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Financial Skeptic Bulletin, February 2011

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According to Newton’s First Law of Motion, a body that is in motion stays in motion until faced with an outside repelling force. Something tells me that what is unfolding across the planet right now is a game changer. The combination of sharply higher oil prices, the global food crisis, the accelerating geopolitical risks abroad, and the switch in the United States from fiscal stimulus to restraint — all will serve to complicate the macro and market outlook further. Valuation may not be at an extreme, but most measures of market sentiment are. And some folks are beginning to notice that the wheels are starting to fall off the tracks after going into hibernation because short interest on the NYSE rose a hefty 2.8% in the first half of February.

At the same time, it is very clear that the U.S. economic recovery is extremely fragile. How else can it be that the radical easing in Fed policy and the announcement late last year of another round of fiscal stimulus, could manage to only muster a 2.8% annualized advance in real GDP. While manufacturing diffusion indices have remained buoyant, the actual data on capital spending, real consumption and housing are all triggering cutbacks in once-rosy forecasts for current-quarter growth.

Home prices are down five months in a row. Both the trends in core durable goods orders and shipments are decelerating. Gasoline prices just hit a two-year high of $3.29 a gallon and the ‘experts’ are talking about $4 a gallon by spring. The retailers are highly vulnerable, especially absent a visible acceleration in the pace of net job creation.

This recovery is almost two years old and we have but two decent payroll months to show for it — the jobless rate is at 9% only by the good grace of a labour force participation rate sliding to its lowest level in 27 years. Otherwise, it would have cleared 12% by now to the upside. We couldn’t help but notice J.C. Penney guide lower to close the week and see its stock price tumble 6.5%.

Many pundits seem to believe that the theme of frugality that caught on like wildfire during the depths of the credit collapse has vanished because of Ben Bernanke’s magical act — a $600 billion wave of the wand and voila, we have a vertical run-up in equity values and a wealth effect on spending, especially at the high end. How nice is that.

The Fed made no bones about generating a rally in the stock market as its goal with QE2, which helps the 20% of the population that actually own equities directly and can make the connection between their monthly statements and what their net worth is. The Fed also wanted to create inflation and indeed it has — in food and energy, at least partly responsible in any event. Talk about a regressive tax on the population. Moreover, the Fed’s policies have done nothing to backstop home prices because, except for a few weeks perhaps, QE2 never did bring down bond yields and mortgage rates.

When we go to the University of Michigan consumer sentiment (see more below) for February, what we see is that confidence rose 9.7% for the high-end income earner and fell 1.4% for the low end. Nice.

For the folks out there that seem to believe that the frugality theme was dead because of the Fed, well, we have some news for you. It was dormant. It wasn’t dead, and now it’s back. For a good read of how this is affecting the consumer landscape, read the brilliant article on page B1 of the Saturday NYT — Use it Up, Wear it Out: Recession-Wary Consumers Are Keeping Their Stuff Longer. It’s called the hand-me-down economy.

Those that think the Fed has more bullets in its chamber may want to have a look at Christina Romer’s piece on page 5 of the business section of the Sunday NYT -- The Debate That’s Muting the Fed’s Response.

And if you think the geopolitical risk premium in the oil price is about to subside, have a look at Protestors Bill Bahrain’s Capital and Yemeni City Feeds Unrest’s Roots on page A9 of the Saturday NYT, and The Vacuum After Qaddafi on the front page of the Sunday NYT.


Don’t forget, especially as U.S. gasoline prices approach or break above $4 a gallon this spring that the grocery bill is also ratcheting higher. The lagged impact of corn, which is up 88% in the past year, wheat (+76% YoY), and soybeans (+37% YoY), will also act to curb the other less essential parts of the household budget.

Moreover, the surge in grains has also lifted the price of hogs and cattle to new all-time highs. So, the share of after-tax personal income now being devoted to food and fuels has risen to 12.6%, and remember at the start of the last recession, the number was at 13%. With wages in nominal terms under pressure ― see A U.S. Recovery Built on Low-Paying Jobs on page 14 of Bloomberg BusinessWeek as one reason why that is the case ― in real or “inflation” adjusted terms, they can be expected to contract given what consumer prices are going to be doing in coming months.

Nonetheless, we don’t see a sustained outbreak of inflation nor do we see a spread to other sectors as we did in the 1970s. Real incomes and profit margins are very likely going to get squeezed sharply in the near- and intermediate-term.


Which is … “The public buys most at the top and the least at the bottom”.

Now let’s see if that is true. At the March 2009 market lows, the U.S. retail investor yanked a near-record $25.6 billion out of equity funds. At the September 2002 lows, equity funds suffered a $16.1 billion net redemption. At the August 1998 low, these funds saw net outflows of $11.6 billion. In October 1987, at the height of the panic, retail investors withdrew a net $7.5 billion, which was a record at that time. Now what about at the highs … There were two peaks in 2007 ― July and October. Equity funds saw net inflows of $11.2 billion the first time and then $10.9 billion at the very next high. At the September 2000 high in the S&P 500, equity funds took in a huge $17.6 billion.

Even worse, over one-third of that was in ‘aggressive growth’ as many clung to the view that the entire tech sector was going to take over the world. At the very peak of the tech bubble in February of that year, aggressive growth funds alone attracted a net $24.3 billion. On the eve of the Asian crisis back in July 1997, the private client sector ploughed in a net $26.5 billion into equity funds ahead of one of the worst global financial storms of all time. You really cannot make this stuff up. In September 1987, just before the biggest one day slide in the market since the 1929 crash, investors put $1.5 billion of their capital into equity funds ― a sum that back then was far above average. Okay. So why go through this exercise. For your benefit ― history doesn’t rhyme but it sure sounds the same.

U.S. based equity funds attracted a net $19.5 billion in January 2011 ― the third inflow in a row but what made this one different is that it was the largest since February 2007. By our estimation, that was four months away from the double-top of the decade. Yes, yes, four months for some is an eternity, but it doesn’t hurt to be early when the storm hits.

Many will make a federal case out of the fact that U.S. bond funds posted a net outflow of $1.8 billion in January on top of the $20 billion net redemption in December 2010. And a sign that bonds are in some sort of a bubble and that the general public finally sees the light as it abandons public enemy #1 ― the evil Treasury market.

If the truth be told, safe-income remains in a secular bull market. Taxable bond funds took in $10.6 billion in January and that was in addition to $7.1 billion the month before. Hybrids attracted $6.3 billion on top of $1.8 billion of fresh funds in December.

What retail investors are doing, again at probably the worst time, is fleeing the municipal bond market en masse AFTER the damage has already been done ― $12.4 billion in January and $12.9 billion in December of net redemptions. Hold me down, Billy! If anything, it is munis that have been priced for disaster that may very well end up proving to be the turnaround asset class of the year. It should come as little surprise that just as Ma and Pa have fled the municipal bond market, that it in turn posted the best returns out of all the fixed-income classes in February — stemming five months of losses (according to Bloomberg that tax-exempt bonds returned 1.6% last month versus +0.5% for corporate bonds and -0.23% for Treasuries).

But to see the retail investor finally capitulate on equities after the major indices have doubled from the lows is an absolutely classic signpost for anyone with a mild contrarian streak. Which then brings us to Bob Farrell’s Rule #6: “Fear and greed are stronger than long-term resolve.” Well, ain’t that the truth.

[Feb 28, 2011] Matt Stoller The Liquidation of Society versus the Global Labor Revival

naked capitalism

But it’s not cheaper, or better, or more efficient. Firing your teachers isn’t exactly “winning the future”. And outsourcing manufacturing, as Boeing found out, is often a good way to increase coordination costs, create more operational risk, and destroy value. However, the system is good at maintaining the power of oligarch-style control of cultural institutions. If no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources. Outsourcing work to China means that workers are scared and have no leverage, so they do what management wants. Again, this isn’t efficient; the UAW sought to make small cars in the 1940s, but was rebuffed by management. Workers are closest to production; treating them terribly is a good way to degrade product quality. Silicon Valley companies give their engineers free snacks and frisbees because happy employees that take ownership over their work create good quality products. Treating people terribly scares them, and makes them more pliable. Again, it’s about control.

The problem for the elites is that the system of control is breaking down. I noted a week and a half ago that the Egyptian revolution was a labor uprising against Rubinites. So to the extent that global labor arbitrage relies on sweatshops and environmental degradation in poor countries for cheap goods, successful strikes in poor countries undercuts the whole system. The reason to outsource work in the first place is to prevent workers in rich countries from gaining pricing and political power. Now workers in poor countries are getting pricing and political power? It’s actually a fragile system of control, and can be broken through either crackdowns on tax havens and oligarchs in wealthy countries or protests/strikes where the goods are made.

The Egyptian revolution was really a series of protests and highly politicized strikes, which is why people in Madison are taking inspiration from Cairo. In fact, the actions in Egypt may be creating a wave of labor actions worldwide, rippling to Wisconsin, Indiana, and Ohio. All of these strikes are aimed at a collusive set of tight relationships.

... ... ...

Striking just isn’t in the collective memory of the American public anymore. This kind of highly politicized hybrid political protest/strike walks like an Egyptian these days, which is why Egyptians were sending Wisconsinites pizza and Madison protesters were holding signs lauding teachers, workers, and the new Egyptian flag. In fact, Madison may represent a new kind of American labor model, the melding of old school unions, Howard Dean-style internet-based organizing, Anonymous-style serious pranking, and social media reporting on protests and policy. There’s an anti-bailout class-based fervor here as well, with a simmering anger at Wall Street as subtext. It’s headless and global, though there is leadership. The most powerful moment so far in the Wisconsin conflict didn’t come from the actions of a labor leader, but from a prank call by alt-weekly “Buffalo Beast” editor Ian Murphy, who pretended to be billionaire American oligarch David Koch and had a frank 20 minute conversation with Governor Scott Walker. Murphy originally wanted to pose as Hosni Mubarak, but couldn’t pull off the accent.

Perversely, people may be so beaten down that they only want to side with institutions that are visibly and aggressively advocating for them. This might lead them to recognize that middle class interests are aligned with those of labor, which was the widespread view in the first generation after World War II. However, that also means that the de facto business unionism of the 1970s onward isn’t appealing. People might only like unions when they see strikes, otherwise all they hear about is backroom negotiations. Perhaps effectively striking is actually the way to force people to ask questions about what kind of country they want to live in. I haven’t seen this much labor coverage since, well, ever in my lifetime. There seems to be multiple feedback loops at work: political, global, and economic.

As commodity prices shoot up, and become more volatile, the pressure to liquidate America will only increase. These increases take the form of gifting public assets to oligarchs, taxing the middle class and poor, slashing social service budgets, and cutting wages through inflation and outright demotions (like the NYC sanitation workers that were demoted right before a giant blizzard). But civil unrest is intensifying it its most basic forms: protests and strikes, and in advanced forms, like the blowback at the national security state embodied in the HB Gary and WIkileaks fiasco.


I worked for a number of years in Austria, a country with a very similar set-up to Germany. There, all wages – for union and non-union alike – were set across industries, meaning that everyone was paid at the same basic rate. Oh, and everyone had benefits and 6 weeks vacation from the get go.

I worked as a manager, and I was part of a union. Everyone was… except for senior management. Union reps were also included on all corporate boards of directors.

The end result? No strikes or labor unrest for decades. Low crime and reduced poverty. Universal healthcare including dental… and, one of the highest living standards in the world.

But, I guess they just don’t get it. A better model seems to be Somalia, where its small ‘government’ has withered away because of the incredibly efficiencies and animal spirits of local Free Market entrepreneurs!

Walter Westcot:

You left out the most important element – CULTURAL, ETHNIC AND RACIAL similarity.

The Scandinavians have the same system – and then they started importing Turks and other Arabs to do the dirty work for less pay…. while the Danes take Ballroom Dance classes with their healthcare benefits.

Every action has an opposite but equal reaction, no?

the breeders are the Turks and Arabs… the Danes are not.

That system is headed off a cliff unless they begin deportations like Germany.

Breeders vs non breeders.

White vs Brown –

We cannot cease from exploration, and the result of our travels will be to arrive where we started and know the place for the first time…. Goebbels couldn’t have said it better.


“Breeders” will surely get you the reflexive response you desire, but won’t advance your point. If you instead addressed the significant advantages that German and Japanese mono-cultures enjoy when assembling teams you’d have a better argument. Or, if you noted the huge carrying costs that cities such as Los Angeles suffer under when the social dysfunction of multicultural efforts have so obviously failed our young and old alike, you’d help those forced to filter the world through their politically correct sunglasses see your viewpoint a bit more clearly.



That’s a beguiling sophistry you tout, and a trap that’s way too easy to fall into. But your moral compass is 180 degrees out of phase with that of Martin Luther King’s.

Your intent is to pit worker rights against civil rights. The “logic” is that civil rights can only be promoted at the expense of worker rights, and vice versa. But your thinking is atavistic, the petrifaction of a 1950s liberalism.

It’s certainly fair to say that labor rights have lost some of their exclusivity. Since the 1960s, the battle against social injustice has been fought on many fronts. But to argue that labor rights are pitted against civil rights is an argument made only by right-wing reactionaries. Those who fight for civil rights and those who fight for labor rights are not enemies, but allies. They share a common foe: society’s injustices.

Here’s how Stephen Toulmin put it in Cosmopolis:

Before Kennedy’s time, politicians thought of their issues as resting on matters of technique. They took for granted the goals of national politics, and argued about the best means of fulfilling them… After 1965, this changed: aside from the Vietnam debates, the 1960s saw a move away from a politics of national goals—-which aimed at consensus—-toward a politics aimed at redressing traditional injustices, driven by a confrontation of sectional interests. In the 18th and 19th centuries, the upper (“respectable”) classes had assumed that the varied and numerous lower (“unfortunate”) classes “knew their places,” and could, if necessary, be kept in those places by social pressure of some kind.

Now, all these classes began to speak up for themselves, in distinct but concerted tones. In theory, the interests of NAACP, La Raza, the Grey Panthers, and the Gay and Lesbian Alliance, were anything but identical: in practice, they united in opposition to those structural rigidities that “respectable” people had viewed as inevitable preconditions for a stable social order. There followed a sequence of assaults on the inequalities entrenched in European society around 1700, and legitimated by the new cosmopolis. Institutionalized racism, a flagrant injustice left long unaddressed, was the first to become a target of the civil rights movement. This was followed by others. Throughout the 1970s, all the inequalities built into modern society came under attack in turn: women, the elderly, the handicapped, lesbians and gays, all spoke up, one group after the other. Those who never questioned the rights and wrongs of modern nationhood found it a terrible shock. Jesus said, “The poor ye have always with you”—-i.e., deserving objects of charity are always near at hand. Now, many believers in “traditional values” understood Him to mean, rather, that it is the business of the poor to stay poor, of blacks to stay deferent, of women to stay home, of the handicapped to stay in the back room, and of homosexuals to stay in the closet.

So Dan, you just tell me how the fight against economic injustice doesn’t square with the larger battle against all injustice.

[Feb 28, 2011] Jobs, Jobs, Jobs

More in Unemployment


Job and hiring anecdote.

I have a small startup (high-tech widgets), and we have posted an ad to fill a roughly half-time position office manager, hoping to get someone at a fairly experienced, professional level who can grow with us and help run things as manufacturing takes hold late summer or so. But it is a modest position to start with.

The ad has been up for a couple of days, and I bet we easily hit over a hundred or so by the time I sort resumes this week.

In the meanwhile, skimming the applicants has been sobering. Modal age looks to be in the forties; I infer from histories and the nature of our area that most have families. To see a resume that's been tailored, covered letter polished, and sent at three in the morning from a forty-year-old mom with a college degree, broad experience, and a clean writing style, speaks to me of the stress out there. The gender split is roughly fifty-fifty.

(Another striking dimension comes from the quarter or so of the applicants that are woefully unprepared, having education ranging from high school through college, often with 'business' training. We have failed these people: Their applications are filled with ridiculous business babble-speak. I don't know if they can understand how badly they have been misdirected. Heartbreaking.)

Maybe one out of five resumes has been touched by FIRE.

Grim out there on many dimensions. It needs to be fixed, and shame on us for not having done so already.

[Feb 27, 2011] Fourth Quarter GDP Revised Downward

Fourth quarter GDP was revised downward:

A disappointing day, by Ryan Avent: ...let me draw your attention to two stories... First, America's fourth quarter GDP growth has been revised down:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent...

The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports.

