Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget”; Ambrose Evans Pritchard Inflicted with FIV
by ilene - March 1st, 2010 8:59 pm
Rep. Suzie Bassi: "Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget"; Ambrose Evans Pritchard Inflicted with FIV
Courtesy of Mish
Ambrose Evans-Pritchard has the right facts but the wrong cure in Don’t go wobbly on us now, Ben Bernanke, an article detailing the problems in many US states, notably Illinois.
Barack Obama’s home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget."
The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It’s a catastrophe", said the Schools Superintedent.
In Alexander County, the sheriff’s patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid.
Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5pc, and imposed a 5pc levy on pension fees.
This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia’s economy may contract by 30pc from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg.
The eurozone’s fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc. Britain must slash soon, or face a gilts strike.
The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now."
The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract.
So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008?…
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Surviving Deflation: First, Understand It
by ilene - February 27th, 2010 3:07 pm
Surviving Deflation: First, Understand It
Deflation is more than just "falling prices." Robert Prechter explains why.
Courtesy of Elliott Wave International
The following article is an excerpt from Elliott Wave International’s free Club EWI resource, "The Guide to Understanding Deflation. Robert Prechter’s Most Important Writings on Deflation."
The Primary Precondition of Deflation
Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: "In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common."
"The Fed Will Stop Deflation"
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars.
Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories…
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China and Germany: The Perils of Vendor Financing
by ilene - February 27th, 2010 12:13 pm
China and Germany: The Perils of Vendor Financing
Courtesy of JOHN RUBINO at Dollar Collapse
In response to Why Would Anyone Buy a Spanish Bond?, reader RAID 3000 pointed out that the U.S. has far more serious problems than Europe (no argument there!) and included a link to LEAP2020, a European site doing great work on this subject. One of its articles contained the following chart:
This got me to wondering if it would be possible to construct a similar chart for China and its main trading partners. (The U.S. would dominate that one.) From there it occurred to me that China and Germany are in more or less the same boat due to their practice of vendor financing. They’ve gone about it differently but the effect has been the same. Consider:
China lends money directly to the U.S. by using the dollars it receives from us to buy Treasury paper. This lowers U.S. interest rates and supports the dollar, which allows us to continue to buy Chinese stuff.
Germany, on the other hand, has lent its credit rating to the whole Euro Zone, allowing countries like Greece and Spain to borrow more and at lower rates than they could have otherwise. The borrowers use some of this money to buy cars, pharmaceuticals, and solar panels from Germany.
Now both China and Germany have discovered that their surpluses were based in part on bad loans to weak borrowers, and that some of the assets they thought they owned are 1) not really theirs or 2) worth way less than face value.
China has a lot of dollars, but can’t unload them without destroying the value of the dollars it retains. It’s trying to move out slowly, scaling back its purchases of U.S. debt and buying gold and oil resources, but it has to walk a fine line because spooking the markets would defeat its purpose. So it’s stuck with big dollar balances for the foreseeable future, while the U.S. is actively destroying the currency’s value.
Germany doesn’t own a lot of Spanish or Greek assets, but is now on the hook for what might end up being hundreds of billions of euros of PIIGS country debt. Which is to say it has to eat some of the loans it made during its vendor financing days.
Either way, those surpluses — and the balance sheets built on them — have turned out to be, in part, illusory.
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The Top 1% Control 42% of the Wealth - Servitude for the Rest of US!
by Phil - February 26th, 2010 6:01 pm
Courtesty of My Budget 360:
Many Americans are not buying the recent stock market rally.
This is being reflected in multiple polls showing negative attitudes towards the economy and Wall Street. Wall Street is so disconnected from the average American that they fail to see the 27 million unemployed and underemployed Americans that now have a harder time believing the gospel of financial engineering prosperity. Americans have a reason to be dubious regarding the recovery because jobs are the main push for most Americans. A recent study shows that over 70 percent of Americans derive their monthly income from an actual W-2 job. In other words, working is the prime mover and source of their income. Yet the financial elite have very little understanding of this concept. Why? 42 percent of financial wealth is controlled by the top 1 percent. We would need to go back to the Great Depression to see such lopsided data.
