bank of America officers and directors who had access to the undisclosed information."

Moreover, the Judge wants further documentation concerning the dismissal by Bank of America of general counsel Timothy Mayopoulos prior to the December 2008 shareholder meeting. The New York AG alleges that Mayopoulos was fired for questioning the company's disclosure, or lack thereof. Rakoff wants to know what's up with that. If he does not get answers, the case will go to trial next month. Memo to BofA: courtrooms are all about disclosure. Of any and all wrongdoing.

Remember all those toxic securities that Congress was so eager to buy through TARP? You know, the ones no one else wanted? Well, there is a whole legion of lawyers trying to sort out exactly to whom those rightfully belong. Thankfully, they do not (yet) belong to us taxpayers. That's because then-Treasury Secretary Hank Paulson, having forced TARP through Congress, took a second look at the merchandise and had a brief moment of clarity: You know what? No one, not even we, can in good conscience push this crap onto the taxpayer. Instead, Hank opted for preferred stock in the banks holding the assets, giving us at least one degree of separation from the ooze.

Stuck with unwanted inventory--and knowing just how bad these mortgage-backed securities are--Wall Street lenders bought default insurance, just in case. Sure enough, distressed homeowners became delinquent on their mortgage payments. Now the insurers, as well as federally chartered guarantors Fannie Mae and Freddie Mac (yeah, we pretty much own them now), are pushing back in court. They claim that the loans were defective by design and were bundled into securities sold without proper--here's that word again--disclosure. The banks are being forced to take many of the loans back. In the words of Christopher Whalen of Institutional Risk Analytics, "The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other." When it comes to cannibalism, nobody does it better than lawyers.

Now let's enter the shadowy netherworld of credit default swaps. This is a whole 'nother universe parallel to the real one in which we live. Here you can buy default insurance for credit instruments that you do not actually own. And you can sell insurance without maintaining any reserves to indemnify buyers should a "credit event" actually occur. You can do these things because you are not regulated, thanks to the Commodities Futures Modernization Act of 2000, the act by which Congress essentially put the SEC into a Rip Van Winkle deep sleep (at least until Congressman Kucinich rang the alarm). You do all these things over the counter, without adult supervision.

By the end of 2007 the CDS market had a notional value of $45 trillion, and the biggest seller of this ghost protection was AIG. In 2008 "credit events" started happening in a big way, triggering massive liabilities at AIG. Unable to pay all the contract holders that came knocking (including Wall Street's biggest dealer banks), AIG tried to negotiate discounted payouts. That's when Timothy Geithner, then head of the New York Federal Reserve, stepped in, suspended negotiations, and ordered payouts at par for all his banking brethren. For that alone he should never have been confirmed as President Obama's Treasury Secretary.

Geithner and Paulson operated under the impression that CDS counterparties were at the top of the food chain in bankruptcy proceedings, senior to all other creditors and shareholders. But New York Bankruptcy Judge James Peck, handling the Lehman Brothers estate, has consigned counterparty risk back to the limbo world from whence it came. This delights Whalen, who views the judge's conduct as "the starkest condemnation possible of the AIG bailout, a hideous political contrivance that ranks with the great acts of political corruption and thievery in the history of the United States." As well, the Peck ruling will further embolden bond insurers and guarantors to seek relief from the sponsor banks who originated shoddy loans, then tried to lay off the risk by selling shady derivatives.

At least one profession has job security these days.

[...as Peter Atwater of Minyanville summarizes in this posting, 02-16-2010:]

Where the securitization market once facilitated the movement of loan assets away from originators, the legal system is now moving financial claims the other way -- from investor to asset manager to underwriter or guarantor -- to “bundler” all the way back to the originator. And while we're just at the beginning stages of the litigation/warranty repurchase daisy chain, if the “settlements” so far are any indication, the final figures will be enormous.

Middle Class Is MIA

Depth & Duration of Past Recessions
[click to enlarge]

Productivity is killing the middle class....

How long will it take for that job-bleeding red line to get back to zero? Look at the brown 2001 line. It took 24 months for that recession to recover the 2% jobs contraction. If we assume that we're now at the start of the turn, then using the same recovery slope as 2001, it will take 72 months (six full years!) to get back to the previous peak employment at the end of 2007, just in time for the 2016 presidential campaign. If the Democrats think that the mid-term elections will be tough this November, wait until 2012 if the recovery is only to -4% on this chart. At least the start of the Obama Presidential Library in 2013 will generate some construction jobs.

