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Online Thucydides

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Re: US Economy
« Reply #525 on: January 29, 2010, 21:37:37 »
Reading GDP figures is bscoming an exercise in reading tea leaves (or is that T.E.A. leaves?). It only seems like good news until you look deeper:

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/28/AR2010012804107_pf.html

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Big jump in GDP may veil weakness in economy

By Steven Mufson
Washington Post Staff Writer
Friday, January 29, 2010; A14

A year ago, the Union Pacific railroad was scouring the country for places to park its idle freight cars -- about 60,000 of them. With auto, coal and chemical shipments plunging, Union Pacific's chief executive, James R. Young, was also scouring the landscape for a bright spot.

"We're so low right now and inventories are so low, if we do see a spark, things could pick up pretty quick," he said last February.

On Friday, the federal government is scheduled to release numbers that many analysts expect will show a 4.6 percent jump in inflation-adjusted gross domestic product, but Young is wondering just how much spark the economy really has.

Union Pacific still has 44,000 idle freight cars and 1,700 idle locomotives. And its freight car loadings are still running nearly 20 percent below the peak levels of a couple of years ago. Young worries that what's really behind the pickup in GDP numbers is that companies have stopped running down inventories and their actual sales to customers haven't changed much.

"I'd say things are stable and maybe there are some signs of strength, but we've got a long ways to go," Young said Thursday.

The example of Nucor

Many economists agree and warn against reading too much into a jump in GDP figures for the last three months of 2009. Ed Yardeni, president of Yardeni Research, said that even if there were no change in final sales of goods, the GDP figures would show a 4 percent increase simply because businesses that were emptying their warehouses a year ago are now buying enough goods to keep stockpiles steady.

"A lot of it is the arithmetic of inventories," said Yardeni, who is expecting a 6.5 percent jump in the GDP number. "Even if there is a very strong number for the fourth quarter, if it's [all because of] inventories, it will raise real questions about the strength of the economy in 2010."

Nucor is a good example. Reeling from the downturn last year, the Charlotte-based steelmaker practically stopped buying pig iron, which it uses as raw material. Instead it used up much of the pig iron it had stockpiled for normal times and suddenly didn't need. For the last quarter of 2008 and the first three quarters of 2009, Nucor bought infrequently.

Now, said the company's chief executive, Daniel R. DiMicco, "we've worked them down to the absolute minimums necessary to meet the demand of market." So the company has gone back to buying more regularly. But steel demand remains weak, and Nucor's mills are running at a little over 60 percent of capacity.

"We're keeping things lean like all our customers," said DiMicco.

DiMicco said that "nothing's really changed in our opinion from the standpoint that the economy is going to be very slow in growing out of this serious recession that we've had."

One of the key indicators that executives say they are watching are employment figures, which remain weak.

On Thursday, the Labor Department said first-time claims dropped 8,000 last week to a seasonally adjusted 470,000. Analysts had expected a steeper drop to 450,000, according to Thomson Reuters. The four-week average, which smooths out fluctuations, rose for the second straight week, to 456,250. The average had fallen for 19 straight weeks before starting to rise.

"One of the key measures I look at from a macro perspective is hiring," Young said. "And I use my own business. We had a peak of 52,000 employees and now we're running at about 42,000 right now. For all practical purposes, our hiring has been shut off for about a year."

He added: "Right now I'm not in a hiring mode for at least the next three or four months. Until we see some positive movement on jobs being added, it's going to be tough to move the economy forward."

Separately, the Commerce Department on Thursday reported that factory orders for manufactured goods rose 0.3 percent in December, far less than the 2 percent advance economists had expected. For all of 2009, durable goods orders plunged 20.2 percent, the largest drop since 1992.

Mixed picture

But Union Pacific's Young said performance varies widely from sector to sector. The railroad's shipments of automobiles in January are up 80 percent from a year ago, but still lag far below levels of two years ago. Shipments of chemicals are up 12 percent so far in January, after being down 2 percent in the fourth quarter. But shipments of industrial products, such as lumber, cement and steel used in infrastructure or construction, are down slightly from the previous January and far below levels of two years ago.