Many Americans are still struggling at the depths of this recession. We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart. Do you think these people are starring at the stock market? The overall data is much worse:
Source: William Domhoff
If we break the data down further we will find that 93 percent of all financial wealth is controlled by the top 10 percent of the country. That is why these people are cheering their one cent share increase while layoffs keep on improving the bottom line. But what bottom line are we talking about here? The Wall Street crowd would like you to believe that all is now good that the stock market has rallied 60+ percent. Of course they are happy because they control most of this wealth. Yet the typical American still has negative views on the economy because they actually have to work to earn a living:
The above daily poll asks Americans about their view on the health of the economy. Only 13 percent believe the economy is good or excellent. Funny how that correlates with the top 10 percent who control 93 percent of wealth. Many Americans were sold the illusion of the bubble. They were sold on the idea that their homes were worth so much more than they really were. And many used this phony wealth effect to go out and spend beyond their means. …
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Bernanke Repudiates Famous 2002 Speech
by ilene - February 26th, 2010 1:14 pm
Very good video of Karl sharing thoughts on Bernanke’s "academic garbage." - Ilene
Bernanke Repudiates Famous 2002 Speech
Courtesy of Karl Denninger at The Market Ticker
If you expect Bernanke to "hyperinflate" the economy you need to listen to this - and find the clip, if you can, of California’s Mr. Sherman and Mr. Bernanke from yesterday.
All is not as you have assumed.
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Time to Worry about China?
by ilene - February 25th, 2010 2:04 pm
Time to Worry about China?
By MICHAEL SCHUMAN, Courtesy of TIME
I’ve gotten a bit of a reputation around the TIME office in Hong Kong of being something of a China basher. I don’t think that’s fair, since I have absolutely no doubt China will be the next great superpower. But I do have an issue with what I consider blind optimism on the part of many observers about the China growth story. Too many economists out here seem to wish away some of the serious structural problems in China’s economy. The prevailing attitude is that China is somehow more capable of dealing with such problems than other countries. I’m not convinced. There is every reason to be optimistic about China’s long-term prospects, but that doesn’t mean there won’t be bumps and bruises (and an occasional broken bone or minor coronary) along the road to global greatness. The U.S. had its share of crashes, panics, recessions, and even a civil war on the way to becoming the world’s indispensible economy. Why would China be any different?
I’m starting to wonder if China is heading into one of those rough patches right now. Sure, China’s GDP growth in 2009 (at 8.7%) was an amazing achievement. But now Beijing has to contend with the fallout from the measures it took to create that growth during the Great Recession.
For example, there is a fascinating story in The Wall Street Journal about the percolating problem of debt at China’s local governments. Provinces and cities gorged on bank loans during the downturn last year to spend on infrastructure projects, which was a major spur to GDP growth. But now, the Journal says, Beijing’s leaders have become nervous that local governments won’t be able to pay back their debts.
This problem gets at a much bigger issue: What damage has China’s stimulus plan done to its financial system? China’s GDP surge was created by a credit boom of biblical proportions. Banks granted almost twice the number of loans in 2009 as they did the year before, an amount equivalent to nearly 30% of GDP. This increase in credit runs counter to usual economic logic. In a downturn, banks should become more cautious, and there is less demand for loans anyway as corporations scale back investments. But China’s banks headed in the opposite direction. Could all of this deluge of loans have gone to creditworthy borrowers, to be spent on profitable projects that would allow them to pay their…
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Japan - Past the Point of No Return
by Phil - February 24th, 2010 5:16 pm
Courtesy of Vitaliy N. Katsenelson:
Japan is suffering from growing expenditures and declining tax revenues. Their population is both aging and declining with a debt to GDP ratio of 197%, second in the world only to Zimbabwe!
The government has accumulated 637 TRILLION Yen in Bond debt at the same time as household savings has been falling from 12% in the late 1990’s to less than 2% today. These are frightening statistics and it begs the question - What happens when Japan can no longer finance their debt internally? Will they begin to compete with the US and Europe for investment capital?
How will that affect global bond rates and, most importantly - how do we make money off it? Have I mentioned I like TBT lately? I also like Vitaliy, who sends me tons of good stuff so I’m making up for not posting him more often by catching up a little:
- Vitaliy also has this overview on our steroid-enhanced economy.
- Yesterday he was on CNBC with Maria mispronouncing his name - discussing our range-bound outlook.