--James Anderson, Minyanville

Click on
PLAY
to watch the lights go out on the middle class.

Monday Muse

Sheryl Crow

The First Cut Is the Deepest

Weekly Wrap

The number that spooked Wall Street yesterday was the figure released by the U.S. Labor Department showing initial claims for state unemployment benefits. The 480,000 reported was up from the week earlier and higher than the four-week moving average (plotted above). After a peak approaching 700K a year ago, job turnover has lessened considerably since. Still, as John Thomas (a.k.a. the Mad Hedge Fund Trader) points out, there is room for improvement:

Someone once asked PIMCO’s bond king, Bill Gross, if he were stranded on a desert island and could get only one statistic on which to base investment decisions, what would it be? He didn’t hesitate. Initial claims for unemployment insurance, released by the Labor Department every Thursday at 8:30 am EST, gives the best real time snapshot of economic activity... During the first half of 2009, more than 600,000 new claims a week were common. Since then, they have dropped to a still serious 450,000/week, indicating, at best, a tepid recovery. When claims drop below 400,000, the unemployment rate will stop rising, below 350,000 a recovery is in progress, and below 300,000 the boom times are back.

This "morning after" the mini-meltdown in the markets brought the monthly unemployment report from the Bureau of Labor Statistics, and investors are having a hard time grappling with the data. The report gave mixed signals as to whether jobs were added or lost in January. The Establishment Survey says we lost 20K. The Population Survey says we gained 785K, a number that, if believed, should be igniting a rally in stocks. But the report cautions that, effective January 2010, the latter survey uses "updated population estimates" and may be overstating the job gain by 243K. The apples-to-oranges comparison is apparently confusing not just me. As of 10:55 a.m. the Dow is unchanged.

Nobody is talking about the Adjusted Household Survey number, a series that attempts to reconcile the CES and CPS numbers. That one is +841K! Maybe we should take these preliminary numbers with a wheelbarrow of salt; they will just get revised again (and again) anyway. For example, December's CES figure got changed from -85K to -150K. An annual benchmark revision moved up the job-loss figure for all of 2009 another 617K, bringing the two-year recession total to 8.4 million. As Benjamin Disraeli once said, there are three kinds of untruths: lies, damn lies, and statistics.

Channeling Disraeli, Mike Mish Shedlock points out that the BLS massages the unemployment data even more than usual in the month of January. And he has a graph to prove it:

[click to enlarge]

The rest of every year is spent reverting to the mean. All this suggests that the 9.7% unemployment rate reported for January is a myth and that we could easily see 11% by summer. TrimTabs, working backwards from tax-collection data, calculates that the number of jobs lost in January likely exceeded 100K, or five times more than the "official" number.

On the bright side, the average work week inched up in January another six minutes, which, believe it or not, is the wage equivalent of tens of thousands of jobs. State governments, obliged to balance their budgets, cut 41,000 jobs last month. The federal government, under no such budget constraint (more on that below), added 33,000 jobs. You can thank our creditors (China et al.) for those. All in all, the BLS report was a wash. But whatever the real job numbers are, they need to improve dramatically, and soon. Adjustable-rate mortgages across the land are ready to explode. Disarming them will require millions of new jobs, not thousands.

President Obama's FY2011 budget was greeted with angst when it was rolled out to the press on Monday. You got the heads-up here last Friday that the headline number on the expenditure side was going to tickle $4 trillion, 40% to be funded by new debt. I'll say it again--four trillion dollars. Hopefully by now I have trained you to look for the REAL number.

Before we can find that one, we must review how the federal government keeps its books. Unlike all the banks it regulates, it uses the cash method of accounting, tracking only current expenditures. The Citigroups, the JPMorgans--all those financial institutions that we love to hate--use the accrual method. They attempt to project costs beyond the present and will reserve some of their earnings to meet those future liabilities. The global financial crisis that has been brewing since the summer of 2007 can be blamed on the failure of the banks to reserve enough for the future in light of the high degree of risk that they were undertaking with subprime and subslime lending.