Though certainly better than lower growth, a 2.6% growth rate is not much progress. It's basically treading water, though barely. To "recover" what was lost in the recession, including lost jobs, we need to grow much faster than that. Unfortunately for the millions of unemployed, problems at the state and local level are far from over, there are other headwinds working against growth as well (e.g. the prospect of higher oil prices, the end of the stimulus package), but policymakers have moved on to other things. And worse, the main topic presently, cutting the budget, works against the employment and output growth

[Feb 25, 2011] Economist's View

As I said earlier today, Republicans "do not intend to allow the budget deficit brought about by the crisis to go to waste," and that is true at both the federal and state levels:
Shock Doctrine, U.S.A., by Paul Krugman, Commentary, NY Times: ...Naomi Klein’s best-selling book “The Shock Doctrine” ... argued that ... right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises, and everything to do with imposing their vision of a harsher, more unequal, less democratic society.
Which brings us to Wisconsin 2011, where the shock doctrine is on full display.
In recent weeks, Madison has been the scene of large demonstrations against the governor’s budget bill, which would deny collective-bargaining rights to public-sector workers. Gov. Scott Walker claims that he needs to pass his bill to deal with the state’s fiscal problems. But his attack on unions has nothing to do with the budget. In fact, those unions have already indicated their willingness to make substantial financial concessions — an offer the governor has rejected.
What’s happening in Wisconsin is, instead, a power grab — an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy. And the power grab goes beyond union-busting. The bill in question is 144 pages long, and there are some extraordinary things hidden deep inside.
For example, the bill includes language that would allow officials appointed by the governor to make sweeping cuts in health coverage for low-income families without having to go through the normal legislative process.
And then there’s this... The state of Wisconsin owns a number of plants supplying heating, cooling, and electricity to state-run facilities (like the University of Wisconsin). The language in the budget bill would, in effect, let the governor privatize any or all of these facilities at whim. Not only that, he could sell them, without taking bids, to anyone he chooses. And note that any such sale would, by definition, be “considered to be in the public interest.”
If this sounds to you like a perfect setup for cronyism and profiteering ... you’re not alone. Indeed, there are enough suspicious minds out there that Koch Industries, owned by the billionaire brothers who are playing such a large role in Mr. Walker’s anti-union push, felt compelled to issue a denial that it’s interested in purchasing any of those power plants. Are you reassured?
The good news from Wisconsin is that the upsurge of public outrage — aided by the maneuvering of Democrats in the State Senate, who absented themselves to deny Republicans a quorum — has slowed the bum’s rush. If Mr. Walker’s plan was to push his bill through before anyone had a chance to realize his true goals, that plan has been foiled. And events in Wisconsin may have given pause to other Republican governors, who seem to be backing off similar moves.
But don’t expect either Mr. Walker or the rest of his party to change those goals. Union-busting and privatization remain G.O.P. priorities, and the party will continue its efforts to smuggle those priorities through in the name of balanced budgets.

[Feb 25, 2011] Matt Stoller The Liquidation of Society versus the Global Labor Revival «

naked capitalism

But it’s not cheaper, or better, or more efficient. Firing your teachers isn’t exactly “winning the future”. And outsourcing manufacturing, as Boeing found out, is often a good way to increase coordination costs, create more operational risk, and destroy value. However, the system is good at maintaining the power of oligarch-style control of cultural institutions. If no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources. Outsourcing work to China means that workers are scared and have no leverage, so they do what management wants. Again, this isn’t efficient; the UAW sought to make small cars in the 1940s, but was rebuffed by management. Workers are closest to production; treating them terribly is a good way to degrade product quality. Silicon Valley companies give their engineers free snacks and frisbees because happy employees that take ownership over their work create good quality products. Treating people terribly scares them, and makes them more pliable. Again, it’s about control.

The problem for the elites is that the system of control is breaking down. I noted a week and a half ago that the Egyptian revolution was a labor uprising against Rubinites. So to the extent that global labor arbitrage relies on sweatshops and environmental degradation in poor countries for cheap goods, successful strikes in poor countries undercuts the whole system. The reason to outsource work in the first place is to prevent workers in rich countries from gaining pricing and political power. Now workers in poor countries are getting pricing and political power? It’s actually a fragile system of control, and can be broken through either crackdowns on tax havens and oligarchs in wealthy countries or protests/strikes where the goods are made.

The Egyptian revolution was really a series of protests and highly politicized strikes, which is why people in Madison are taking inspiration from Cairo. In fact, the actions in Egypt may be creating a wave of labor actions worldwide, rippling to Wisconsin, Indiana, and Ohio. All of these strikes are aimed at a collusive set of tight relationships.

[Feb 23, 2011] "The Most Dangerous Union in the World"

Michael Perelman:
The Most Dangerous Union in the World, by Michael Perelman: Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.
Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.
This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.
The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.
Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.
Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.
Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.
The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.
Private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.
One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before it as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.
The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.

Winslow R.:

Targeting all business is misdirected, largely unfocused, as well as off-putting.

The most dangerous union in the world is the international financial system, by a long shot. They are also most dependent upon government support for their monopoly.

Mark needs to play catchup, CalculatedRisk has it right....

"Today, I am convinced that the existence of too big to fail financial institutions poses the greatest risk to the U.S. economy. "

It doesn't seem to be sinking in, the number of community banks has fallen while wealth inequality has increased.

Concentration of power in the financial sector screws the middle class, isn't it obvious?


The right appeals to people's base and vicious instincts. The Great Depression put a lid on that because it taught two generations that destitution can happen to anyone.

Until something purges the puffed-up self righteousness of the common American and teaches him or her a little humility and compassion, nothing is going to change.

Couple this collective meanness with the mass delusion that we're all just one NFL contract, American Idol appearance, or homemade sex video away from joining the ranks of the plutocracy, and you have a formidable obstacle any kind of social justice.


The problem we face is that capitalism has failed. Even its biggest supporters argue that it cannot produce economic growth, rising living standards, well paying jobs, any jobs for that matter, health care, scientific progress, or just about anything else save for tax cuts and big corporate bonuses for a handful of individuals. No one, not even the folks at the University of Chicago, can come up with anything good to say about it.

In the Cold War battle of economic systems, capitalism seems to have barely outlasted communism.

Simon :

Considering the Soviet Economic Model(SEM) was based on the fundamentals of capitalism itself, we see the flaws. Why guys like Castro thought it would make a great economic system is beyond me.

GE,Standard Oil and hundreds of corps built power plants and infrastructure in the 1920's for Rus.....I mean the Soviet Union. This was well documented. Nobody liked em, but they couldn't resist the profit. Then came the cold war and it left the history books.

The fact is, the Russian Empire eventually engulfed the "Soviet" and Stalin became its final Czar with the SEM as its economic trojan horse. Russians did well under the Soviet during its glory days, the "colonies" were beaten up and bruised. When we talk about "genocide" in the Soviet Union we are really talking about the Russian Empire laying the wood to the "colonies" on a mass scale not ever seen and the Czar's had body counts as well.

The capitalists themselves made sizeable body counts in 19th century America from deaths of famine and outright executions of excess labor.

[Feb 23, 2011] The Beast’s “David Koch” Speaks to Wisconsin Governor Walker « naked capitalism

Transcript of the call is availble from
February 23, 2011

War on the middle class

State-by-State Scorecard for Civil War?

Poverty in the U.S. spikes
Regionally, the South was the poorest area of the country, with a rate of 15.7%. It also experienced the biggest jump in poverty, 1.4 percentage points from 14.3% in 2008.

The West had a poverty rate of 14.8%, the Midwest rate was 13.3% and the Northeast rate was 12.2%.

Mississippi is the poorest state in the nation with an average of 20.6% of the population earning less than the threshold rate over the past two years. Arizona, at 19.6%, and New Mexico, at 19.3%, also recorded much higher poverty than the national average.

New Hampshire, at 7.3%, had the lowest percentage of poor residents with Connecticut, at 8.3%, and Utah, at 8.6%, also scoring well.

The state comparisons may not be very fair, according to Sawhill. They make no provisions for differences in living costs. Groceries, housing, prpoerty and sales taxes and lots of other costs can vary greatly.

“I think we need to revise the poverty measure to take into account regional cost differences,” she said.

Census seems to agree. It announced an initiative to work with other agencies to develop a supplemental poverty measure that will incorporate non-cash factors, as well as cost of living differences, to better describe economic well-being. The new gauge will not replace the poverty report.

[Feb 23, 2011] Haldane Unto the Breach « naked capitalism

EoC means this FT piece; responding to the Merv crisis, BoE regulator Haldane is pushing his latest formulation of the idea that big banks need either to be broken up, or to carry a lot more capital. He’s just published a paper about this, at Nature, if you’re keen to part with $32:

In the run-up to the crisis, and in the pursuit of diversification, banks’ balance sheets and risk management systems became increasingly homogenous. For example, banks became increasingly reliant on wholesale funding on the liabilities side of the balance sheet; in structured credit on the assets side of their balance sheet; and managed the resulting risks using the same value-at-risk models. This desire for diversification was individually rational from a risk perspective. But it came at the expense of lower diversity across the system as whole, thereby increasing systemic risk.

In his paper, he uses a biological metaphor, or model, and expands on it some more in his new FT piece:

There is no evidence that failure probabilities are lower among big, complex banks than smaller ones. But even if there were, the case for big banks holding higher levels of loss-absorbing capital would not be weakened. That case rests not on the probability of large banks failing, but on their system-wide impact. What matters is not a bank’s closeness to the edge of the cliff; it is the extent of the fall. And this will depend on a bank’s size, complexity and numbers of market counterparties.

These basic principles have long been known in the study of infectious diseases. Optimal strategies for preventing disease spread focus on “super spreaders”: not those most likely to die, but those with the greatest capacity to infect counterparties. The same calculus applies to big, complex banks. These super-spreaders of the financial world have huge balance sheets and often comprise thousands of distinct legal entities. Their numbers of counterparties are often mind-boggling. When Lehman Brothers failed, it had more than 1m such relationships. These spread financial infection on a global scale.

[Feb 21, 2011] Paul Krugman- Wisconsin Power Play


Observer, you have hit on a problem for the unions. Banks and business know that the best way to operate, under the veneer of democracy, is to buy both parties. Unions, as they have declined in members, made a devil's bargain with the Democratic party. Of course, this isn't true of all unions - the union of prison workers in the prison industry have made a pretty penny from investing in Republican governors and legislators in California.

The problem is that unions can neither ally with Republicans nor rely on Democrats. Unlike businesses, which have a world of cushy positions and perks for the politico and his family. Once upon a time, in the age of the urban machines, they did. No longer. What was called corruption when it is done by a union is, of course, just dubbed as good business when done by a corporation - hence, the effortless movement of Peter Orzag to Citibank after assuring the survival of Citibank by the Obama regime. Nobody blinks at such things.

Still, once can be hopeful, to use Krugman's words, that the masks are coming off and class positions are finally becoming clearer.


Fixed piece battle in class war, Madison is Cairo.

The republican party is the party of the elite, owner/managerial class who are on the other side of the bargaining table from the worker and use politics to gain advantage there.

For republicans it is government for the few versus bought by money interest democrats.

Wilson and Boehner are Mubarak.

Need a new guitar to fight fascism.


I sure hope you're pulling my leg, paine, because if you're not, then it is you who is way off base here. Now if Wisconsin public school teachers were mostly black, Jesse Jackson would be at the Wisconsin State Capitol today making claims that Gov. Walker's attack on the teachers' union is more about oppressing blacks than it is about oppressing workers. He would be painting Gov. Walker as racist pig, but not necessarily as a fascist union buster. As I have said before, black activists like Jesse Jackson are more interested in using their political clout to increase the number of black Americans to be part of the upper echelons of society, be it in government or in business. They have little to no interest in advancing the cause of ordinary Americans, especially the ones whose skin color isn't black.

And as I have also said before, Southern blacks are no different from Southern whites in terms of being severely afflicted with the right-wing Christian disease -- the disease that brainwashes them into believing that they'll burn in hell if they were to join a labor union and that the only way for them to get to heaven is to worship at the altar of wealth and power.

Believe me, paine, it'll be a cold day in hell before Dixie opens its doors to labor unions. The right-wing Christian disease also causes Southerners, black and white alike, to become fire-breathing racists. So now Dixie is suffering from an infestation of racist pigs on both sides of the racial divide.

Icarus Lives:

Large Consulting companies are currently offshoring entire business processes...this is one of the reasons why job growth in the US is so slow. Entire functions, like accounts payable, or HR, or payroll are being done overseas. If you look at firms like Cognizant, Wipro, TCS, and such...they are growing at a 30% year to year clip...all due to growth in such services.

That said...this model isnt happening in the public sector, because of obvious issues of nationalism. But, it may, and it can.

Instead of paying semi-skilled labor in the US something like $50,000/year for essentially glorified clerical work, we may have a model to do this work elsewhere.

I know, I know...offshoring state government tasks seems deplorable to some of you...but, it may be a reality. We could shrink budgets, keep taxes low, and obtain the same quality of services.


Robert Reich got it right. Half the idiot citizens are so ready to blame the unions. They dont even care that its got nothing to do with the deficits. They just want to see the unions busted, so that, voila, their taxes will suddenly go down. They will take that hope to the poorhouse.

Here we have posters complaining that the teachers should not have striked!! They want them to create half-truth ads on the TV networks to correct perception. Spend their contributions to correct mindset of lazy, corrupt, selfish, illiterate, uneducated, and plain stupid voters.

In my mind, not much can be done. Wisconsin voters got these financial taliban into power. They will get what they deserve.

But teachers need to think long term if they want to get out of their present scenario. They need to create the ability to vote with their feet. Create private schools which are unionized but for profit. Create a scenario of competition against public school system. I know, it goes against one of the basic bulwarks of US society, but its not upto teachers to support it with their wallets.


You know that fascism has come to Wisconsin when its Governor threatens to call out the National Guard if union workers protest against having their collective bargaining rights taken away from them, and especially when he made certain that union workers who are heavily armed with guns and testosterone ( i.e., the state troopers) are exempt from having their collective bargaining rights taken away from them.

And what better way for a fascist governor like Scott Walker and his billionaire corporate backers like the Koch Brothers to squash a labor revolt than to get union workers who profit in a fascist state by being heavily armed with guns and testosterone, i.e., the state troopers, on their side against union workers who are mostly unarmed and mostly female, i.e., public school teachers.

Too bad that most Americans can't get it through their thick skulls that an assault on labor unions is an an assault on Lady Liberty and everything she stands for!


February 21, 2011

The NYT Puts Its Desire for Public Sector Workers to Take Pay Cuts in Its News Section

A New York Times article on President Obama's relationship with unions in Wisconsin referred to * the "need for public employees to sacrifice." There is no "need" for public sector workers to sacrifice.

As virtually all economists acknowledge, the economy's current problems stems from a lack of demand. If there were more demand, then the economy would grow more and it would generate more jobs. If public sector workers "sacrifice" by accepting cuts in pay and benefits then they will have to cut their spending. This will mean less demand, less growth, and fewer jobs.

For this reason, there is certainly no "need" for public sector workers to sacrifice. The NYT and others may feel better seeing them take cuts in pay, but this has nothing to do with the needs of the economy.


-- Dean Baker

Icarus Lives:

Such a horrible argument - "Overpay me, and my kin, so we can go shopping and hence keep demand strong". ??

The issue here is that public sector union members are overpaid, and are taking up much too much of our overall state budgets.

Fair pay does not involve cushy retirement deals, or job security for life, or a host of other benefits some of our public sector folk have corruptly negotiated.


"corruptly negotiated"!!!!

yes let's use that as the new standard for contracts!

nobody gets what they were promised if they entered the negotiations with profit in mind!

Matt Young:

Back to the Whodunnit, financial deregulation dunnit.

What would a sound finacial system have done if oil approached $140/barrel? They would have creashed earlier, say 2003 or 2004 rather than mid July, 2008. The 2008 is the point oil peaked. The crash would have been smaller, and we would have a bit more breathing room to solve energy problems.

But the economy selected the crash point, not krugman, and the economy selected July 2008, so let's work with that crash, its the only crash we have. Time travel is still not invented.


Amazing!!! The governor lets the guys with guns skate on their negotiating rights, but smashes the teacher's union which is primarily female.

Oh wait. The same crew in DC is slashing women's their children's programs.

If you notice a strong misogynist streak here, you're on to something.


This has probably nothing to do with gender, but as you observe with the guns. Where even the guns are to an extent figurative - no government is well advised to treat the security/executive apparatus with the same disrespect as everybody else. Clearly this is in line with the vision that government's mission is to exert power on behalf of its "constituents", not deliver services to the population.



Ah, Prof. Krugman has rediscovered countervailing power. What a pity he's forgotten which US economist first started using the concept nearly 60 years ago.

John Kenneth Galbraith.

But nobody who wants to be taken seriously can ever admit even hearing that name, can they? Let alone quote him.

[Paul Krugman has in earlier times completely dismissed the work of John Kenneth Galbraith, but lately a respect has come. However, Galbraith still seems remarkably little remembered among economists.]