- Here’s Yahoo giving him more time on the same subject.
- Welcome to Another Lost Decade
- Q&A on Range-Bound Market with the FT
(What's this?)
(market folly, 2/25/10)
(Investment U, 12/18/09)
(THE PRAGMATIC CAPITALIST, 1/6/10)
Investing in Japan,
ProShares UltraShort 20+ Year Treasury,
Yahoo!
at Wikinvest
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“The Public Backs The Austerity Plan”
by ilene - February 24th, 2010 10:59 am
"The Public Backs The Austerity Plan"
Courtesy of Gus Lubin at Clusterstock/Business Insider
Greece’s finance minister George Papaconstantinou said last week that Greece is in a "terrible mess" but his government has the backing of the public to push through its package of austerity measures.
Wrong.
The first round of strikes were mostly peaceful: marches and rallies of the young and old.
But today the strikes turned violent.
Transportation unions are taking part, which means no one’s getting in or out of Greece.
See The Strike Turn Violent >
See Also:
Now Over Half Of Greece Has Stopped Working In A Bid to Save The Economy From Market Forces
(What's this?)
(naked capitalism, 2/16/10)
(Money Morning, 2/24/10)
(naked capitalism, 2/1/10)
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America Just Declared The Recovery Over So You’d Better Get Ready For The Double Dip
by ilene - February 23rd, 2010 2:23 pm
America Just Declared The Recovery Over So You’d Better Get Ready For The Double Dip
Courtesy of John Carney at Clusterstock/Business Insider
Today’s bleak consumer confidence number is undoubtedly bad news for the economy. The bigger than expected drop suggests that consumers have lost confidence in the recovery, which will drive down home prices and consumer spending.
Consumer confidence is typically our "first look" at the state of the economy. While most government aggregated data come out with a two-month lag, or more, consumer confidence hits with just a one month lag. Studies have shown that consumer confidence is a good predictor of consumer spending numbers. Basically, people surveyed seem to be good at accurately reading their own economic situation, and those surveyed accurately reflect the broader economy. When consumer confidence drops to such deep unexpected levels–today’s were the worst in 27 years–then it is a flashing red-light about the economy.
There wasn’t anything good about today’s numbers. Every part of the survey was awful. On jobs, the optimistic folks who say jobs are plentiful fell to 3.6 percent from 4.4 percent. The pessimistic people who said jobs are hard to get increased to 47.7 percent from 46.5 percent. The gauge of expectations for the next six-months fell to 63.8, from 77.3 the prior month. The share of people who believe their incomes will increase over the next six months fell to 9.5 from 11 percent. The share of those expecting more jobs fell to 12.4 percent from 15.8 percent.
The message: the economy sucks.
The recovery we were supposed to have.
You’ll read a lot about how the consumer confidence numbers are a lagging indicator. Indeed, they are a lagging indicator when measured against the stock market. The real time data conveyed by the stock market is often a better indicator than any survey or government data. But that doesn’t mean you shouldn’t pay attention to the consumer confidence number, especially since stocks have declined for most of this year.
Lets be clear here. The story-book recovery was dependent on a recovery of the consumer and a decline in the saving rate. If consumers lost some of their apprehension about future income prospects and future employment, they might begin to spend more on both retail goods and to purchase homes again. Anticipating this return of the consumer, businesses would increase capital spending and inventory.
We got half of that equation. Business spending on new equipment and software reversed course from the sharp drop recorded during the recession.…
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European Banks Prepare For €1 Trillion Debt Rollover Tidal Wave
by ilene - February 23rd, 2010 6:44 am
European Banks Prepare For €1 Trillion Debt Rollover Tidal Wave
By Ambrose Evans-Pritchard, courtesy of Clusterstock/Business Insider
From The Telegraph:
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European banks need to roll over €1 trillion (£877bn) of debt over the next two years at a much higher cost and in direct competition with hungry sovereign states, according to a report by Morgan Stanley.
The bank has advised clients to prepare for chillier times as monetary tightening begins in the US and China, causing major spill-over effects in Europe.
Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.
See Also:
(What's this?)
(naked capitalism, 3/12/10)
(naked capitalism, 2/11/10)
(Fund my Mutual Fund, 2/4/10)
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(