Federal regulators are now (a bit late, I would say) tightening up on the banks, raising capital requirements. But who is overseeing the federal government, which has been piling up liabilities within its entitlement programs (primarily Medicare and Social Security)? It is supposed to be holding monies in trust for future pay-outs, monies paid into the system by employers and employees under one of the government's original mandates. But since the days of hey-hey-LBJ, the government has been raiding the trust accounts to fund current operations, creating future liabilities without tracking them in annual budget statements. If we were properly reserving for future pay-outs, we would be showing much higher deficits.

On Christmas Eve, Treasury Secretary Timothy Geithner gifted taxpayers with the announcement that the federal government would backstop all home mortgages held by GSEs Fannie Mae and Freddie Mac. Presto! Trillions in new liabilities added to our collective balance sheet, all without congressional approval. Which brings us back to the question, what is the real annual federal deficit? Answer: no one knows. But the number must come from a certified public accountant (any of those in DC, or are they all attorneys?) and is assuredly some multiple of the $1.556 trillion that the Big O is proposing for 2011. The Government Accountability Office, which audits the books, will not even hazard a guess, offering this disclaimer:

Because of the federal government's inability to demonstrate the reliability of significant portions of the U.S. government's accompanying accrual basis consolidated financial statements for fiscal years 2008 and 2007, principally resulting from certain material weaknesses, and other limitations on the scope of our work, described in this report, we are unable to, and we do not, express an opinion on such accrual basis consolidated financial statements.

"No opinion" means the numbers are worthless. As the debt rolls forward to our children and grandchildren, I will whisper in their ears the magic words. Strategic default. That's right, it's time to repudiate the national debt. It is not morally defensible for one generation to sell another one (or more) into slavery. And what would I say to the creditors, the ones holding all those Treasuries? Tough noogies. You took on the risk, you suffer the consequences. In the Mother of All Workouts, you bondholders, as always, will have to take a haircut.

There, glad I solved that one.

[update, 02-08-10: In this Bloomberg interview, Marc Faber calls U.S. debt "junk."]

[Niall Ferguson in a Financial Times column, 02-11-10:

US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941. Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.]

Monday Muse

Loreena McKennitt

Night Ride Across the Caucasus

Weekly Wrap

Sounding like he really means it, President Barack Obama promised earlier this week to rein in spending by the federal government. His proposed three-year budget freeze, however, does not apply to military intervention overseas, to homeland security, to entitlements, nor to economic-stimulus-that-may-be-needed-from-time-to-time. That leaves only one-sixth of the budget to be "frozen." For everything else, the sky's the limit.

Déjà vu all over again, as Yogi would say. This freeze in "discretionary" spending is exactly what Obama's predecessor, George W. Bush, proposed two years ago when rolling out the nation's first $3 trillion budget. And how well did that work? Glad you asked. The FY2009 budget started ballooning before the ink was dry when Bush okayed the TARP bailout. With the banks taken care of, Obama allocated unspent TARP money to the auto industry. Then came the $787 billion stimulus package. When the fiscal year came mercifully to a close last September 30, federal spending for the year finished just shy of $4 trillion.

Trouble was, $1.8 trillion of that had to be borrowed. $383 billion of it was interest paid on money already borrowed. Obama's "freeze" will not stop the red ink. His FY2011 budget calls for spending $3.6 trillion, or 16% more than the last time a U.S. President used the word "freeze." Can you imagine what a thaw would look like? Congress already has. Yesterday the Senate voted to raise the nation's debt limit by $1.9 trillion to $14.3 trillion. Plus ça change. Now if only the French had a word for entrepreneur.

Add public and private debt together, and you get a number approaching $50 trillion, or almost four times GDP, a record in the U.S.:

courtesy Van Hoisington and Lacy Hunt

The graph illustrates that the debt-to-GDP ratio last saw a similar peak in midst of the Great Depression. It also suggests that much of peak debt needs to be extinguished before sustained economic growth can resume. As Van Hoisington and Dr. Lacy Hunt explain, "once debt becomes excessive, countries do not grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased saving."