Some companies have taken a more sanguine view. "GE's environment has improved and we saw some encouraging signs at year-end," GE chief executive Jeffrey Immelt said last Friday on a conference call about the company's earnings. He said fourth-quarter infrastructure orders increased $3.7 billion from the third quarter to $22.1 billion. GE's service orders grew 14 percent, and consumer delinquencies were "stabilizing," Immelt said.

But economists and executives remain cautious. Yardeni, more optimistic than the consensus about the fourth quarter, cautioned that "a lot of people lost their jobs in industries likely to remain depressed, particularly housing and automobile-related industries. . . . Many of those people will have to change careers because their jobs aren't going to come back."
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #526 on: January 31, 2010, 15:56:08 »
Forecasting just go so much easier [/sarcasm]:

http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Obamas-2011-budget-will-include-phantom-cap-and-trade-revenue-83075057.html

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Obama's 2011 budget will include phantom cap-and-trade revenue
By: Mark Tapscott
Editorial Page Editor
01/29/10 6:29 PM EST

A trade publication is reporting this afternoon that President Obama's 2011 federal budget proposal will assume receipt of billions of dollars in revenue generated from the cap-and-trade program even though that proposal appears now to be all but dead in Congress.

"The White House told Sen. John Kerry's office that the president plans to assume revenue from the controversial climate policy approach. Kerry aides said they had assurances the revenue won't be designated for issues unrelated to energy policy and combating climate change.

"Obama last year proposed in his fiscal 2010 budget that a cap-and-trade program would raise some $650 billion over 10 years via a full auction of emission credits, with the money primarily going to pay for middle-class tax cuts and development and deployment of clean energy technologies," Energy and Environment News senior reporter Darren Samuelson wrote in the publication that is subscription-only.

Obama repeated during his State of the Union address Wednesday evening his hope that Congress would pass the energy reform bill that featues as its anti-global warming centerpiece establishment of a cap-and-trade program of government credits for carbon emissions reductions that businesses would buy and sell.

The proposal's main Senate co-sponsors are Sen. Barbara Boxer, the California Democrat who is chairman of the Environment and Public Works Committee, and Kerry, the Massachusetts Democrat. A similar bill co-sponsored by Representatives Henry Waxman of California and Ed Markey of Massachusetts was approved by the House last year.

The House bill projects cap-and-trade revenues of $873 billion.

Whether it's the $650 billion projected by the Senate bill or the $873 billion of the House bill, it appears highly unlikely, to put it charitably, that either measure will make it to Obama's desk with the cap-and-trade program intact. That means Obama will be counting phantom revenue as part of his next federal budget proposal.

But then Obama's $787 billion economic stimulus program has produced two million phantom jobs located in phantom zip codes in phantom congressional districts, so perhaps nobody should be surprised to see phantom revenues in a White House budget proposal. 

Read more at the Washington Examiner: http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Obamas-2011-budget-will-include-phantom-cap-and-trade-revenue-83075057.html#ixzz0eE1afvEz
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #527 on: February 02, 2010, 08:36:57 »
And more phantom money. I remember a movie ("Dave") where a character says: "If any businessman did his books like the government, they'd be in jail"

http://legalinsurrection.blogspot.com/2010/02/1-trillion-obama-will-never-see.html

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$1 Trillion Obama Will Never See

Raising tax rates on high income earners is the key to the Obama way, both during the campaign and in his latest budget and tax proposals. Taxing the wealthy, or rather, taxing those making over $250k a year, is the gospel according to Obama.

Obama is raising taxes on people making over $250k by over $1 trillion (yes, with a "t") over ten years.

Those with the power to tax never learn from history. I've written about the "revolt of the kulaks" phenomenon in which the producers of society would rather not produce than be subjected to confiscatory taxation. A related phenomenon is tax avoidance, in which people structure their lives so as so avoid creating taxable income (for example, purchasing municipal bonds rather than corporate bonds).

Whether it is a revolt of the kulaks, or mere tax avoidance, there is economic distortion from high rates of taxation.

The British are seeing this effect in their current budget, as wealthy Brits engage in tax avoidance (structuring their financial lives so as to legally avoid taxes) in anticipation of a rise from a 40% to a 50% rate:

High earners will cost the public purse hundreds of millions of pounds through tax dodges as they avoid the new 50p rate of income tax, a minister indicated yesterday.