[Feb 21, 2011] Summary for Week ending February 19th Hoocoodanode


And when will that healthy economy manifest itself?

We are still clinging to a BAU solution, and that is in the rear view mirror. Hopefully my comrades here will start paying attention to what is happening around them, other than the story they believe is happening. Scream for a while in the fetal position as the smoke clears, and as your predicament become obvious, then do what you can. Denial is very rarely a solution. .

lawyerliz wrote on Sun, 2/20/2011 - 7:34 am (in reply to...) TagsOf course. In the past I worked for managers who never actually did any work ever, even when they showed up.

But he works very hard at work.

traderwalt wrote on Sun, 2/20/2011 - 7:40 am Tags"The bottom line is we're broke,"

A gentle reminder. We have two wars that we aren't paying for and have just given the wealthy a big tax cut and businesses all sorts of tax cuts and subsidies. This is why we appear to be "broke". Why do Republicans hate working Americans so?




A gentle reminder. We have two wars that we aren't paying for and have just given the wealthy a big tax cut and businesses all sorts of tax cuts and subsidies. This is why we appear to be "broke".

I think we really are broke, but, yes, all the people who claim we need to cut spending never seem to acknowledge that a large part of the deficit results from the lack of tax revenue, just as a large part of the debt results from the policies of the past decade, including two cost-free wars and ten years of the lowest income tax rates in a very long time.


straderwalt wrote:

This is why we appear to be "broke". Why do Republicans hate working Americans so?

Let us not also forget the sucking black hole going back more than a decade of these business tax 'breaks' along with corporate 'evasion' of taxes overseas and the wealthiest whose funds are also safely hidden away. I love the talk of 'fiscal responsibility' in the face of these well know facts. Responsibility extends only to their self-interest no matter the law or its intent.

Also appreciated is those states who claimed 'fiscal' conservatism are in the same trouble, just as deep, as those states the politically driven enjoy using as a tool for their ideological arguments. .

[Feb 21, 2011] Economist's View The Unrest in Wisconsin

Larry Siginor:

Gail Collins educates us about the Wisconsin political hierarchy:

"Wisconsin’s Democratic state senators went into hiding to deprive the Republican majority of the quorum they need to pass Walker’s agenda. The Senate majority leader, Scott Fitzgerald — who happens to be the brother of the Assembly speaker, Jeff Fitzgerald — believes the governor is absolutely right about the need for draconian measures to cut spending in this crisis. So he’s been sending state troopers out to look for the missing Democrats.

The troopers are under the direction of the new chief of the state patrol, Stephen Fitzgerald. He is the 68-year-old father of Jeff and Scott and was appointed to the $105,678 post this month by Governor Walker."


Frankly, I hope Walker is successful. I hope all these virulent libertarians achieve their wildest dreams. The majority of Americans support them, so why should I care if they get screwed?

[Feb 20, 2011] Sector Rotation and the Stock Market Cycle

Here is another one of our favorite charts, courtesy of Jim Stack and Investech Research. It shows how leadership shifts over three stages of a Bull run:>

Stages of Sector Rotation

• Stage I: The transition from bear market to bull. Cyclical sectors — Financials, Technology and Consumer Discretionary — outperform.

• Stage II: Mid-to-late bull market. Materials and Industrials outperform, as do Energy and Telecom stocks;

• Stage III: Nondiscretionary sectors — Health Care, Consumer Staples and Utilities — Recession proof products and services — are the most resilient as the bull begins to die.

Chief Tomahawk

2 to 1 in favor of the negatives…

Chile tightened? I understand China tightening is influential because of their status as the #2 global economy. But the inclusion of Chile tightening is a head scratcher… unless one believes in the butterfly effect?

From Wikipedia: “The butterfly effect is a metaphor that encapsulates the concept of sensitive dependence on initial conditions in chaos theory; namely, a small change at one place in a complex system can have large effects elsewhere.”

Bill Wilson

“Let’s get serious here, all the bears have capitulated, even Dr.Doom is bullish, that’s like Jeremy Siegel turning bearish

That’s really funny. I thought that sentiment was too bullish two months ago. Lately, I feel that we’ve gone beyond bullish optimism to an unshakable belief that the S&P 500 will travel in a straight line upwards from now to infinity.

[Feb 20, 2011] The Oil Drum Discussions about Energy and Our Future

So, if we believe BP, there will be a long flat production period: 20 years plateau or more. Pretty flat peak oil.

There is a significant reliance, among those who write on fossil fuels, on the statistics that BP annually compile on global energy production. For example it provides underlying information for Energy Export Databrowser, as well as many of the posts at The Oil Drum.

And so when BP just released their forecast for energy for the next 20 years (Energy Outlook 2030) it is worth having a look at to see what they predict. Bear in mind that this is only one company prediction, yet nevertheless it is an influential one.

The report is very briefly summarized in the introductory speech by Bob Dudley, the Chief Executive, who chose the following highlights:

[Feb 19, 2011] Intelligence Community Fears U.S. Manufacturing Decline


Richard McCormack reported in Manufacturing & Technology News on February 3 that the Director of National Intelligence has initiated preparation of a National Intelligence Estimate to assess the security implications of waning manufacturing activity in America. National Intelligence Estimates are the most authoritative analyses prepared by the intelligence community, definitive interagency products typically reserved for the most serious threats. So the fact that the nation’s top intelligence official thinks a National Intelligence Estimate is needed for manufacturing isn’t a good sign. It suggests that America’s industrial decline is approaching the status of a crisis.

The National Intelligence Estimate being managed by senior intelligence official Lawrence Gershwin will be looking at much more than the military industrial base, because it is supposed to capture all of the adverse security consequences arising from declining manufacturing activity. Take the case of steel. The year before China joined the WTO, the United States and China each produced about 100 million tons of crude steel. But once China was in the WTO, its steel output rose rapidly while U.S. production drifted downward. Last year, China produced eleven times as much steel as America (880 million tons versus 81 million). The huge size of the Chinese industry now makes it a dominant force in both the global steel market and the market for production inputs such as iron ore and metallurgical coal. Few U.S. producers can compete with China’s state-supported producers, and as a result some key products like the “rebar” used to reinforce concrete are no longer produced at all in America.

[Feb 19, 2011] Empire at the End of Decadence - Readers' Comments -


The working classes, the poor, the marginal, and the dispossessed are used to taking the back of the hand from politicians; and these groups, already well-versed in privation, will handle with their usual stoicism getting the shaft from the current mannequins striking their dramatic poses in Washington. The middle class, though, will take it less well, particularly those who are scrambling, out of work, facing foreclosure, and whose fortunes are otherwise sinking toward the status of the generally despised poor. The middle class, what's left of it, will whine and whine as they look for someone, anyone, to blame as the reality dawns that not only are they no longer "middle" anything, they are the new poor. Then, come election season, our newly poor will nevertheless vote for the same nitwits that loathe them for the obvious immorality of their failures and favor the rich for the plain Godliness of their successes.

clem healy

"Republicans have even submitted a draconian budget that would make deep cuts … that would prove devastating to the poor and working class." Don't blame the Republicans in the House. The American electorate voted them into office. Hopefully, this will be a lesson learned; don't vote in anger, don't simply vote to demonstrate displeasure with the incumbents. I do not believe the voters really wanted to back the "Draconian" measures being put forth by the House majority, but the voters squandered their voting privileges away out of anger-and now others, the less fortunate, will have to pay. I truly do not think that the voters were in favor of "so be it" attitude expressed so heartlessly by John Boehner, but the best we can hope for is that the voters will remember it at the polls in 2012.

Marie Burns

Every budget is a political document, and the House budget -- and many of its 129 amendments -- is a design to defeat the President & Democrats in 2012. By cutting or defunding programs that save money, like the healthcare law, or that help working people, like educational programs and social services, or that promote job creation, like infrastructure improvements -- Republicans hope to so weaken the nation that voters will blame the President.

Hey, it worked for them in 2010. It might just work in 2012. So what if the country further declines? It's all for a good cause -- the election of Republicans.

If the Congress were serious about cutting wasteful spending, they would surgically defund programs that support our shameful war in Afghanistan. Our military budget is not only the largest in the world, it represents 46.5 percent of ALL OF THE WORLD's military spending. We are not just killing soldiers and Afghans, we're killing our own retirements and our children's futures with our out-of-control military spending.

For you bellicose, originalist tea partiers, let me end on a note from the father of our Constitution:

"Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes ... known instruments for bringing the many under the domination of the few.... No nation could preserve its freedom in the midst of continual warfare." -- James Madison, 1795

The Constant Weader at

Thure Gustafson

Our inability to look at ourselves in any dispassionate way, to honestly evaluate our current situation and make realistic plans for the future...How do you change a culture where "positive thinking" is the norm? Regan ushered in a era of denial and rosy thinking and he is considered practically a saint by much of America--even a democratic president feels the need to reference him reverently. No, it's going to take something pretty bad for us to face our real selves in the mirror.

Math professor

As someone who travels a lot, I can attest from first-hand experience: Australia and Canada are truly great and civilized nations and I am not at all surprised they are at the very top of Mr. Blow's ranking. Austria, Germany and the Netherlans are also fantastic countries (each with its own unique quirks some of which I don't care for) that are well deserving of their high ranking on the list.

What I believe all these nations I mention possess, and the U.S. doesn't, is a distinct sense of community, civic pride and mutual responsibility. Americans whine all the time about their petty little individual rights. While these things are important and have their place, such selfish thinking and utter lack of the simplest feelings of solidarity with one's fellow man is the cause of much of America's problems today. This selfishness is manifested in every aspect of the public debate:

No no no, me me me, it's all about me and what I want now and nobody will tell me what to do or how to live or ask me to shoulder any of the burden of making the country a better place to live. This is America today. But it doesn't have to be this way. Just ask an Australian.

[Feb 19, 2011] Chinese Exporters Going Down, Western Importers Ambushed Winter (Economic and Market) Watch

At the same time, the Chinese export sector scrambled to try and save its labor force with hikes of 20-30% in wages and benefits [Reuters]. Reportedly, this has had limited success, which is a moot point anyway if western buyers fail to cover these increased costs. China has a new labor law and labor unions now have the upper hand. From

Increasing militancy over labor conditions and terms by migrant workers in China is having a serious impact on South China-based businesses, as many migrant workers are refusing to return from the Chinese New Year vacation unless their demands are met. With workers becoming increasingly aware of their rights under the Labor Law, many are resorting to strong-arm tactics to “persuade” factory owners to give them more money. The situation is often exacerbated by grass roots labor union officials, who also stand to benefit via larger payments into the labor funds at their disposal if companies pay higher wages. Increasing China labor costs and worker demands are making once profitable businesses lose money and there is virtually no leeway for labor-intensive manufacturing to survive under such circumstances.

In addition to intense labor pressures, Chinese exporters have been completely crushed by the massive input goods hyperinflation supposedly created by Chinese “demand” and “growth.” One of the more revealing quotes about this “demand” came from Sharon Johnson of Penson Futures on the latest big spike in cotton: “I cannot say this clearly enough…this is not mill buying, mills cannot buy at these prices.

[Feb 19, 2011] Different Perspectives, But a Similar Picture

Financial Armageddon

And here's what Gonzalo Lira wrote (with a bit less British reserve) in "'We Owe How Much?': Waiting for The Big Splatter":

These defict numbers are huge. Huge. HUGE.

There's also the little issue of the debts that have already been racked up as a result of prior profligacy.

As of January 2011, the U.S. Treasury had $8.965 trillion in outstanding securities, plus an additional $5.166 trillion in “non-marketable” securities—that is, intra-government debts. The total outstanding debt of the U.S. Federal government is $14.131 trillion.

The U.S.’s gross domestic product in 2009 was $14.29 trillion.

So this current deficit is over 11.5% of 2009 GDP. Even if we take Office of Management and Budget (OMB) rosy predictions for 2010’s GDP, the deficit is still 10.9% of GDP.

As to the rolling debt? It’s just about 100% of GDP.

These are Third World numbers: Deficits that are in the double-digits vis à vis the gross domestic product—and total debts that equal tha GDP—are numbers that Argentina—Greece—Zambia gets:

These numbers aren’t supposed to happen to the good ol’ U.S. of A.!

Oh, but they are happening.

Coupled to those terrible numbers, the Federal Reserve is monetizing the Federal government’s debt—that is, printing money, in order to help the government pay its bills. There’s really no other way to look at it. As I wrote here (when the deficit was still projected at only $1.267 trillion), the Fed is monetizing 50% of the FY 2011 deficit, and buying up an additional 10% with excedents through QE-lite.

With the new numbers, that proportion of what the Fed is buying for FY 2011 is diminishing, to 47% of the deficit, of which 37.5% is outright monetization.

But this is like fiscal heroin: It’s clear to anyone that the Federal government cannot continue to function without the Federal Reserve’s ongoing purchases of Treasury bonds by way of Quantitative Easing 2. With the 10-year at 2.5% interest, there would simply be no demand for Treasury debt, if the Federal Reserve cut off the Federal government—and the Fed knows this.

So the Federal Reserve will have to continue monetizing the Federal government debt, with no end in sight—it really has no choice: If it doesn’t, interest rates will rise so high so fast, that the Federal government would simply go broke. So when QE-2 expires in June, it’ll be extended: Quietly, and without fuss.

Again, this is a Third World policy: Deficit funding that nakedly depends on the central bank printing up and buying close to half of the new issuance of debt.

And on top of everything, this budget deficit is for a budget that has yet to be passed! After all, the fiscal year 2011 budget has not been passed, the government operating since October 1, 2010, under continuing resolutions. The latest extension runs out on March 4—when presumably the budget has to be passed this time—for sure! . . . maybe.

No matter how you put it, one thing seems clear: this is not going to end well.

[Feb 19, 2011] Bernanke Blames the Global Financial Crisis on China

February 19, 2011 | naked capitalism


How long before the stock bubble pops? The hacks on Cnbc are sickening.


Yves, I think the emphasis on the Fed’s low interest rate policy post 2001 misses the structural sources of the crisis, and risks aligning your analysis with that of John Taylor (”things would have been fine if only they had followed my rule”).

In fact, it was the underlying structural weakness of business investment and the resulting jobless recovery that created the need for those low interest rates as the Fed desperately tried to avoid Japan-style deflation. Without low rates, the structural problems would have surfaced earlier, perhaps less spectacularly to be sure, but who knows. Bernanke is wrong, as you point out, to blame the savings glut–its really more of an investment shortage. This ties in nicely with your repeated and astute observation that net business saving (sectoral saving minus investment) swung positive before and now after the crisis. I hope you will take this as a friendly criticism.

John Emerson:

It really seems that the US is a failed state. The supposed technocrats at the Fed failed, and contrary to myth they aren’t neutral, but have a political agenda. It’s just an anti-democratic political agenda completely insulated from the voters.

The supposed economics profession and their supposed science failed. I don’t understand economics and for that reason cannot be part of the debate, but by observing it from the outside it seems to be all agenda, half fraud, and very little science.

The political system has failed. There aren’t 100 Congressmen whose lives would be worth saving in an emergency. The process s designed for graft and influence-peddling at the expense of both democracy and good government. (I’d be happy with one of the two, but we get neither).

The media have failed. There’s a whole counter-media explaining how the official media is worthless: in economics alone you have Dean Baker, Brad DeLong, Yves here, Mark Thoma, and as many others as you can name.

I just don’t see how this can continue. We’re finally now reaching the “sharpening the contradictions” phase, when people lose their homes and their livelihoods, and there are no positive political forces, but only the Teapartiers.

Fred Bethune:

” But how did the Chinese get all those dollars?”

That’s kind of obvious, isn’t it? They got them in exchange for consumer goods, mainly through places like Walmart. The forex exchange has to go through the chinese government. It keeps all the dollars and gives the manufacturers renminbi. If it spent the dollars in China AND gave the manufacturers renminbi that would obviously cause inflation, so they had to find somewhere outside the country to park the dollars. Treasuries and agencies are the natural choice.

“Because the kleptocratic psychopaths who “run” our “system” financially raped, sacked and looted the nation disemploying tens of millions of Americans just so their psycopathic cadres can elevate themselves from multi-millionaires to multi-multi-millionaires while they help China dump its big bag of plastic toxic crap onto us like a typhoon of shitt falling from the skies.”

I more or less agree. The main lever through which they did this was Rubin’s high dollar policy and complicity with allowing the Asian pegs. Overvalues USD is very good for Wall Street so they can snap up foreign factories on the cheap, and very bad for workers who lose their jobs. In a sense it is hypocritical for the US to chide China so much, given that Wall Street and the Treasury went along with the scheme quite willingly at first.