But growing our way out of the problem is exactly what the Obama Administration is trying to do--with fiscal stimulus and near-zero interest rates. The goal: creating more debt in an economy already swamped by debt. Over-exposed consumers are doing the right thing by paying down credit balances, but lenders are too slow to write off bad debt, some of which has simply been transferred to the Federal Reserve Bank's balance sheet through the creation of new fiat currency. American exceptionalists, take note. A recent book written by Carmen Reinhart and Kenneth Rogoff entitled This Time Is Different concludes, after abundant historical research, that no time is ever different: debt deflations are always painful and protracted.

Just in from the Commerce Department: GDP grew at an annual rate of 5.7% in the fourth quarter of 2009. Before jumping to the conclusion that we can grow out of this mess, look more closely. Most of the statistical increase was due to the restocking of depleted inventories; final sales were up a more modest 2.2%. Personal consumption was up just 1.4%. Hours worked in the private sector were down 0.5%. David Rosenberg of Gluskin Sheff calls it the Houdini recovery, destined to disappear once inventory builds and capital spending have run their course. Bottom line, today's headline GDP is a rear-view, drug-induced number unlikely to be repeated anytime in 2010.

Who's the mark? Revealed here.

Monday Muse

Dionne Warwick

You've Lost That Lovin' Feelin'

Weekly Wrap

We know he drives a truck--but what kind? Is it one of those monster-ma-deals seen at car shows, the ones that drive up and over a whole row of puny imports, crushing them in the process?

Whatever it is, the Wrentham Wrecker (owner: Scott Brown, Republican) has been leaving tread marks all over the political landscape. The first to be flattened was Martha Coakley, Massachusetts AG and Brown's opponent in the race for Ted Kennedy's U.S. Senate seat. In Tuesday's election, Brown won going away. Add to the road kill President Barack Obama's health reform bill, which succumbs to the new math in the Senate.

Want more victims? How about Treasury Secretary Tim Geithner? Check out where he is standing in the photo below, taken at a press conference yesterday:


Turbo Tim is at the far left, displaced in Obama's inner circle by former Fed Head Paul Volcker (the six-foot-seven legend looming large behind the President). Geithner has been coddling the big banks on Wall Street throughout the financial crisis, while Volcker has been urging the President to cut them down to size. Brown's victory has improved Obama's hearing, thus Thursday's rollout of the new Volcker Rule.

Geithner does not get a rule named after him. Instead, he gets to go stand in the corner. Look at the photo again. How bad is that when your boss uses MA Congressman Barney Frank as a physical buffer between you and him? O.K., O.K., maybe Obama was just trying to win back some favor with Bay Staters by showcasing their congressman. Still, Tim does not look happy. He has since leaked his displeasure with the bank bashing, which means that his days on the job may be numbered.

Another heavyweight in line for a pink slip is none other than the current Federal Reserve Chair, Ben Bernanke, who needs to be confirmed by the Senate before the end of next week to be assured of another term. Today Senators are falling over one another reaching for the microphone to announce to their constituents that they will not support Bernanke's nomination. Credit Brown for this rush to the exits, as well as for Obama's instant lame-duckery. (How's this for lame: Obama jumped on Brown's bandwagon, I mean truck, by claiming in a morning-after interview that he was the original Scott Brown in 2008, before Scott Brown even thought about being Scott Brown.) Amazing; Obama went from the hunter to the hunted in just one year.

Anyone get the plate number on that truck?

[update 01-28-10:]

The Senate votes on Bernanke's nomination...

Monday Muse

Joan Baez

Diamonds and Rust

Weekly Wrap

A "tell" for Election Year 2010? That is how pundits describe next Tuesday's special election in Massachusetts for the U.S. Senate seat formerly held by the late Ted Kennedy. In a normal year, a seasoned Democratic public servant like Martha Coakley (above) would coast to victory in the liberal Bay State. But recent polls are all over the place as to how close this race really is. Republicans are trumpeting that little-known state senator Scott Brown (below) has pulled into a dead heat. Can this be for real?


This race may be an early referendum on President Barack Obama's ambitious healthcare reform bill, still being worked out in Congress. The President had hoped to have the legislation passed by Christmas and now wants it no later than his State of the Union address (date still uncertain, possibly in early February). The real deadline may be January 28, the day before the Massachusetts Secretary of State certifies the results of the special election. If Brown wins, he becomes the 41st Republican Senator, the marginal vote that a unified Republican caucus needs to filibuster the healthcare bill. It's a race within the race.