Lord Myners, the City Minister, said that the Treasury had “significantly reduced” its estimate of the revenue to be earned from the historic change.

He said that he believed that the new top rate, due to come into force this April, would still generate extra income from the wealthiest 2 per cent of the national workforce. But he cast doubt on whether the Treasury would pocket the £1.13 billion it has earmarked for 2010, and the £2.5 billion it hopes to raise in 2011. “We still believe it will be beneficial,” he said.

Lord Myners told peers that “behavioural consequences of the new higher rate of taxation” — shorthand for tax avoidance — had forced the Treasury to lower its expectations.

Guaranteed future headline: "Obama administration surprised at lower than expected revenues from taxes on the wealthy."

They never learn, do they?
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #528 on: February 06, 2010, 17:54:12 »
Looking at the winners and losers in the Stimulus game:

http://pajamasmedia.com/blog/honey-they-shrunk-the-private-sector/

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Honey, They Shrunk the Private Sector

Posted By Tom Blumer On February 5, 2010 @ 12:00 am In . Positioning, Column 2, Money, Politics, US News | 22 Comments

There’s a reason why Americans who don’t happen to work for the government or directly benefit from its largesse are not sensing an economic recovery. For them, it’s mostly not happening. ADP’s January employment report [1] showing 22,000 private-sector jobs lost, the last available jobs-related information available when this column was written, only confirms that feeling.

A look at what has happened to the nation’s inflation-adjusted gross domestic product (GDP), the value of all goods and services produced in the economy, during the last six quarters [2] is sadly instructive. Comparing the fourth quarter of 2009 with the second quarter of 2008, we see that:

    * Even after six months of “recovery,” the economy as a whole has shrunk by almost 2%.
    * Uncle Sam’s level of annualized consumption and “investment” has grown by 8.5%.
    * Despite the incessant pleadings of poverty by most state and local governments, their consumption and “investment” have hardly changed.
    * What remains, i.e., the private sector, is over 3% smaller.


The private-sector shrink is really about one percentage point higher than indicated, because the above data treats General Motors and Chrysler as if the government and a meddling Congress aren’t in control of them. This of course [3] is nonsense [4].

Meanwhile, the past year and a half has been a great period to be a federal government employee. While the private sector has shed almost 6.4 million jobs [5] on a seasonally adjusted basis during that time, federal non-postal employment has leaped by over 150,000 [6], a stunning increase of over 7.5%. Two-thirds of the increase occurred during the first eleven full months of the Obama administration, even though the severity of the recession was drop-dead obvious well before he took office. Even higher federal employment is on the horizon [7].

The burgeoning ranks of federal employees are in an enviable situation compared to their private-sector counterparts — or perhaps I should say, “underlings.” In December, USA Today reported [8] that:

    * The average federal worker’s annual pay is over $71,200, compared to just over $40,300 in the private sector.
    * Almost one in five federal workers makes $100,000 a year or more — “and that’s before overtime pay and bonuses are counted.” It’s also before considering a far better than average benefits package.
    * In late 2007, “the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.”
    * Effective in January, despite a virtually zero-inflation environment and while pay and jobs were still being slashed in the private sector, a typical federal worker saw his or her pay increase by over 3%.

There is little doubt that whether or not the economy ever returns to something resembling normalcy again, the government’s influence on our daily lives, absent a historic pushback, will be demonstrably larger.

Chalk all of this up as yet another “accomplishment” of what I have identified and have been calling the POR (Pelosi-Obama-Reid) economy [9] since (imagine that) mid-2008.

Others, including editorialists at the Wall Street Journal and Investor’s Business Daily, have more recently named what we are living through “the uncertainty economy.” But the key to understanding what has transpired is accepting the truth about when it really began. Its origins go back to June 2008 [10], when Nancy Pelosi, Barack Obama, and Harry Reid injected enough of the aforementioned uncertainty to cause deep concerns about the future among the people who matter most when it comes to creating and sustaining economic growth: entrepreneurs, businesspeople, and investors.