The main lever through which they did this was Rubin’s high dollar policy and complicity with allowing the Asian pegs. Overvalued USD is very good for Wall Street so they can snap up foreign factories on the cheap, and very bad for workers who lose their jobs. In a sense it is hypocritical for the US to chide China so much, given that Wall Street and the Treasury went along with the scheme quite willingly at first.

This was quit a feeding frenzy. During Asian financial crisis US corporations managed to buy quite a bit on cheap and with fleshly printed by Fed dollars. I remember Business Week cover depicting Uncle Sam with factories in the shopping basket. Talk about globalization served as a useful anesthesia for the assets grab.

Moreover at this point foreign corporations who previously put quite a bit of efforts (and money) to build a production base for themselves in the USA market, started moving from manufacturing in the USA to just distribution.

Essentially it was a Congress approved swap of the US manufacturing and infrastructure development for oversees manufacturing and infrastructure development in hopes that the US status as the only superpower and the owner of reserve currency (exorbitant privilege as De Gaulle used to call it) allows extraction of enough profits to sustain the USA domestic consumption. Typical imperial play.

steve from virginia:

Maybe it’s me but the disconnect seems obvious: the Chinese built a large currency reserve for whatever reasons and are castigated now for having lent some of it to us.

Now the multinationals have built large currency reserves for whatever reasons and are castigated for not lending at all.

Seems to me the reserve issue — while important — is subordinate to other structural matters such as productivity and ROI. F/X reserve is a problem for China but the problem behind that problem is demographic imbalances just like our real problem is increased efficiency of resource waste with diminishing returns.

To some degree Bernanke is right. I give him a lot of credit as a poker player with a handfuls of nothing who has managed to keep himself in the game with timely bluffs. He clearly understands that in the short term China must divest itself of its overload of dollars for China’s sake: recycling them within the Chinese underground economy is the #1 source of hyperinflation in China right now.

This means China must try harder to do what Krugman et al accused her of doing to cause the crisis in the first place: to repatriate dollars to the US and do so in ways that keeps them here. This must also be done to maintain dollar exchange rate stability.

What I can say about this is neither the US nor China are trying very hard to devise a way to do this. The backdrop is that the worth of the commodity dollar is different from the exchange value which is set by swapping dollars for oil. The dollar is a defacto hard currency backed by crude oil. This is and will be so as long as crude exporters accept dollars.

There is also a lower bound to dollar value! Nominal price of crude @ some level destroys both physical demand and crude oil nominal value increasing dollar worth @ the same time.

This currency bound makes Bernanke more or less irrelevant as millions of the world’s drivers make monetary policy just as they are not starting to make political waves.

America needs to come up with more goods the Chinese will buy besides automobiles. China needs to think outside the Treasury/GSE/Sovereign Wealth Fund box. Both need to embrace energy conservation because relative energy shortages are stripping capital value from all economies. China cannot waste enough fuel and do so on a large enough scale to rebalance the world’s economy.

Expecting them to do so is suicide. We are already in the middle of peak oil. Best we start behaving accordingly.


Zoellick: the #G20 needs to put food first. We’re reaching a danger point. Food Crisis – The World Bank

Benanke says don’t blame me I just print $ but this does not contribute to rising food and commodity prices


I wonder if China is able to print yuan and buy hard assets, in addition to all the dollars they need to spend? Maybe that is part of the reason the world is having so much inflation?

Some reason I think china has a much bigger ponzi sceme going on than the US. It has to be more than just spending the dollar surplus.



Chairman Bernanke has thrown you off your usual perspective of what caused the credit crisis.

Since the beginning of this blog, you have argued that had investors known what was going into these securities, they would not have bought them.

Since the beginning of this blog, you have written 100s of postings about what was going into (or in the case of mortgages not being transferred according to the pooling and servicing agreements, not going into) these securities.

Bernanke’s observation about China purchases US government backed securities is irrelevant to your thesis. Even with the Chinese artificially driving up the price of treasuries, had investors known what was going into these securities, they still would not have purchased them.

All Bernanke’s comment does is to show that the Chinese were actually very good investors. They followed Warren Buffett’s advice and stuck to investing in securities that they could understand.


“All Bernanke’s comment does is to show that the Chinese were actually very good investors.”

Yup. If China had gotten greedy, they woulda got blowed up along with everybody else.

But they didn’t get greedy. They stuck to their plan. And when the sh+t hit the fan in the fall of ‘08, China instantly reacted, and – domestically – stimulated, to the tune of many trillions, and an export nation that should have been crushed by a world-wide demand crisis came out it with a bulging $3 trillion foreign cash reserve and a growth rate — perpetually stuck? — at 10%.

Strategy and tactics — in that order. Too smart China.

RebelEconomist :

The problem I have long had ( ) with this analysis is that I would have expected that if the US current account deficit was driven by official reserves inflows, which were mostly invested in treasuries and agencies, spreads should have widened. As it was, as you say, they narrowed. This suggests to me that the process was driven by financial innovation in the US, which created new demand for spread product such as sub-prime mortgage debt by packaging them up as CDOs. Investors who had not previously been able to buy such lowly rated debt were now able to do so by effectively hiving off the first losses. The result was a housing and hence consumption boom in the US which drew in more imports from China, and which, given the Chinese exchange rate peg, forced the Chinese authorities to absorb more dollars. In short, the irresistible force of a financial innovation driven US consumption boom met the immovable object of the renminbi peg.

Yves Smith:

I thought it was implicit in the post. The Fed is still refusing to take responsibility for its huge mistakes……the biggest being thinking an unregulated financial system is a great idea and they could let inmates with state backstopping (the big banks with meaningful dealer operations, JPM and Citi alone were obvious risks before you even get to the fact that they weren’t willing to let investment banks fail post Lehman) get up to their eyeballs in risk.

I can’t recite all my past arguments in every post, each would wind up being chapter length. But perhaps I should have had the word “deregulation” somewhere in the piece, fair point. The fact that Bernanke mentions it en passant does not change the thrust of his argument. You need to ask yourself: why is he still taking about and writing about “savings glut” if the point is not to make it sound like a primary driver? You need to look at the emphasis in his speech and the underlying paper, how many paragraphs he spends on each topic. Even if he makes the right point (as in he can’t deny the role of deregulation), it comes off like a necessary caveat, not a central theme.

If he really believes that deregulation was the central problem, his behavior is not consistent with that. Why are he and his smart colleagues at the Fed not throwing most of their research weight into looking at that problem? (Admittedly, some of it comes from the fact that the place is lousy with monetary economists, so they prefer to study what is familiar to them).

Actually, like you, I read his paper. I really wanted to see how far he would go in blaming the “savings glut” and China for the financial crisis.

Like the Financial Crisis Inquiry Commission report, he never made the case for why the savings glut was the necessary and sufficient condition to explain the credit crisis or how its absence would have prevented the crisis.

Nowhere in the paper does he show that China stopped buying US government backed paper and the next day the credit crisis hit.

Given all that you have said, it is clear that even if there had not been this savings glut, there still would have been a credit crisis.

The necessary and sufficient condition for the credit crisis was regulators adopting the position that they no longer had to modernize and enforce financial regulations. Particularly those that applied to disclosure and making sure that investors had access to all the information they needed to make a fully informed investment decision.

On a slightly different topic, I hope you saw BoE Deputy Governor Paul Tucker’s comments about the “sense of shame” felt by central bankers and regulators for requiring tax payers to bailout the global banking system.


“The Fed is still refusing to take responsibility for its huge mistakes……the biggest being thinking an unregulated financial system is a great idea and they could let inmates with state backstopping (the big banks with meaningful dealer operations, JPM and Citi alone were obvious risks before you even get to the fact that they weren’t willing to let investment banks fail post Lehman) get up to their eyeballs in risk. “

That’s true and it’s important to remind that academic establishment served as the fifth column in the deregulation frenzy. This is one case when I think American suspicious attitude toward eggheads has serious fundamentals. But on the society level it looks to me more like moves in zugzwang, when no matter what course of actions you chose your position deteriorates. That does not mean that Greenspan was not a white collar criminal, but if we remember the history it was Prohibition that raised organized crime on a new level. So like Al Capone was the creature created by Prohibition, Greenspan was the creature of decline in manufacturing. I think that there are two bigger themes here then the Fed mistakes/blunders as gross as they were:

1. Many known empires experienced financization state after their zeniths (Spain, Dutch, Great Britain are notable examples). Have we seen the apex of American economic hegemony? Kevin Phillips in Wealth and Democracy makes a compelling case we did and that the United States mirrors many of the historical aspects of previous economic powers in decline. What is most startling, all of them experienced the phase in which dependence on financial institutions was at the top because of desperate attempts to replace declining manufacturing tax base. His comparison of 17th century Spanish, 18th century Dutch, 19th century British, and 20th century American economics is quite illuminating. Another interesting point that Mr. Phillips makes is that financization can be, and has been in the past, reversed. The cost is the empire.

2. This might be not a new crisis, but a new phase of the same crisis after long vacations caused by collapse of the USSR. I think most readers here does not understand the magnitude and consequences of this historical event. And the key driver in both phases of the crises was/is the rise of energy prices and arrival of peak oil which made the oil-based economic model of the USA and other developed nations less sustainable and espoused other economic weaknesses. This is the crucial difference between the current crisis and 1930th. The oil dependence of the current manufacturing base prevents its rebuilding on a new platform due to the the shire size of the base, as was the case with coal dominated GB and actually there is no any viable new energy source for replacing oil in transport. So it might be a semi-couscous decision to prolong the agony by trying to convert the USA into another Switzerland on the strength of reserve currency and global military position in a hope the technological progress will bail us out as it did in the past. That line of thinking is connected to the previous argument about empires. The key mechanism here is that when you cannot invest profitably in manufacturing the money automatically start flowing into finance, speculation and oversees. It takes two to tango and the Congress was an accomplice in this historic transformation. In other words the titans of finance have gained tremendous power with direct government assistance, and first of all the assistance of the Fed and SEC. Stock market became holy under Chairman Greenspan if I remember correctly. Shredding of manufacturing and rise of speculation and predatory finance naturally gave a rise to the plutocracy, or more correctly to the changes in the composition of the top 1%.

[Feb 18, 2011] naked capitalism

Independent Accountant:

The SEC hopeless. It wastes its time on trivia. It is controlled by Wall Street, as is the SDNY US attorney’s office. I’ve complained about this for 21 years. Really. As long as we have the revolving door, nothing will change.


The primary problem is not capitalism the ideology, nor is it profit maximization, looting, or any of those motivations for criminal behavior. It is the revolving door. If we could somehow close that door, there WOULD be investigations, indictments, prosecutions, convictions and vacations at one of America’s penal (or is it penile?) institutions.

Let me make the point in a relational way. You work hard. The work you do is complex, every bit as complex as the work being done by those you regulate. You see that they are crooks. They make ten times what you make, in part by being crooked. Are you inclined to be nice to them? Now, imagine that if you are nice to them, they might let you join the club, you could, IF you are REAL NICE, earn their salary. Its that second part that is the problem. Just as money is corrupting politics, it has also corrupted the bureaucracy. Close the damn revolving door. Congress: Are you listening?


The Revolving Door, the most advanced, most subtle form of corruption on earth. American capitalism’s gift to the world.

Peripheral Visionary:

...And Taibbi never asks one critical question: why is the regulator so quick to settle? The implied answer to the unasked question is because of a close relationship with Wall Street, but the reality is much more mundane: the regulator is badly understaffed, and simply does not have time for lengthy court cases. And it wouldn’t fit the anti-regulatory crusade (and make no mistake, pieces like Taibbi’s provide more ammunition for those who would like to get rid of the regulators than for those who would like to strengthen them).

But to Taibbi’s central question:

“Why Isn’t Wall Street in Jail?”

Simple answer, because cases on securities crimes are very difficult to make. He cites the case of the two Bear Stearns execs who were let off, and why were they let off? Because the jury thought they did not commit a crime, that’s why. Securities cases are very difficult to prosecute, and routinely end up in no conviction.

The simple fact is that working for Wall Street is not a crime, much as people like Taibbi seems to think it is. Making money is not a crime. Losing your client’s money is not a crime. Making money for yourself while losing your client’s money is not a crime. Accepting government bailouts is not a crime. Lying and misrepresentation can potentially be crimes, but well, have you seen the boilerplate disclosures on prospectuses? They may as well say, “and we are disclosing to you that we are going to do whatever we want, and we are telling you that right now so that you can’t drag us into court for misrepresentation, so don’t even think about it.”

The fundamental problem is a severe disconnect between what the internet crusaders of the world think is a crime and what is actually in the legal code. The people who work in the industry know what the law is, and how to stay out of court. Why do you think they pay those lawyers so much? The few cases that do go to court are very often in “gray areas” where the legal (if not morally right) thing to do is in question–that’s why so many of those cases fail in court. If you want to prevent what you see as a problem–Wall Street people making money while Main Street people lose it–then you’re going to need to change the law.

Ms Xeno:

Peripheral Visionary:

“If you want to prevent what you see as a problem–Wall Street people making money while Main Street people lose it–then you’re going to need to change the law.”

But what law? The law is a joke because doesn’t apply to banksters, only to the non-rich.

An important principle to keep in mind is that there are a lot more of us than there are of them. We’ve got the numbers. Will this ultimately come down to lynch mobs and vigilante justice? I don’t know but the more time that goes by without justice being done, the more likely it becomes that people will end up taking matters into their own hands.

Peripheral Visionary:

The law applies to everyone, but the central problem is that in the financial sphere, the law is based on disclosure, where in virtually every other aspect of business law, it is based on good faith, etc. That means that those in the financial sector can basically get away with anything, as long as it is disclosed–and nearly all the time, it is (have you seen the boilerplate?) We do not have the same luxury.

The central change that would radically reshape the financial sector would be to impose a clear burden of responsibility on financial counterparties, to not just disclose their interests, but to not act in a way that they know to be detrimental to others’ interests. That is a radical change, but it is possible (it is effectively the standard that investment advisors adhere to, but they are only a small sector within the financial industry).


PV, I think you make excellent points. However, being naive, I have a bit of a bone to pick – is there a difference between a customer, who pays a fee for services, and a counterparty? It is my view that regardless of the disclosures made in a prospective, if an entity charges a fee for services, that entity incurs a fiduciary responsibility to its customer.

That is, the fee implies a specific form of relationship, vendor-customer, while the term counterparty conjurs up images of the poker table, a peer, willing to assume the risks that other players may disguise or otherwise hide their real interests.

My own experience and the piles of blog entries I have read as regards this crisis suggest that my views on implied relationships are not supported by the law and established dicta. If that is so, our society is coarser than I wish to believe. Thank you for your comments, they are illuminating.

Peripheral Visionary:

steelhead23, you make some good points, but the line between a counterparty and a customer (or client) is not well-defined. Somebody buying a security from his regular broker is both that broker’s counterparty (for that transaction) and client.

However, the law is quite clear that fiduciary responsibility only applies in the narrow case of a registered investment advisor, which is defined as a financial manager who charges a fee based on assets under management, not a commission.

Brokers are not held to a fiduciary responsibility, nor are underwriters. There is a proposal under Dodd-Frank to add the fiduciary standard to brokers, but that decision has not yet been made. And even if that passes, that still leaves problems related to underwriting, market making, etc.


PV, given enough time and effort anything can be gamed, and since gaming the system is apparently the whole point of finance—as is clear from your post—then the only workable long term solution is to end all regulation and shutter the SEC. All it does now is provide cover for the lie that is “finance.” So, yes, you hit the nail on the head about what people should conclude from the Taibbi article.


Corruption of the democratic political system gave seignorage to the financial industry to loot the country by bubble blowing and now the SEC completes the process by officially offering “Stay Out of Jail Passes.” Change You can Believe In!


With no civilized legal system in charge, TPTB are reduced to gangsta rules...

Francois T:

The true measure of how little Obama and Congress care about this country (by that, I mean, the country as a whole, not just the country for elites only where they navigate daily) is very well captured at the end of Taibbi’s article.

But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy.

They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — [FT: That is, conditional to who you are, as opposed to the inherent merits of the claim] when the state simply gives up on the notion of justice [FT: This shall be Obama's legacy; not bad for a Constitutional Law professor, no?] — this whole American Dream thing recedes even further from reality.

[Feb 17, 2011] Bubble Talk Grantham Warns Of The Paradox Of Profit Margins - Intelligent Investing - Ideas from Forbes Investor Team - Forbes by John Reese

Feb 17, 2011 | Forbes

In the second half of his year-end letter, GMO’s Jeremy Grantham takes a look at numerous asset bubbles throughout history, warning investors to ignore bubbles at their own peril. Grantham’s GMO manages more than $100 billion in assets.

“Responding to the ebbs and flows of major cycles and saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk,” Grantham writes. “In comparison, waiting on the railroad tracks as the ‘Bubble Express’ comes barreling toward you is a very painful way to show your disdain for macro concepts and a blind devotion to your central skill of stock picking. The really major bubbles will wash away big slices of even the best Graham and Dodd portfolios.”