Coakley probably wishes that Congress had met the original target date. That would have gotten her off the hook for a bill that most Americans oppose but which she supports. Brown has pounded her on this issue, which distracts voters from the good work that she has done as the state's attorney general. She investigated contractor abuses arising from Boston's infamous Big Dig and two years ago was busy chasing down miscreants on Wall Street for peddling toxic derivatives to citizens and cities alike (documented here and here). As well, she questions the surge in Afghanistan, a stance that should earn her brownie points in the only state won by anti-war candidate George McGovern in the 1972 Presidential election.

If Coakley loses, or even wins with less than a 50% majority, it will be because of her party affiliation--and her party's damn-the-torpedoes commitment to bigger government. As David Rosenberg of Gluskin Sheff offers in this morning's "Breakfast with Dave," the outcome in Massachusetts may betray "the general public's concern over the implications of running up a fiscal tab that could threaten the country's future prosperity to curb today's consumer deleveraging pain--a mini Tea Party of sorts, which is why the vote is being held in the right state."

Don't forget the banks. No way can I wrap the week without a quick look at the financial sector. Reporting this morning, JPMorgan Chase was the first of the big banks out with fourth-quarter earnings. The lipstick was good (profits quadrupled from the preceding quarter), but the underlying complexion was spotty. Revenues came in a bit light; and loan-loss provisions for two divisions, Retail Financial Services and Card Services, added up to $8.5 billion. Firmwide credit reserves now total $32.5 billion and, according to management, may expand further in 2010, meaning charge-offs for bad loans are far from over. "Consumer credit costs remain high and weak employment and home prices persist,” said CEO Jamie Dimon. “Accordingly, we remain cautious.”

How cautious? The company left its quarterly dividend at a nickel a share, where it has been for the past year (after getting axed from 38 cents last February). Investors are disappointed, knocking a buck off the share price in today's trading. And this is one of the strongest banks out there. What happens when ne'er-do-wells Citigroup and Bank of America, more highly leveraged to struggling consumers, report next week? The mind boggles. Maybe that's why the Dow is down triple digits today. Black Tuesday, anyone?

But Diamond Jamie has his. Even as the company was flipping nickels to shareholders, the average compensation for each JPMorgan employee jumped 20% in 2009. Doesn't that make you feel good all over?

Job-Less Recovery

The chart above has been widely shared by bloggers in the past week. It shows negligible job growth in the U.S. over the past decade. Jobs created by the debt boom of the first part of the decade have been repealed in just the last two years.

Next question: when are they coming back? Optimists are banking on a V-shaped recovery any day now. Typically job growth resumes within a month or two after the economy hits bottom, but research at Hussman Funds finds that the current recovery is hardly typical. If we assume that growth in GDP reported for the third quarter of 2009 marked a bottom at the end of June, then the current employment trend (illustrated by the red line below) is clearly lagging the average bounce (in blue):


In fact it more closely resembles the delayed recovery following the 2000-01 recession:


...all of which suggests that we might have another two years or more of flat to negative job growth.

Except for public-sector jobs. While private-sector nonfarm payrolls have declined by 6.625 million (-5.8%) since January 2007, total government jobs have increased by 355,000 (+1.6%). Taxes on the former (goose) pay for the latter (golden eggs), so one wonders how long that disparity can continue. Expect it to widen in 2010 as we go about the decennial task of counting ourselves.

Chris Wood at Casey Research summarizes: "the loss of employment has occurred entirely in the private sector, as Uncle Sam grows more bloated each day. If you happen to be in the private sector, it also might not psych you up too much to know that the average pay per federal worker in 2009 was reportedly $75,419, while per capita average annual income across the U.S. is only about $36,000."

Monday Muse

Sarah McLachlan

Blackbird

Weekly Wrap

1.4 million Americans filed for bankruptcy in 2009, one-third more than the year before, according to a report earlier this week in the Wall Street Journal. Recall that President George W. Bush tried to suppress bankruptcy filings by signing the Bankruptcy Reform Act of 2005. At first it was mission accomplished. Following a rush to the exits by filers hoping to beat the new law, bankruptcies dropped by three-fourths in 2006. As the chart above shows, they have been rising ever since.

Running for re-election in 2004, Bush championed the concept of the "ownership society," proclaiming that "America is a stronger country every single time a family moves into a home of their own." Of course, for most folks owning a home means taking out a mortgage. The Bush Administration, aide and abetted by Congress, facilitated widespread "ownership" by allowing exotic mortgages with no down payments, little or no payments for the first few years, and no documentation of a borrower's ability to repay. In truth, most of the owning going on during Bush's second term was banks (and upstream investors) coming to own uninformed borrowers.

With the Bankruptcy Reform Act, Bush and his acolytes in the banking industry wanted to make sure that borrowers would forever own up to their debt, not slough it off when times got tough. It should have been called the Debt Slave Act, says Mike Mish Shedlock, who considers it poetic justice that a bill designed to promote high-risk lending has backfired. Shedlock is not at all surprised by the uptick in bankruptcies, particularly Chapter 7 filings, which clear the deck by liquidating assets to pay off some debts and absolving filers of the rest. "If you're unemployed, struggling, and deep in debt, it may be best to get it over with." And do it now, before you're re-hired, while the means-testing for Chapter 7 works in your favor.

In cases where borrowers cannot simply walk away from their debt (as they do when, for example, defaulting on no-recourse home mortgages), they are smartly paying down high-interest loans. The American Banking Association reported yesterday that delinquencies declined in the third quarter for most types of consumer loans, including auto loans and bank cards. The exception: housing-related loans. Home-equity-loan delinquencies rose to a record 4.30% of all accounts, and mobile-home delinquencies were up as well, to 3.63%. This may be a sign that homeowners feel entitled to forbearance on housing-related debt. They also sense that banks are in no hurry to foreclose on residential properties in a saturated market.

Today the Federal Reserve reported that total seasonally adjusted consumer debt (all debt not secured by real estate) fell $17.5 billion in November to $2.46 trillion. Annualized, that is a drop of 8.5%, almost twice the cumulative rate of decline since consumer credit peaked at $2.58 trillion in Q3 2008.

Another thing that consumers are walking away from is their health insurance. Today brings the news that Anthem Blue Cross and Blue Shield, the largest health insurer in Maine, is seeking a rate increase of 23% for its 11,000-plus individual policy holders. If approved, the bump would cap a decade of truly mind-boggling increases in health premiums. Despite the increases, Anthem is losing money on individual policies as healthy subscribers migrate elsewhere (my wife and I dropped our HealthChoice years ago). Those left are experiencing the classic "death spiral."

I have my own plan for healthcare reform, and it doesn't take up 2,000 pages like all those congressional plans do. It takes up just one. The keystone is saying good-bye to private health insurers, not subsidizing them they way congressional Democrats propose to do. Incidentally, the reform proposals now in the pipeline are impeding economic recovery, as Kristin Graham ably explains.

So what's driving all those bankruptcies and delinquencies? Other than the high costs of healthcare, that is. Why, it's the weak labor market, of course. Four million jobs in the U.S. were lost in 2008, another four million in 2009. We needed to add 2.5 million jobs during those two years just to keep the unemployment rate from rising. This morning there was the widely anticipated report from the Bureau of Labor Statistics on the employment situation during the month of December. Prior to the news release, there had been hope that, for the first time since December 2007, the U.S. economy might have added jobs (the "whisper" number was +100K).

Alas, another 85,000 jobs were lost--or more, depending on what number you use. The Establishment Survey figure of -85K was the least damaging. The Household Survey yielded a whopping -589K. The number to which I pay the most attention--the adjusted household survey--came in at -465K. Folks, those numbers are just plain awful. As I write, stock traders seem to be reaching for their Tums. No surprise; they were warned.

Jake at EconomPic has graciously updated his chart showing hours worked per week per capita. Sobering.

Big deal. Who needs to work for a living these days? The government has you covered. Personal Current Transfer Receipts, as defined by the Bureau of Economic Analysis, are "benefits received by persons for which no current services are performed" (e.g. retirement and disability insurance benefits, worker's compensation, medical benefits, unemployment insurance and other income assistance, etc.). Transfer payments now add up to one-fifth of GDP. That's groovy. But, as former British Prime Minister Margaret Thatcher pointed out, "the trouble with socialism is that you eventually run out of other people's money."

Up, up, and away...

Monday Muse

Joni Mitchell

Urge For Going