Grantham says that bubbles form because of a cycle in which investment managers, feeling the career risk in making bold moves, fall prey to “herding”. It also involves what he calls “double counting”. Profit margins, he says, are mean-reverting, meaning that at times when margins are high, investors should be willing to pay less per dollar of earnings. In reality, what often happens, he says, is that when margins are high, inflating earnings, investors pay more for each dollar of earnings.

“It is a classic fallacy of composition,” he says. “For an individual company, having an exceptional profit margin deserves a premium P/E against its competitors. But for the market as a whole, for which profit margins are beautifully mean reverting, it is exactly the reverse. This apparent paradox seems to fool the market persistently.”

Also necessary for a bubble to form: a generous money supply, Grantham adds.

Grantham also shows how bubbles — from the South Sea Stock Bubble of the early 1700s to the recent U.S. housing bubble — always go back to their original trend that was in place before the bubble formed.

To download a full copy of Grantham’s report, visit GMO’s Web site. (Free registration is required.)

[Feb 17, 2011] FX Concepts' John Taylor On The Equity Endgame- "Extension Of Equity And Economic Strength Beyond June Unlikely"

zero hedge

We had seen the financial wreckage and losses from the events of 2007 and 2008 as too severe to allow this growth cycle to continue. We were wrong — or at least 75% wrong.

What makes us still 25% right is that the next recession, coming sooner than most pundits think, will be precipitated without a significant increase in interest rates, which is totally different than any other post-war cycle.

Despite decent economic growth and extreme market optimism, this cycle is crippled as the banking and government issues supporting the monetary expansion necessary for GDP growth have either no capital base or no taxing ability and no further deficit spending power...

The strong commodity markets and continuing QE2 should keep the dollar under pressure into June, except possibly in Europe where the shorter cycles are arguing for a euro high in March.

As the Republican House of Representatives and the fiscal gridlock in Washington will keep Bernanke and Obama in check, an extension of equity and economic strength beyond June looks very unlikely.

[Feb 16, 2011] Obama's Revenue Estimates Are Either Fantasy Or Comedy


Is it any surprise? The guy that promise a "green economy", Guantanamo would close, we would pull out of Iraq his first year, that he was about "change". With a vice president who stated we would see 500,000 jobs created monthly.

Alaric the Goth:

If that's the change you all voted for, I think you need your money back.

[Feb 14, 2011] SF Fed What Is the New Normal Unemployment Rate

What a clowns...
Calculated Risk

An economic letter from Justin Weidner and John Williams at the SF Fed: What Is the New Normal Unemployment Rate?

... ... ...

Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate.
A second explanation is that the degree of mismatch between job seekers and potential employers has increased. The construction, finance, and real estate sectors have shrunk after the bursting of the housing bubble and the subsequent financial crisis. The skills of workers who used to be employed in those sectors may not be easily transferable to growing sectors such as education and health care ....
A third explanation involves the sizable increase in long-term unemployment over the past few years. Workers out of jobs for extended periods may experience higher rates of unemployment owing to deterioration of skills and weakening labor market attachment.
Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years.

... ... ...

EvilHenryPaulson :

also without looking for citations or reading beyond CR's excerpt at this time, it looks like the SF Fed ignored their own earlier work that dismissed 99wks as a significant explanation for the increase. over half sounds farcical. the only way they could arrive at the conclusion is if they abuse the statistic of those dropping out of the labour force and presuming its induced by individual choice/wealth effect. otherwise when economic conditions improved, then so would their conjured natural rate of unemployment .

...why people bother with the unemployment rate, i do not know even the federal reserve doesn't react to it, they just selectively attack wage income increases vs capital income increases .


I remember when a family could live in style on one wage.

I remember when a 6.7% natural rate of unemployment would have been political suicide.

I remember when this country actually made things.

That's the thing about change. If it occurs slowly enough, you won't even realize it has happened until it's over. .


Economists have cited a number of possible reasons why the natural rate of unemployment may have risen in recent years. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to as much as 99 weeks. Extended benefits reduce the hardship on unemployed workers and their families during this severe downturn. However, they may also reduce the incentive of the unemployed to seek and accept less desirable jobs, which in turn may raise the measured unemployment rate.

If they ain't seeking, they ain't "unemployed." Doesn't this suggest it is more likely that these guys are dropping out of the labor force? .

Comrade Alexei Mikhailovich:

Lights out manufacturing is structural, not cyclical.

Flattening of hierarchy due to IT automation is structural, not cyclical

sm_landlord :

speed racer wrote:

CalculatedRisk wrote: Construction has lost 29% of the pre-recession jobs.

That number seems very small.

Anyone who has even been at a construction site could explain that easily, at least in California.


This report is a joke right? Some sort of whacky Fed Valentine's Day joke? The Fed is clueless, evil, or a combination of both. .

memmel :

JP wrote:

On the other end of the spectrum, we were too busy to write the job description, and we kept growing. Now we're scrambling to hire

I've alway wondered about survivor bias in my friends case the company was already the biggest guy on the block so yeah I agree that they where simply trolling not really hiring. But given the nature of our downturn I think a lot of whats happening is survivor bias.

If you think about it for every company that goes out of business the remaining ones need to say increase their workforce by say 25% to take over the customer base. With some business's booming and high unemployment it seems that survivor bias is important to our current recovery indeed it may account for 90% --

Next I've wondered a lot about what the military industrial complex is up too and government in general. .


Hackman wrote:

full-on psychosis sets in, whichever occurs first

What happens when an entire country of optimists goes "full-on psychotic"? .

[Feb 14, 2011] Not Quite Overbought Yet, But . . .

February 14, 2011 | The Big Picture


John Hussman in his weekly piece talked about cyclically adjusted P.E.’s and future returns when the market trades at high multiples there of(future returns were usually low). We’re clearly at a high level, so the question is do you mean over-bought as a technical term that’s good for the next 15 minutes or are speaking six months or two years out?

On a seperate note, I continue to be worried about comidity price rises for two reasons.

1) Companies may not be able to pass the full price through which hurts margins

2) There’s been a small amount of stock-piling(wsj reports), where companies buy ahead of a price
increase locking in cheap supplies.

Both of the above do not bode well for future profits or stock prices.

carrottop Says:

BR, you’ve been too desperate for correction signs lately . All of the reasons based on chart porn

curbyourrisk Says:

Carrottop……are you serious? Fundamentals? This market has no fundamentals, just half truths, outright lies, and government support at every level. Don;t start talking about fundamentals. When the data sets are corrupted with lies a crap……fundamentals are no more.

bda_guy Says:

I have to agree with “curbyourrisk”. The more that I try to understand the valuations of a company according to their fundamentals, the more I see that the price is totally disconnected from their fundamentals. NFLX is a case in point. Currently, you can buy this at $245/share which is approx. 70x the company’s current EQUITY. I know that investors love a good high-tech growth story but this valuation is ridiculous!


At the peak on Oct. 9, 2007, the overbought indicator was around 60%, less than today’s level.

So it doesn’t HAVE to break out above the 65% line to put in a top.


The music is still placing people, so get up and dance. That’s what Chuck Prince would be doing right???


Markets can remain irrational longer than shorts can remain solvent. It’s irrelevant whether NFLX is overvalued. In its essence the equity market is about supply and demand. As long as there is demand for the stock at this level or above, it can still rise.

Sell side “research” and forward looking statements by corporate shills tell a fraction of what a good chart can.

I saw this happen in 2000 with CIEN, JDSU, JNPR, as well as the B2B stuff like VNTR, ARBA, and other tech trash. Wait for the trend break. See if a re-test of the break fails, and then it’s time to think about going short.

Remember, short the weak, go long the strong. The trend is your friend. About 40% of the performance of a stock can be attributed to the broader market, 40% to its sector, and 20% to its overall fundamentals. A company can be crap, but if its sector and the overall market are moving up, a rising tide tends to lift all boats. The reverse is true as well.

In the end, reversion to the mean wins, but you can make a lot more money riding the trends and momentum than adhering to a particular market bias.

As for the SPX, the 1360 range should provide pretty decent overhead resistance.


Cobradriver wrote:

How do you think I feel about my company???

There are 3 levels of management tho. The senior "leadership" gets perks AND the opportunity to screw the owners. Depends which kinda management you are as to how you "see" the company. I assume if your "hourly" didn't get a cut they were union (?); (if so) that means they know where they stand in the big picture of things. .


Now, I am off to a pulled pork sandwich

I've already arranged that with my wife for supper.

This unemployment rate is not only destructive to the economy, including government budgets, it is social acid. Monsters can rise up from the swamps of a society if it goes on for too long. I'm talking about politics.


Throw in free-cable and the monsters will never appear.

Good idea. Cable. .


[Feb 14, 2011] Former Sun CEO on Jobs- "We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia"

WSJ: When did you see Silicon Valley begin to recover from the recession, and how far along has it come?

Mr. McNealy: It's not a terribly job-filled recovery. Productivity gains continue to push the need to hire out.

I see a migration from the early days of the Valley. We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia and other places where there are lots of technical engineers who are willing to work at a more reasonable salary because they don't have to spend $3.5 million on a home and pay half of it to taxes.

I think every new transition has created less job opportunity as technology has become very leveraged. I don't think our education system, our regulations, our government policies have kept pace with the changes that technology is driving.

Maybe I'm sounding like an old guy, but [Silicon Valley] ain't what it used to be. I, for one, don't think this is the best place in the world to start a company.

[Feb 13, 2011] The full text of the veto message to Congress of July 10, 1832 from President Andrew Jackson which effectively terminated the charter of the Second Bank of the United States

Taken from the Yale University Law Library, this declaration of independence from a government-sponsored central bank by our first popularly elected president is among the great libertarian statements in American history. And notice that the Second Bank had foreign shareholders. Enjoy.

President Jackson's Veto Message Regarding the Bank of the United States

WASHINGTON, July 10, 1832.

To the Senate.

The bill "to modify and continue " the act entitled "An act to incorporate the subscribers to the Bank of the United States " was presented to me on the 4th July instant. Having considered it with that solemn regard to the principles of the Constitution which the day was calculated to inspire, and come to the conclusion that it ought not to become a law, I herewith return it to the Senate, in which it originated, with my objections.

A bank of the United States is in many respects convenient for the Government and useful to the people. Entertaining this opinion, and deeply impressed with the belief that some of the powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people, I felt it my duty at an early period of my Administration to call the attention of Congress to the practicability of organizing an institution combining all its advantages and obviating these objections. I sincerely regret that in the act before me I can perceive none of those modifications of the bank charter which are necessary, in my opinion, to make it compatible with justice, with sound policy, or with the Constitution of our country.

The present corporate body, denominated the president, directors, and company of the Bank of the United States, will have existed at the time this act is intended to take effect twenty years. It enjoys an exclusive privilege of banking under the authority of the General Government, a monopoly of its favor and support, and, as a necessary consequence, almost a monopoly of the foreign and domestic exchange. The powers, privileges, and favors bestowed upon it in the original charter, by increasing the value of the stock far above its par value, operated as a gratuity of many millions to the stockholders.

An apology may be found for the failure to guard against this result in the consideration that the effect of the original act of incorporation could not be certainly foreseen at the time of its passage. The act before me proposes another gratuity to the holders of the same stock, and in many cases to the same men, of at least seven millions more. This donation finds no apology in any uncertainty as to the effect of the act. On all hands it is conceded that its passage will increase at least so or 30 per cent more the market price of the stock, subject to the payment of the annuity of $200,000 per year secured by the act, thus adding in a moment one-fourth to its par value. It is not our own citizens only who are to receive the bounty of our Government. More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars. For these gratuities to foreigners and to some of our own opulent citizens the act secures no equivalent whatever. They are the certain gains of the present stockholders under the operation of this act, after making full allowance for the payment of the bonus.

Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people. It is due to them, therefore, if their Government sell monopolies and exclusive privileges, that they should at least exact for them as much as they are worth in open market. The value of the monopoly in this case may be correctly ascertained. The twenty-eight millions of stock would probably be at an advance of 50 per cent, and command in market at least $42,000,000, subject to the payment of the present bonus. The present value of the monopoly, therefore, is $17,000,000, and this the act proposes to sell for three millions, payable in fifteen annual installments of $200,000 each.

It is not conceivable how the present stockholders can have any claim to the special favor of the Government. The present corporation has enjoyed its monopoly during the period stipulated in the original contract. If we must have such a corporation, why should not the Government sell out the whole stock and thus secure to the people the full market value of the privileges granted? Why should not Congress create and sell twenty-eight millions of stock, incorporating the purchasers with all the powers and privileges secured in this act and putting the premium upon the sales into the Treasury?

But this act does not permit competition in the purchase of this monopoly. It seems to be predicated on the erroneous idea that the present stockholders have a prescriptive right not only to the favor but to the bounty of Government. It appears that more than a fourth part of the stock is held by foreigners and the residue is held by a few hundred of our own citizens, chiefly of the richest class. For their benefit does this act exclude the whole American people from competition in the purchase of this monopoly and dispose of it for many millions less than it is worth. This seems the less excusable because some of our citizens not now stockholders petitioned that the door of competition might be opened, and offered to take a charter on terms much more favorable to the Government and country.

But this proposition, although made by men whose aggregate wealth is believed to be equal to all the private stock in the existing bank, has been set aside, and the bounty of our Government is proposed to be again bestowed on the few who have been fortunate enough to secure the stock and at this moment wield the power of the existing institution. I can not perceive the justice or policy of this course. If our Government must sell monopolies, it would seem to be its duty to take nothing less than their full value, and if gratuities must be made once in fifteen or twenty years let them not be bestowed on the subjects of a foreign government nor upon a designated and favored class of men in our own country. It is but justice and good policy, as far as the nature of the case will admit, to confine our favors to our own fellow-citizens, and let each in his turn enjoy an opportunity to profit by our bounty. In the bearings of the act before me upon these points I find ample reasons why it should not become a law.

It has been urged as an argument in favor of rechartering the present bank that the calling in its loans will produce great embarrassment and distress. The time allowed to close its concerns is ample, and if it has been well managed its pressure will be light, and heavy only in case its management has been bad. If, therefore, it shall produce distress, the fault will be its own, and it would furnish a reason against renewing a power which has been so obviously abused. But will there ever be a time when this reason will be less powerful? To acknowledge its force is to admit that the bank ought to be perpetual, and as a consequence the present stockholders and those inheriting their rights as successors be established a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the Government.

The modifications of the existing charter proposed by this act are not such, in my view, as make it consistent with the rights of the States or the liberties of the people. The qualification of the right of the bank to hold real estate, the limitation of its power to establish branches, and the power reserved to Congress to forbid the circulation of small notes are restrictions comparatively of little value or importance. All the objectionable principles of the existing corporation, and most of its odious features, are retained without alleviation.

The fourth section provides " that the notes or bills of the said corporation, although the same be, on the faces thereof, respectively made payable at one place only, shall nevertheless be received by the said corporation at the bank or at any of the offices of discount and deposit thereof if tendered in liquidation or payment of any balance or balances due to said corporation or to such office of discount and deposit from any other incorporated bank." This provision secures to the State banks a legal privilege in the Bank of the United States which is withheld from all private citizens. If a State bank in Philadelphia owe the Bank of the United States and have notes issued by the St. Louis branch, it can pay the debt with those notes, but if a merchant, mechanic, or other private citizen be in like circumstances he can not by law pay his debt with those notes, but must sell them at a discount or send them to St. Louis to be cashed. This boon conceded to the State banks, though not unjust in itself, is most odious because it does not measure out equal justice to the high and the low, the rich and the poor. To the extent of its practical effect it is a bond of union among the banking establishments of the nation, erecting them into an interest separate from that of the people, and its necessary tendency is to unite the Bank of the United States and the State banks in any measure which may be thought conducive to their common interest.

The ninth section of the act recognizes principles of worse tendency than any provision of the present charter.

It enacts that " the cashier of the bank shall annually report to the Secretary of the Treasury the names of all stockholders who are not resident citizens of the United States, and on the application of the treasurer of any State shall make out and transmit to such treasurer a list of stockholders residing in or citizens of such State, with the amount of stock owned by each." Although this provision, taken in connection with a decision of the Supreme Court, surrenders, by its silence, the right of the States to tax the banking institutions created by this corporation under the name of branches throughout the Union, it is evidently intended to be construed as a concession of their right to tax that portion of the stock which may be held by their own citizens and residents. In this light, if the act becomes a law, it will be understood by the States, who will probably proceed to levy a tax equal to that paid upon the stock of banks incorporated by themselves. In some States that tax is now I per cent, either on the capital or on the shares, and that may be assumed as the amount which all citizen or resident stockholders would be taxed under the operation of this act. As it is only the stock held in the States and not that employed within them which would be subject to taxation, and as the names of foreign stockholders are not to be reported to the treasurers of the States, it is obvious that the stock held by them will be exempt from this burden. Their annual profits will therefore be I per cent more than the citizen stockholders, and as the annual dividends of the bank may be safely estimated at 7 per cent, the stock will be worth 10 or 15 per cent more to foreigners than to citizens of the United States. To appreciate the effects which this state of things will produce, we must take a brief review of the operations and present condition of the Bank of the United States.

By documents submitted to Congress at the present session it appears that on the 1st of January, 1832, of the twenty-eight millions of private stock in the corporation, $8,405,500 were held by foreigners, mostly of Great Britain. The amount of stock held in the nine Western and Southwestern States is $140,200, and in the four Southern States is $5,623,100, and in the Middle and Eastern States is about $13,522,000. The profits of the bank in 1831, as shown in a statement to Congress, were about $3,455,598; of this there accrued in the nine western States about $1,640,048; in the four Southern States about $352,507, and in the Middle and Eastern States about $1,463,041. As little stock is held in the West, it is obvious that the debt of the people in that section to the bank is principally a debt to the Eastern and foreign stockholders; that the interest they pay upon it is carried into the Eastern States and into Europe, and that it is a burden upon their industry and a drain of their currency, which no country can bear without inconvenience and occasional distress. To meet this burden and equalize the exchange operations of the bank, the amount of specie drawn from those States through its branches within the last two years, as shown by its official reports, was about $6,000,000. More than half a million of this amount does not stop in the Eastern States, but passes on to Europe to pay the dividends of the foreign stockholders. In the principle of taxation recognized by this act the Western States find no adequate compensation for this perpetual burden on their industry and drain of their currency. The branch bank at Mobile made last year $95,140, yet under the provisions of this act the State of Alabama can raise no revenue from these profitable operations, because not a share of the stock is held by any of her citizens. Mississippi and Missouri are in the same condition in relation to the branches at Natchez and St. Louis, and such, in a greater or less degree, is the condition of every Western State. The tendency of the plan of taxation which this act proposes will be to place the whole United States in the same relation to foreign countries which the Western States now bear to the Eastern. When by a tax on resident stockholders the stock of this bank is made worth 10 or 15 per cent more to foreigners than to residents, most of it will inevitably leave the country.

Thus will this provision in its practical effect deprive the Eastern as well as the Southern and Western States of the means of raising a revenue from the extension of business and great profits of this institution. It will make the American people debtors to aliens in nearly the whole amount due to this bank, and send across the Atlantic from two to five millions of specie every year to pay the bank dividends.

In another of its bearings this provision is fraught with danger. Of the twenty-five directors of this bank five are chosen by the Government and twenty by the citizen stockholders. From all voice in these elections the foreign stockholders are excluded by the charter. In proportion, therefore, as the stock is transferred to foreign holders the extent of suffrage in the choice of directors is curtailed. Already is almost a third of the stock in foreign hands and not represented in elections. It is constantly passing out of the country, and this act will accelerate its departure. The entire control of the institution would necessarily fall into the hands of a few citizen stockholders, and the ease with which the object would be accomplished would be a temptation to designing men to secure that control in their own hands by monopolizing the remaining stock. There is danger that a president and directors would then be able to elect themselves from year to year, and without responsibility or control manage the whole concerns of the bank during the existence of its charter. It is easy to conceive that great evils to our country and its institutions millet flow from such a concentration of power in the hands of a few men irresponsible to the people.

Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? The president of the bank has told us that most of the State banks exist by its forbearance. Should its influence become concentered, as it may under the operation of such an act as this, in the hands of a self-elected directory whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the purity of our elections in peace and for the independence of our country in war? Their power would be great whenever they might choose to exert it; but if this monopoly were regularly renewed every fifteen or twenty years on terms proposed by themselves, they might seldom in peace put forth their strength to influence elections or control the affairs of the nation. But if any private citizen or public functionary should interpose to curtail its powers or prevent a renewal of its privileges, it can not be doubted that he would be made to feel its influence.

Should the stock of the bank principally pass into the hands of the subjects of a foreign country, and we should unfortunately become involved in a war with that country, what would be our condition? Of the course which would be pursued by a bank almost wholly owned by the subjects of a foreign power, and managed by those whose interests, if not affections, would run in the same direction there can be no doubt. All its operations within would be in aid of the hostile fleets and armies without. Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence, it would be more formidable and dangerous than the naval and military power of the enemy.

If we must have a bank with private stockholders, every consideration of sound policy and every impulse of American feeling admonishes that it should be purely American. Its stockholders should be composed exclusively of our own citizens, who at least ought to be friendly to our Government and willing to support it in times of difficulty and danger. So abundant is domestic capital that competition in subscribing for the stock of local banks has recently led almost to riots. To a bank exclusively of American stockholders, possessing the powers and privileges granted by this act, subscriptions for $200,000,000 could be readily obtained. Instead of sending abroad the stock of the bank in which the Government must deposit its funds and on which it must rely to sustain its credit in times of emergency, it would rather seem to be expedient to prohibit its sale to aliens under penalty of absolute forfeiture.

It is maintained by the advocates of the bank that its constitutionality in all its features ought to be considered as settled by precedent and by the decision of the Supreme Court. To this conclusion I can not assent. Mere precedent is a dangerous source of authority, and should not be regarded as deciding questions of constitutional power except where the acquiescence of the people and the States can be considered as well settled. So far from this being the case on this subject, an argument against the bank might be based on precedent. One Congress, in 1791, decided in favor of a bank; another, in 1811, decided against it. One Congress, in 1815, decided against a bank; another, in 1816, decided in its favor. Prior to the present Congress, therefore, the precedents drawn from that source were equal. If we resort to the States, the expressions of legislative, judicial, and executive opinions against the bank have been probably to those in its favor as 4 to 1. There is nothing in precedent, therefore, which, if its authority were admitted, ought to weigh in favor of the act before me.

If the opinion of the Supreme Court covered the whole ground of this act, it ought not to control the coordinate authorities of this Government. The Congress, the Executive, and the Court must each for itself be guided by its own opinion of the Constitution. Each public officer who takes an oath to support the Constitution swears that he will support it as he understands it, and not as it is understood by others. It is as much the duty of the House of Representatives, of the Senate, and of the President to decide upon the constitutionality of any bill or resolution which may be presented to them for passage or approval as it is of the supreme judges when it may be brought before them for judicial decision. The opinion of the judges has no more authority over Congress than the opinion of Congress has over the judges, and on that point the President is independent of both. The authority of the Supreme Court must not, therefore, be permitted to control the Congress or the Executive when acting in their legislative capacities, but to have only such influence as the force of their reasoning may deserve.

But in the case relied upon the Supreme Court have not decided that all the features of this corporation are compatible with the Constitution. It is true that the court have said that the law incorporating the bank is a constitutional exercise of power by Congress; but taking into view the whole opinion of the court and the reasoning by which they have come to that conclusion, I understand them to have decided that inasmuch as a bank is an appropriate means for carrying into effect the enumerated powers of the General Government, therefore the law incorporating it is in accordance with that provision of the Constitution which declares that Congress shall have power " to make all laws which shall be necessary and proper for carrying those powers into execution. " Having satisfied themselves that the word "necessary" in the Constitution means needful," "requisite," "essential," "conducive to," and that "a bank" is a convenient, a useful, and essential instrument in the prosecution of the Government's "fiscal operations," they conclude that to "use one must be within the discretion of Congress " and that " the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution;" "but, " say they, "where the law is not prohibited and is really calculated to effect any of the objects intrusted to the Government, to undertake here to inquire into the degree of its necessity would be to pass the line which circumscribes the judicial department and to tread on legislative ground."

The principle here affirmed is that the "degree of its necessity," involving all the details of a banking institution, is a question exclusively for legislative consideration. A bank is constitutional, but it is the province of the Legislature to determine whether this or that particular power, privilege, or exemption is "necessary and proper" to enable the bank to discharge its duties to the Government, and from their decision there is no appeal to the courts of justice. Under the decision of the Supreme Court, therefore, it is the exclusive province of Congress and the President to decide whether the particular features of this act are necessary and proper in order to enable the bank to perform conveniently and efficiently the public duties assigned to it as a fiscal agent, and therefore constitutional, or unnecessary and improper, and therefore unconstitutional.

Without commenting on the general principle affirmed by the Supreme Court, let us examine the details of this act in accordance with the rule of legislative action which they have laid down. It will be found that many of the powers and privileges conferred on it can not be supposed necessary for the purpose for which it is proposed to be created, and are not, therefore, means necessary to attain the end in view, and consequently not justified by the Constitution.

The original act of incorporation, section 2I, enacts "that no other bank shall be established by any future law of the United States during the continuance of the corporation hereby created, for which the faith of the United States is hereby pledged: Provided, Congress may renew existing charters for banks within the District of Columbia not increasing the capital thereof, and may also establish any other bank or banks in said District with capitals not exceeding in the whole $6,000,000 if they shall deem it expedient." This provision is continued in force by the act before me fifteen years from the ad of March, 1836.

If Congress possessed the power to establish one bank, they had power to establish more than one if in their opinion two or more banks had been " necessary " to facilitate the execution of the powers delegated to them in the Constitution. If they possessed the power to establish a second bank, it was a power derived from the Constitution to be exercised from time to time, and at any time when the interests of the country or the emergencies of the Government might make it expedient. It was possessed by one Congress as well as another, and by all Congresses alike, and alike at every session. But the Congress of 1816 have taken it away from their successors for twenty years, and the Congress of 1832 proposes to abolish it for fifteen years more. It can not be "necessary" or "proper" for Congress to barter away or divest themselves of any of the powers-vested in them by the Constitution to be exercised for the public good. It is not " necessary " to the efficiency of the bank, nor is it "proper'' in relation to themselves and their successors. They may properly use the discretion vested in them, but they may not limit the discretion of their successors. This restriction on themselves and grant of a monopoly to the bank is therefore unconstitutional.

In another point of view this provision is a palpable attempt to amend the Constitution by an act of legislation. The Constitution declares that "the Congress shall have power to exercise exclusive legislation in all cases whatsoever" over the District of Columbia. Its constitutional power, therefore, to establish banks in the District of Columbia and increase their capital at will is unlimited and uncontrollable by any other power than that which gave authority to the Constitution. Yet this act declares that Congress shall not increase the capital of existing banks, nor create other banks with capitals exceeding in the whole $6,000,000. The Constitution declares that Congress shall have power to exercise exclusive legislation over this District "in all cases whatsoever," and this act declares they shall not. Which is the supreme law of the land? This provision can not be "necessary" or "proper" or constitutional unless the absurdity be admitted that whenever it be "necessary and proper " in the opinion of Congress they have a right to barter away one portion of the powers vested in them by the Constitution as a means of executing the rest.

On two subjects only does the Constitution recognize in Congress the power to grant exclusive privileges or monopolies. It declares that "Congress shall have power to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Out of this express delegation of power have grown our laws of patents and copyrights. As the Constitution expressly delegates to Congress the power to grant exclusive privileges in these cases as the means of executing the substantive power " to promote the progress of science and useful arts," it is consistent with the fair rules of construction to conclude that such a power was not intended to be granted as a means of accomplishing any other end. On every other subject which comes within the scope of Congressional power there is an ever-living discretion in the use of proper means, which can not be restricted or abolished without an amendment of the Constitution. Every act of Congress, therefore, which attempts by grants of monopolies or sale of exclusive privileges for a limited time, or a time without limit, to restrict or extinguish its own discretion in the choice of means to execute its delegated powers is equivalent to a legislative amendment of the Constitution, and palpably unconstitutional.

This act authorizes and encourages transfers of its stock to foreigners and grants them an exemption from all State and national taxation. So far from being "necessary and proper" that the bank should possess this power to make it a safe and efficient agent of the Government in its fiscal operations, it is calculated to convert the Bank of the United States into a foreign bank, to impoverish our people in time of peace, to disseminate a foreign influence through every section of the Republic, and in war to endanger our independence.

The several States reserved the power at the formation of the Constitution to regulate and control titles and transfers of real property, and most, if not all, of them have laws disqualifying aliens from acquiring or holding lands within their limits. But this act, in disregard of the undoubted right of the States to prescribe such disqualifications, gives to aliens stockholders in this bank an interest and title, as members of the corporation, to all the real property it may acquire within any of the States of this Union. This privilege granted to aliens is not "necessary" to enable the bank to perform its public duties, nor in any sense "proper," because it is vitally subversive of the rights of the States.

The Government of the United States have no constitutional power to purchase lands within the States except "for the erection of forts, magazines, arsenals, dockyards, and other needful buildings," and even for these objects only "by the consent of the legislature of the State in which the same shall be." By making themselves stockholders in the bank and granting to the corporation the power to purchase lands for other purposes they assume a power not granted in the Constitution and grant to others what they do not themselves possess. It is not necessary to the receiving, safe-keeping, or transmission of the funds of the Government that the bank should possess this power, and it is not proper that Congress should thus enlarge the powers delegated to them in the Constitution.

The old Bank of the United States possessed a capital of only $11,000,000, which was found fully sufficient to enable it with dispatch and safety to perform all the functions required of it by the Government. The capital of the present bank is $35,000,000-at least twenty-four more than experience has proved to be necessary to enable a bank to perform its public functions. The public debt which existed during the period of the old bank and on the establishment of the new has been nearly paid off, and our revenue will soon be reduced. This increase of capital is therefore not for public but for private purposes.

The Government is the only "proper" judge where its agents should reside and keep their offices, because it best knows where their presence will be "necessary." It can not, therefore, be "necessary" or "proper" to authorize the bank to locate branches where it pleases to perform the public service, without consulting the Government, and contrary to its will. The principle laid down by the Supreme Court concedes that Congress can not establish a bank for purposes of private speculation and gain, but only as a means of executing the delegated powers of the General Government. By the same principle a branch bank can not constitutionally be established for other than public purposes. The power which this act gives to establish two branches in any State, without the injunction or request of the Government and for other than public purposes, is not "necessary" to the due execution of the powers delegated to Congress.

The bonus which is exacted from the bank is a confession upon the face of the act that the powers granted by it are greater than are "necessary" to its character of a fiscal agent. The Government does not tax its officers and agents for the privilege of serving it. The bonus of a million and a half required by the original charter and that of three millions proposed by this act are not exacted for the privilege of giving "the necessary facilities for transferring the public funds from place to place within the United States or the Territories thereof, and for distributing the same in payment of the public creditors without charging commission or claiming allowance on account of the difference of exchange," as required by the act of incorporation, but for something more beneficial to the stockholders. The original act declares that it (the bonus) is granted " in consideration of the exclusive privileges and benefits conferred by this act upon the said bank, " and the act before me declares it to be "in consideration of the exclusive benefits and privileges continued by this act to the said corporation for fifteen years, as aforesaid." It is therefore for "exclusive privileges and benefits" conferred for their own use and emolument, and not for the advantage of the Government, that a bonus is exacted. These surplus powers for which the bank is required to pay can not surely be "necessary" to make it the fiscal agent of the Treasury. If they were, the exaction of a bonus for them would not be " proper."

It is maintained by some that the bank is a means of executing the constitutional power "to coin money and regulate the value thereof." Congress have established a mint to coin money and passed laws to regulate the value thereof. The money so coined, with its value so regulated, and such foreign coins as Congress may adopt are the only currency known to the Constitution. But if they have other power to regulate the currency, it was conferred to be exercised by themselves, and not to be transferred to a corporation. If the bank be established for that purpose, with a charter unalterable without its consent, Congress have parted with their power for a term of years, during which the Constitution is a dead letter. It is neither necessary nor proper to transfer its legislative power to such a bank, and therefore unconstitutional.

By its silence, considered in connection with the decision of the Supreme Court in the case of McCulloch against the State of Maryland, this act takes from the States the power to tax a portion of the banking business carried on within their limits, in subversion of one of the strongest barriers which secured them against Federal encroachments. Banking, like farming, manufacturing, or any other occupation or profession, is a business, the right to follow which is not originally derived from the laws. Every citizen and every company of citizens in all of our States possessed the right until the State legislatures deemed it good policy to prohibit private banking by law. If the prohibitory State laws were now repealed, every citizen would again possess the right. The State banks are a qualified restoration of the right which has been taken away by the laws against banking, guarded by such provisions and limitations as in the opinion of the State legislatures the public interest requires. These corporations, unless there be an exemption in their charter, are, like private bankers and banking companies, subject to State taxation. The manner in which these taxes shall be laid depends wholly on legislative discretion. It may be upon the bank, upon the stock, upon the profits, or in any other mode which the sovereign power shall will.

Upon the formation of the Constitution the States guarded their taxing power with peculiar jealousy. They surrendered it only as it regards imports and exports. In relation to every other object within their jurisdiction, whether persons, property, business, or professions, it was secured in as ample a manner as it was before possessed. All persons, though United States officers, are liable to a poll tax by the States within which they reside. The lands of the United States are liable to the usual land tax, except in the new States, from whom agreements that they will not tax unsold lands are exacted when they are admitted into the Union. Horses, wagons, any beasts or vehicles, tools, or property belonging to private citizens, though employed in the service of the United States, are subject to State taxation. Every private business, whether carried on by an officer of the General Government or not, whether it be mixed with public concerns or not, even if it be carried on by the Government of the United States itself, separately or in partnership, falls within the scope of the taxing power of the State. Nothing comes more fully within it than banks and the business of banking, by whomsoever instituted and carried on. Over this whole subject-matter it is just as absolute, unlimited, and uncontrollable as if the Constitution had never been adopted, because in the formation of that instrument it was reserved without qualification.

The principle is conceded that the States can not rightfully tax the operations of the General Government. They can not tax the money of the Government deposited in the State banks, nor the agency of those banks in remitting it; but will any man maintain that their mere selection to perform this public service for the General Government would exempt the State banks and their ordinary business from State taxation? Had the United States, instead of establishing a bank at Philadelphia, employed a private banker to keep and transmit their funds, would it have deprived Pennsylvania of the right to tax his bank and his usual banking operations? It will not be pretended. Upon what principal, then, are the banking establishments of the Bank of the United States and their usual banking operations to be exempted from taxation ? It is not their public agency or the deposits of the Government which the States claim a right to tax, but their banks and their banking powers, instituted and exercised within State jurisdiction for their private emolument-those powers and privileges for which they pay a bonus, and which the States tax in their own banks. The exercise of these powers within a State, no matter by whom or under what authority, whether by private citizens in their original right, by corporate bodies created by the States, by foreigners or the agents of foreign governments located within their limits, forms a legitimate object of State taxation. From this and like sources, from the persons, property, and business that are found residing, located, or carried on under their jurisdiction, must the States, since the surrender of their right to raise a revenue from imports and exports, draw all the money necessary for the support of their governments and the maintenance of their independence. There is no more appropriate subject of taxation than banks, banking, and bank stocks, and none to which the States ought more pertinaciously to cling.

It can not be necessary to the character of the bank as a fiscal agent of the Government that its private business should be exempted from that taxation to which all the State banks are liable, nor can I conceive it "proper" that the substantive and most essential powers reserved by the States shall be thus attacked and annihilated as a means of executing the powers delegated to the General Government. It may be safely assumed that none of those sages who had an agency in forming or adopting our Constitution ever imagined that any portion of the taxing power of the States not prohibited to them nor delegated to Congress was to be swept away and annihilated as a means of executing certain powers delegated to Congress.

If our power over means is so absolute that the Supreme Court will not call in question the constitutionality of an act of Congress the subject of which "is not prohibited, and is really calculated to effect any of the objects intrusted to the Government," although, as in the case before me, it takes away powers expressly granted to Congress and rights scrupulously reserved to the States, it becomes us to proceed in our legislation with the utmost caution. Though not directly, our own powers and the rights of the States may be indirectly legislated away in the use of means to execute substantive powers. We may not enact that Congress shall not have the power of exclusive legislation over the District of Columbia, but we may pledge the faith of the United States that as a means of executing other powers it shall not be exercised for twenty years or forever. We may not pass an act prohibiting the States to tax the banking business carried on within their limits, but we may, as a means of executing our powers over other objects, place that business in the hands of our agents and then declare it exempt from State taxation in their hands. Thus may our own powers and the rights of the States, which we can not directly curtail or invade, be frittered away and extinguished in the use of means employed by us to execute other powers. That a bank of the United States, competent to all the duties which may be required by the Government, might be so organized as not to infringe on our own delegated powers or the reserved rights of the States I do not entertain a doubt. Had the Executive been called upon to furnish the project of such an institution, the duty would have been cheerfully performed. In the absence of such a call it was obviously proper that he should confine himself to pointing out those prominent features in the act presented which in his opinion make it incompatible with the Constitution and sound policy. A general discussion will now take place, eliciting new light and settling important principles; and a new Congress, elected in the midst of such discussion, and furnishing an equal representation of the people according to the last census, will bear to the Capitol the verdict of public opinion, and, I doubt not, bring this important question to a satisfactory result.

Under such circumstances the bank comes forward and asks a renewal of its charter for a term of fifteen years upon conditions which not only operate as a gratuity to the stockholders of many millions of dollars, but will sanction any abuses and legalize any encroachments.

Suspicions are entertained and charges are made of gross abuse and violation of its charter. An investigation unwillingly conceded and so restricted in time as necessarily to make it incomplete and unsatisfactory discloses enough to excite suspicion and alarm. In the practices of the principal bank partially unveiled, in the absence of important witnesses, and in numerous charges confidently made and as yet wholly uninvestigated there was enough to induce a majority of the committee of investigation-a committee which was selected from the most able and honorable members of the House of Representatives-to recommend a suspension of further action upon the bill and a prosecution of the inquiry. As the charter had yet four years to run, and as a renewal now was not necessary to the successful prosecution of its business, it was to have been expected that the bank itself, conscious of its purity and proud of its character, would have withdrawn its application for the present, and demanded the severest scrutiny into all its transactions. In their declining to do so there seems to be an additional reason why the functionaries of the Government should proceed with less haste and more caution in the rene\val of their monopoly.

The bank is professedly established as an agent of the executive branch of the Government, and its constitutionality is maintained on that ground. Neither upon the propriety of present action nor upon the provisions of this act was the Executive consulted. It has had no opportunity to say that it neither needs nor wants an agent clothed with such powers and favored by such exemptions. There is nothing in its legitimate functions which makes it necessary or proper. Whatever interest or influence, whether public or private, has given birth to this act, it can not be found either in the wishes or necessities of the executive department, by which present action is deemed premature, and the powers conferred upon its agent not only unnecessary, but dangerous to the Government and country.

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society-the farmers, mechanics, and laborers-who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.

Nor is our Government to be maintained or our Union preserved by invasions of the rights and powers of the several States. In thus attempting to make our General Government strong we make it weak. Its true strength consists in leaving individuals and States as much as possible to themselves-in making itself felt, not in its power, but in its beneficence; not in its control, but in its protection; not in binding the States more closely to the center, but leaving each to move unobstructed in its proper orbit.

Experience should teach us wisdom. Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress. By attempting to gratify their desires we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of the Revolution and the fathers of our Union. If we can not at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy.

I have now done my duty to my country. If sustained by my fellow citizens, I shall be grateful and happy; if not, I shall find in the motives which impel me ample grounds for contentment and peace. In the difficulties which surround us and the dangers which threaten our institutions there is cause for neither dismay nor alarm. For relief and deliverance let us firmly rely on that kind Providence which I am sure watches with peculiar care over the destinies of our Republic, and on the intelligence and wisdom of our countrymen. Through His abundant goodness and heir patriotic devotion our liberty and Union will be preserved.


[Feb 13, 2011] Why politics and investing don’t mix

February 12th, 2011 | The Big Picture


But Barry-

You left out a hugely important aspect of this whole cycle which is inflation/deflation.

Let’s say you invested $100K in 2003 and then cashed out in 2007 with $200K. Well – you paid 15% off the bat leaving you with $85K. But now everything costs more…MUCH more. Gas prices nearly doubled eating a good $1,200 out of that profit. Heating ate another $1,500. Food $1,100 etc.

So….who really ‘won’? Well – the rich dude of course. Because he can turn that $20 MILLION into fixed income and he really won’t care if inflation goes up will he? Nope. He doubled his ‘yield’.

Fast forward to today. Let’s say you turned $50K into $200K by playing both sides. Great. Now you cash out and eat ~$23K in taxes. Then you get to watch your home value decline once again, your cost of living go up sharply etc.

Unless a person’s net worth exceeds $10 million, they are essentially screwed when bubbles burst. And in a credit-driven system, they all must burst once debt levels become unserviceable which is why cheap money cannot work over the long haul. Money has to originate from the bottom up, not the top down.

Petey Wheatstraw:

Perception is a tricky thing. Does one WANT to believe that the illusionist’s trick is real, or does one cling to the rational understanding that a trick is being performed? Must one accept the illusion as reality in order to profit from it (more importantly, does the acceptance of the illusion lead to a real reward, and if so, what does the illusionist gain from his real and costly contribution supporting his illusion)? What about questioning the need/motive for a trick to be performed in the first place? Is one’s belief or need to believe in the illusion further strengthened by making a wager that the illusory is actually real?

Perception might warp our understanding of, and reaction to, reality, overtly or subliminally, but it cannot change the reality.

Never forget that someone is paying to see the illusion (and paying even more if they think acceptance of the illusion will return real gains), and someone else is making money, or will eventually reap a windfall, from it. Both cannot gain. Someone will be fleeced.

Fool me once, shame on you.

We have been fooled more than once. The reality is that being a customer in a gambling parlor is no way to make money. If you disagree, and you accept the huckster’s illusion that both the house and the mark make money in the end, keep on doubling down — even if you have to mortgage the farm to feed your perception and stay in the game.

P. T. Barnum had it all figured out.



As did Grete de Francesco, in his 1939 The Power of the Charlatan. A snippet: “The followers of the charlatan greedily absorbed his emotion-soakced verbiage, and most readily when he painted visions of the future.”


Great article, individual actors following biases (individual or mob-driven) is a key cause. However we also have pundits and demagogues that urge the mobs (“Buy Gold” or “Buy Stocks” are their refrains) which either feed, replace, or supplant their biases.

cognitive dissident:

February 12th, 2011 at 10:26 am You don’t pose an exact equivalence—liberals were right (the Bush tax cuts were budget-busting gifts to the wealthy) and conservatives were wrong (Obama isn’t a Kenyan Muslim socialist)—but you make an excellent point about cognitive biases.

FWIW, I don’t know any liberals who pulled out of the market because of Bush’s tax cuts, but I do know conservatives who did so due to fears about Obama’s economic program…


cognitive dissident

Ritholtz actually did pose an equivalence — but its not his fault that its not very flattering to the wingnuts.

It looks to these eyes that he stated the legitimate concerns of the left about the Bush tax cuts — concerns that were rational and well founded and turned out to be very prescient.

On the other hand, the concerns of the right — Obama the muslim/kenyan/socialist/destroyer of liberties/despoiler of the economy — were just so much more of that wing’s scare tactics and cheap populist appeal to the lowest common denominator.

As Stephen Colbert has said, Reality has a Liberals bias . . .

call me ahab:

BR- I think you posted this previously as I read the article a few days back-

also- here’s little ol’ Ahab’s knowledge learned over the past two years or so-

the men at the Fed Reserve are professional serial bubble blowers. We’re talking Real Pros! And regardless of a person’s personal disgust by their antics -- when they say they intend to inflate stock prices -- best to blind your eyes and plug your ears from that point forward and bet it all on black . . .

[Feb 12, 2011] Is this more like 2007 or 1998-When Will Global Imbalances Matter?

" Is this more like 2007 or more like 1998 with 2 more years of partying before another crash?No one knows for sure. Heck, most are not even aware of the question, oblivious to how overvalued this market is."

In Thursday's Breakfast with Dave, Dave Rosenberg asks the question Is this the time to be going long?

My question is a bit different, but this is what Rosenberg had to say.

Sorry, but that time has passed. But we will probably get another kick at the can because we are sure that the “event risk”, which caused so much turbulence and buying opportunities in 2010 will come around again in 2011. But this is one overextended U.S. stock market, that is for sure.

...please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

As in 2007, everyone thinks they can or will get out in time. Mathematically it's impossible. Moreover, dip buying is now so firmly entrenched (again), that few will recognize the turn when it happens.

[Feb 12, 2011] Is U.S. Economic Empire Breaking Up - Starting With Egypt

Seeking Alpha

It appears that despite President Obama’s talk of backing the Egyptian protestors, Washington is in actuality favoring the status quo in terms of the regime there. According to a story in The New York Times, Vice President Suleiman is now being backed by the US and several European governments as the man who can re-legitimize the Egyptian government.

Suleiman however, is hardly the protestors’ choice to lead the “revolution.” Having headed the hated Egyptian security services for a number of years, Suleiman is alleged to have been directly involved in torture, playing a key role in CIA associated extraordinary renditions and helping Israel to crack down on supply tunnels into Gaza.

Having backed Egypt’s autocratic regime for since 1950s, the current crisis is a test for whether America can continue to maintain friendly regimes in the Middle East, even as those leaders are highly unpopular with the people they govern. The concern for Washington is that oil producing countries in the region could overthrow their governments and install Islamist-leaning or even quasi-secular governments that would be hostile to Western interests in the region. With Bahrain scheduled to see massive protests beginning Feb 14th, the big fear is that the unrest could spread and topple the neighboring Saudi government. The Saudis are so unnerved by the current situation that they have this week threaten to bankroll Mubarak if the US fails to do so.

Because of the excessive debts built up in the US, the dollar’s credibility as a reserve currency is already under pressure. Were newly installed Middle Eastern governments to begin to reject the dollar as a unit of payment and demand payment for oil in gold, euros, yen or yuan, the resulting drop in the demand for the dollar could lead to the end of the dollar’s role as the world’s currency of choice.

A weak dollar could crash the US bond market and US power in the world would diminish accordingly. Without a strong market for US bonds, American military spending would have to be cut drastically. In that scenario, as the US’s military power waned and its ability to protect its client states diminished, the incentive for previously allied foreign governments to play along with US economic policies would decrease. There are certainly some parallels here with the breakup of the Soviet empire, in that a weakened economic system eventually led to client states wanting out of the union with the core power.

As always, Ox Mountain Financial advocates that investors employ a well balanced portfolio of both international and US investments. In the current uncertain environment, precious metals and oil may continue to do well.

Disclosure: I am long GLD, RJI, SLV.

bob adamson:

I suggest that “The Ox” presupposes that the US can and should control events in the Middle East and North Africa to an extent that is unrealistic. The US and its citizens will set themselves up for disappointment and misadventures if the assumption is made that the course of events in that region (or in most of the rest of the world for that matter) could really be controlled and determined by adroit US policy and policy execution. On the other hand, the US does retain the capacity to significantly influence events for the good through adroit actions on its part (or, conversely, make a shambles of things through ham handed policy and policy execution. During a few brief decades following WW II the US enjoyed a unique power in the world because of the economic, social and political devastation of that war for the other great powers; those days are past and, while the US retains great capacity to influence by example and assistance, it no longer has the capacity to impose settlements.

In judging the US Government responses to the Egyptian crisis we need to keep in mind that:
(a) The Tunisian and Egyptian crises were triggered by events that were quite independent of direct US involvement (i.e. While a case can be made that US enthusiastic support of the Mubarak regime in recent years may have delayed the modernization of the Egyptian economy and democratization of political life and US agricultural and monetary policies may have increased food prices in Tunisia, Egypt and elsewhere thereby increasing social tensions, these were not the specific sparks igniting the process of regime over through).
(b) The former regimes in Tunisia and Egypt were inherently unstable and it was only prudent that the US anticipate their eventual collapse by informally cultivating support for the values it wanted the successor regimes to evidence.
(c) Point (b) is especially relevant as regime change in Egypt would have a major impact throughout North Africa and the Middle East.
(d) While the US would and will have influence on the course of events throughout North Africa and the Middle East it is folly to think that it can control those events. It would, in fact, be counterproductive for the US to be seen as trying to prop up unpopular regimes or control who or what steps into the voids when former regimes fall.

The UK and France misjudged their interests, capacity and options in the lead-up to the Suez crisis of 1956 and the US happily now appears determined to avoid similar folly. Unfortunately for the appearance of the US Government in its day-to-day responses as these crises evolve, the twin imperative of encouraging a more democratic but non-fundamentalist outcome while avoiding the appearance of meddling in the domestic affairs of countries in the region can make the US Government look hesitant and irresolute but this is unavoidable to some extent.

While many will argue that the US’s role as the world’s superpower had to eventually end due to the sheer unsustainability of US debt levels, it was never apparent when that would happen or what catalysts would lead to it losing its economic empire. The overthrow of the Mubarak regime could go down in history as one such catalyst. There is no doubt that without the US as the world’s superpower, global power realignments could lead to several ugly wars breaking out. In the long run however, the debt-burdened US tax payer may be glad to be rid of the high personal and financial sacrifices involved in maintaining a global empire and the associated military presence that is required.

[Feb 11, 2011] The Fed, Emerging Markets and the Money Bubble - Seeking Alpha

Even I am surprised by how rapidly inflation pressure has risen in the U.S. over past few weeks. You don't see this in the official CPI. But if you go shopping, pay variable-rate utility, fill up gas, or read financial markets, there's plenty of evidence.

This must be the nightmare scenario for the Fed: inflation takes off before employment recovers enough to get off life support. But if they didn't see this coming, they have nobody but themselves to blame. Here's how I see it came to be:

USD being the reserve currency, U.S. monetary policy has broad and immediate global implications. This can be good and bad for the Fed. The good is that Fed can print much more than any other central bank before paying the same price in inflation, as a good portion of printed money will go abroad without domestic inflationary costs. The bad is that the international factor could make the effects tricky to predict.

Fed enjoyed the good part immensely for QE1 and the first few months of QE2. Then it got too good and backfired. The enormous and seemingly perpetual stimulus pushed inflation up around the world, mostly emerging markets and especially BRIC (China and India have their fair share of blame for their own inflation, but Fed's inflation export helped exacerbating the problem). But they wised up this time. With conspiracy-worthy uniformity and synchronicity, they all tightened up capital-control measures while trying to minimize interest-rate hiking. The result is all the hot money got squeezed out and fended off of emerging markets and tsunamied to the U.S.

What we're seeing in the past few weeks is a classical monetary inflation bubble. There's an enormous amount of non-real money in the system (QE1, QE2). There's not enough long-term investment opportunities (low capex by corporations). So the bulk of this free gift from Santa Fed goes into short-term, speculative markets. In 2010 we saw a series of mini-bubbles come and go: junk bonds, treasuries, munis. Now everything is in bubble phase except bonds despite mediocre earnings, mediocre macroeconomic prospect, and still dismal housing market.

Happy days are here again. Of course, such happy days invariably end in tears for most people. But that's for tomorrow, which nobody cares about today.


Bo, I wonder; has there ever been a Bond Market capitulation? Are we set up for one about now based upon today's price and yield movements? Something is not working out and your article today seems to wrap it up nicely - BUT, the question, what is it that is not working? And what is it that will now cause that capitulation? First it looked like Egypt might be a cause, Australia might be a cause, then the higher price of oil (related admittedly to Egypt), then the general commodity inflation bubble might be the cause, today the China rate hike could still cause it, YET, no capitulation? So, does it ever happen? Will it happen? Can it happen might be the most fundamental of questions? I do not know but I am asking?

Bo Peng

Many good questions, sorry I have no answer. The world is moving away from USD reserve currency. If the trend continues, the bond vigilantes will find a trigger to kill the treasuries and, by extension, most other bonds. There's still hope for redemption, I hope. But QE2 did not help.

[Feb 07, 2011] The Slow Recovery of Unemployment

Economist's View


Robert Reich has a forecast of his own :

"...Corporate profits cannot continue to rise on the basis of foreign sales (which are slowing as Europe adopts austerity and China raises interest rates), the purchases of the richest 10 percent of Americans (which are dependent on a rising stock market), and cost-cutting measures at home (which are necessarily limited).

Without a strong and broadly-based middle-class recovery, America’s big money economy will fall in on itself. A major stock market “correction” is a certainty."


Businesses try to cheat and get advantages even without resorting to illegal labor. Consider offshoring and permatemps. There are a lot of questionable labor practices going around, not all of them illegal.

That's not to say I condone under the table labor. But it's not "the" problem by fixing which the labor market will be restored to its glory.


"there's a good reason why I try to avoid forecasts. In the past, whenever I've tried to predict the path the economy would take, I've found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me."

exactly correct on many levels

if you want to remain a realist stay out of the forecasting business

peddle all the policy stuff you want but lay off the crystal ball act

"I am very worried that we are, for all intents and purposes, about to abandon the millions who are still unemployed. "

join the club skipper


Any profession whose job it is to "do something" carries an innate tendency toward self-justification. In medical terms this is calling a disease "self-limiting." The body heals itself. This kind of positive thinking heals the soul of the diagnostician, though not always the body of the patient.

Self-justifying or not, your position is the only humane one. And so is your putting the real problem in these mundane terms: "making it possible for their kids to get dental care...."

Croesus Watch Banker Pay Levitates to New Highs «

February 2, 2011 | naked capitalism


According to Barry Rithowitz: “There is nothing wrong with most of the compensation that is paid to Wall Street.” __________________

The word “most” is certainly debatable. Let’s start with the first straw man: the # of employees argument. You cite AIGs 116,000 employees, but almost none of them were big time financial dealers making outrageous bonuses. Nobody is going after some lucky insurance salesmen who manages to make 100k one year, or some IT guy with a few degrees getting 120K to set up the trading systems. We are talking about those in financial front office positions making incredibly large (often 7 figure) bonuses of dubious value. Of people making that kind of money its certainly debatable whether “most” of it is deserved. Veering away from AIG to wall street proper, I find a great volume of its business has low social value. I worked in derivatives, and I can tell you I don’t see how the growth of the derivatives market helps capital markets function better or helps raise funds for businesses. I’ve seen the garbage of the theoretical arguments for myself firsthand. For your assertion to be true most of the growth in Wall Street compensation would have to have come from bread and butter financial functions like IPOs and bond placements to raise capital for business to put to work, better financial research and guidance, and value positive investment banking services. Putting aside whether any of those things has gotten better (and I can make convincing arguments it hasn’t) most of the growth on Wall Street has come from more exotic financial products that I don’t see as valuable to society. Thus, such compensation is undeserved, even if there is no wrong acting on the part of participants ( in my time, I witnessed plenty of wrong acting, but leave that aside). Properly regulated so as to eliminate finance activities that can generate revenue, but are harmful to society, many on Wall Street would be out of a job, even relatively honest players. Thus, on can conclude that there is something wrong with most compensation on Wall Street, because the product its producing is not improving society. Its ok to value a consumer products value based on its sale price where the seller and buyer have very clear information and motives. I’m not here to question the pricing mechanism of capitalism across the board. However, financial markets are littered with asymmetric information and principal/agent problems that make use of the pricing mechanism as the sole determinate of the value of financial products questionable, and thus calls the outsized compensation of most of Wall Street into question.


I understand how difficult it is for him, after all he got rich off trading so he needs to justify it. I find morality arguments by people who took their Wall Street payout, kept the money, and now rail against injustice pretty hilarious.


Great comment. In addition, note that the fraction of GDP going to FIRE has increased a lot (doubled?) since 1980. The usual argument is that it’s legitimate (ie, adding value, not just rent collecting) because it leads to more efficient capital markets, and thus a more efficient economy. Yet looking at GDP overall, growth in this period has been pretty anemic by historical standards, so the claimed value added isn’t there.

... ... ..

One thing I don’t understand is: who’s the customer for all this crap? I completely agree that a large fraction of FIRE revenue is just economic rent (aka legalized theft). What I don’t understand is, who are the idiots on the other side of the transactions? Yes, a large fraction of the rent results from the inordinate privileges government grants the FIRE sector. E.g. the ability of commercial banks to create money out of thin air, lend it out, and pocket the interest. But many of those benefits existed before the post-1980 boom in FIRE rent collection. How is Wall St “forcing” the rest of the economy to buy their crap, in a way that allows them to capture the post-1980 rents? For example, all these derivatives products that ultimately don’t appear to make the capital markets more efficient. (Obviously, in the wake of the Crash, it’s difficult to argue that they don’t make them more _inefficient_.) Who’s buying this crap? If Wall St were just profiting off private parties who are suckers (day traders, wealthy individuals, etc), then I wouldn’t care so much. But I assume they’re also leeching off the great bulk of the population via pension funds, local governments, hidden costs in retail products that all of us use (checking accounts, mortgages, etc). It’d be nice if a more detailed outline of Wall St. theft could be enumerated. Reply liberal says: February 2, 2011 at 8:58 am He made most of his fortune via the proscriptions (basically legalized theft) under the dictator Sulla, and increased it via a combination of investment and opportunism (he was famous for buying buildings as soon as they caught fire, as well as the ones immediately adjacent, then having his well organized fire brigade put the blaze out, which usually resulted in him getting the neighboring properties on the cheap and fully intact). Almost all (if not all) of the inordinately wealthy get that way via rent collection.

[Feb 01, 2011] Bloomberg interviews in Davos

Soros Says Higher Commodity Prices Likely for ‘Couple of Years’

Stigliz Discusses U.S. Economy Jan. 26

Jan. 26 (Bloomberg) -- Nobel Prize-winning economist and Columbia University Professor Joseph Stiglitz discusses the outlook for the U.S. economy. Stiglitz speaks with Bloomberg's Tom Keene at the World Economic Forum in Davos, Switzerland. (Source: Bloomberg)

Roubini Interview

Soros on Debt Crisis - Video - Bloomberg

[Feb 01, 2011] SP 500 and NDX March Futures Daily Charts

"People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome. Advertising [perception management] is the rattling of a stick inside a swill bucket."

George Orwell

Watching the commentary on the stock market and Egypt on US financial television today was an exercise in cognitive dissonance.

See, there are no problems in the world, because the Dow has hit 12,000. All is well, and now is the time to buy these shares from us, so that we can unload this misvalued paper just like we sold slop buckets full of collateralized debt obligations to the institutions and foreign banks.

The hubris and arrogance of Wall Street is almost shocking if one does not realize that these fellows are very afraid, and probably trying to run a bluff, to tough this latest crisis out. They are whistling past the graveyard, treading lightly over the bodies of their victims, keeping one eye on the exit.

There may be a bull market in Swiss chalets and South American villas coming, depending on how steadily the winds of change sweep across the globe.

[Feb 01, 2011] How Banks Influence People in High Places

Interesting note on municipal bond corruption problem by Ron
January 31, 201 | naked capitalism


The problem here is that for incumbents this is not only appropriate but necessary staff orientation.

Once elected, the primary task of staff is to raise money to get the boss re-elected. What better way to train your staff than for them to get comfortable with the positions that will maximize the flow of future campaign funds?

It’s much more pernicious than influence, it’s about funding your boss’s future and your future income.


Special interests provides candidate funding, no other inducements are necessary.

Here in Calif progressive democrats are aligned with various unions, commercial construction, financial services groups and have used the bond market as their primary weapon of choice. Calif has no debt ceiling so an endless array of bond debt can be generated by cities, counties, special tax districts and of course the state.

Want to continue building urban housing tracts on Ag or open space land? no problem fund the necessary water, sewage facilities with bond debt, call it growth or good for business, now comes the build out generating huge profits for various builders,financial service, public/private unions etc.

The end result is Calif now has the highest bond debt of any state and if the recent Sonoma county Board of Supervisors decision to issue 290 million bonds to make up pension shortfalls due to stock market losses are any trend it could mushroom into the billions as a recent Stanford study pegged Calif public pension debt around 500 billion.

The tangled web of growth/political power/debt creation is practiced at a high level in Calif.

Billy Bob:

Both Yves and VP have some confusion about how banks – and other industries – influence people, in Congress at least. These industry seminars are not really where the influencing takes place. They are NOT regarded by anyone in Congress as presenting objective, expert knowledge. Groups of all kinds present these sorts of seminars for people who work on Capitol Hill. Everyone knows that the American Petroleum Institute is going to have a different take on energy production than the Apollo Alliance.

Where bankers (similarly to other corporations) put the screws to politicians is when a regional representative from ABA shows up in your office with the presidents of three small banks in your state or district, all spouting the ABA line, despite the fact that you know that their interests do NOT coincide with those of the big banks that run ABA. It is hard to tell your constituents that they are being duped and keep their support. But the clincher is when the ABA gives money to your opponent and recommends that a lot of those constituent bankers do too. Moreover, in the case of bankers, they are in touch with a lot of other business people among constituents and influence their opinions, votes and donations. It is just easier and safer to take the money and go with the flow. But it’s a long-term disaster for the nation.

Possible solutions, or at least mitigations, include restoring the Fairness Doctrine or some other means of taking money out of politics; getting more wealthy liberals – and they are out there – to understand the necessity of setting up institutions to rival the right’s; to reinvigorate labor unions; or at a minimum to revoke McCain-Feingold. BCRA makes politicians sell out to the entire class of wealthy people.

Billy Bob:

Industry lobbying groups are certainly not seen by Congressional offices as being “objective” and “merely presenting expert knowledge.” Even the stupidest, most naive offices know better than that.

The evil industry lobbying group seminars accomplish is much more closely related to what ftm says above: the need to raise money and for LA’s who cover an industry’s issues to learn what to support and what to oppose in order to do that.

[Feb 01, 2011] Normal Recovery No Way

The majority of economists and strategists are now telling anyone who will listen that the economic recovery is now normal and are trumpeting this view to jump-start the stock market. They are confidently asserting that "the new normal" concept popularized by Pimco is now a moot issue. In fact, there is nothing in the major economic indicators to indicate that the current recovery is anything other than anemic. We have taken eight major economic indicators and compared them to where they are now versus the economic peak 36 months ago. We did the same for the equivalent time periods for the prior two business cycles, using the official dates designated by the National Bureau of Economic Research. We did not use surveys, opinions or diffusion indexes, but relied instead on the major basic indicators measuring employment, income, consumption, production, housing and capital expenditures.

As was true when we did a similar study about four months ago, the results are very clear that the current recovery is far weaker than the prior two expansionary periods, which themselves were below the average of other post-war expansions. The results are summarized as follows.

  1. GDP was up an average of 6.4% from the prior peak at this point in the last two cycles, and only 0.2% now.
  2. New home sales were up 23% then; down 47% now.
  3. Retail sales were up 14% then, 1% now.
  4. Industrial production was up 2.5% then, down 5.6% now.
  5. Non-farm payroll employment was down 0.1% then, down 5.2% now
  6. Personal income was up 11% then, 4% now.
  7. New orders for durable goods were up 6.2% then, down 2.2% now.
  8. Initial weekly unemployment claims were down 8% then, up 22% now.

The facts speak for themselves. The current recovery is far weaker than the prior two across a broad array of major economic numbers, and the Fed apparently agrees. That is why they stated in Tuesday's release following the FOMC meeting that the economy has been growing "at a rate insufficient to bring about an improvement in labor market conditions. Growth in household spending....remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit ....investment in non-residential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to remain depressed."

That is why the Fed reiterated its policy of purchasing $600 billion of longer-term Treasury securities and repeated its previous statement that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate for an extended period." The current market action seems based on the same type of delusionary views that prevailed at the tops in early 2000 and late 2007, and therefore rests on a rickety foundation.

[Feb 01, 2011] "It's Much Worse": Howard Davidowitz on the State of the Union

Feb 01, 2011 | Tech Ticker
HPlay VideoNow Playing
A week has passed since President Obama's State of the Union address so we figured it was about time for a "rebuttal" from one of Tech Ticker's favorite guests: Howard Davidowitz of Davidowitz & Associates.

It will come as no surprise to faithful viewers that Davidowitz remains
highly critical of President Obama and deeply skeptical about prospects for the U.S. economy. (For those needing a refresher, go here and here.)

His take on the State of the Union? "It's much worse."

Neither time nor improvements in the financial markets and the economy have shaken Davidowitz's dour convictions. As you'll see in the accompanying video, he has some snappy answers to my questions about what look like positive signs to the rest of us, including:

The Market: The Dow enters Tuesday's session just below multi-year highs and up dramatically since Obama took office. But this is mainly a function of the Federal Reserve trying to force investors into riskier assets, Davidowitz says, warning Bernanke's policies will eventually "destroy the dollar."

Consumer Spending: The government said consumer spending rose 0.7% in December, the latest sign of improvement. But what's really going on, Davidowitz says, is the improvement in capital markets is driving spending by wealthy Americans while the rest continue to suffer under the weight of joblessness, foreclosures and heavy debts. "All of the additional consumer spending we've seen is by 30% of the population," he says. "[The other] 70% are completely under water."

Unemployment: The unemployment rate fell from 9.8% in November to 9.4% to December, the lowest level in 19 months. But Davidowitz notes that apparent steep drop was largely a result of a steep decline in the labor pool as the "participation rate" fell to its lowest level in a quarter century. "Unemployment did not go down," he says.

To Howard, the only number that matters is the Federal deficit, which the CBO now projects will hit $1.5 trillion in the current fiscal year. "The debt is going through the roof," he says. "Maybe [Obama] thinks that's an improvement. I don't."

In his SOTU, President Obama said: "We need to take responsibility for our deficit, and reform our government" and referenced how his own deficit reduction panel
Said "the only way to tackle our deficit is to cut excessive spending wherever we find it - in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes."

Here again, Davidowitz is highly critical and dismissive.

"I thought [the panel] did a very responsible job," he says. "[Obama] threw their entire thing in the entire thing in the toilet bowl because he increased the deficit by $1 trillion because he extended the Bush tax cuts. We're under water. No one can get a tax cut. "

Check the accompanying video for Davidowitz's prescription for tackling the deficit and to hear what he really thinks. What about you?



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