June 2008 is when the terrible triumvirate went visibly wacko on energy. In the name of “protecting” humanity from the horrible consequences of supposedly settled assertions that have since been exposed as utterly without credible support [11] — namely that global warming is occurring and that human activity is causing it — they promised to starve the nation of the conventional energy it needs to function, in the likely vain hope that acceptable, affordable alternatives will just, like, well, y’know … show up. The fact that they and their party intend to pursue their radical cap-and-tax plan in spite of the comprehensive scientific debunking that the colossal Climategate scandal represents merely proves that the business community’s fear-based mid-2008 reaction was more than justified. Their accurate advance perception was that the “climate change” discussion isn’t really about the environment; it’s about control.

At the same time, Pelosi, Obama, and Reid — but especially Obama — promised to punitively tax the five percent of the nation’s most productive so they could redistribute money to everyone else. These promises were routinely accompanied by heavy doses of business-bashing, pseudo-populist rhetoric. Again, those who saw big trouble on the horizon in mid-2008 from a potentially hostile government have been more than vindicated. Few of us ever thought that a president of the United States would be telling bankers who had money forced onto them at figurative gunpoint [12] but who fully repaid their loans that he still “wants our money back [13]” — and that he would then mobilize/mob-ilize his minions [14] in an attempt to create the pressure to make it happen.

In mid-2008, perceptive entrepreneurs, businesspeople, and investors reacted defensively — as anyone who has decided that they are under attack would — by abandoning expansion plans, trimming employment, and cutting their spending to the bone. Thus, the second-quarter-of-2008 recovery [15] from the previous quarter’s difficulties abruptly ended. In the third quarter, the recession as normal people define it [16] began.

Matters only worsened in ensuing months. The decades-in-the-making Fannie Mae- and Freddie Mac-driven [17] housing and mortgage lending debacles, the “stimulus” that has only stimulated bogus claims [18] of jobs “created and saved,” and the “Chicago way” conduct of the Chrysler [19] and GM [20] bankruptcies have only reinforced the business community’s justifiable siege mentality.

In this POR “rebound? what rebound? [21]” economy, it should not surprise anyone that the government has become bigger, bolder, and more intrusive, while a worried private sector has contracted. Is there any good reason to believe that this has not been part of the plan all along?

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/honey-they-shrunk-the-private-sector/

URLs in this post:

[1] ADP’s January employment report: http://adpemploymentreport.com/

[2] during the last six quarters: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&FirstYear=2008&LastYear=2009&Freq=Qtr

[3] of course: http://www.reuters.com/article/idUSTRE60R7GS20100128

[4] nonsense: http://www.businessweek.com/magazine/content/09_50/b4159000314215.htm

[5] almost 6.4 million jobs: http://i739.photobucket.com/albums/xx40/mmatters/BLSprivateSectorJobs2007to2009.jpg

[6] by over 150,000: http://i739.photobucket.com/albums/xx40/mmatters/BLSunclesamJobs2007to2009.jpg

[7] is on the horizon: http://washingtontimes.com/news/2010/feb/02/burgeoning-federal-payroll-signals-return-of-big-g/

[8] USA Today reported: http://www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm

[9] the POR (Pelosi-Obama-Reid) economy: http://www.bizzyblog.com/2008/07/03/the-pelosi-obama-reid-recession-porr-may-have-begun/

[10] to June 2008: http://pajamasmedia.com../../../../../blog/going-galt-got-going-last-summer/2/

[11] utterly without credible support: http://pajamasmedia.com../../../../../blog/climategate-noaa-and-nasa-complicit-in-data-manipulation/

[12] at figurative gunpoint: http://www.bizzyblog.com/2008/10/15/cnbc-paulson-put-a-gun-to-all-their-heads/

[13] wants our money back: http://www.youtube.com/watch?v=OGeBJX6E8vU

[14] mobilize/mob-ilize his minions: http://i739.photobucket.com/albums/xx40/mmatters/ObamaOFAonBankTax011510.jpg

[15] the second-quarter-of-2008 recovery: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&FirstYear=2008&LastYear=2009&Freq=Qtr

[16] as normal people define it: http://www.investorwords.com/4086/recession.html

[17] Fannie Mae- and Freddie Mac-driven: http://pajamasmedia.com../../../../../blog/fan-and-fred-frauds-by-design/

[18] bogus claims: http://www.washingtonexaminer.com/maps/Bogus-jobs-created-or-saved-by-the-Stimulus.html

[19] Chrysler: http://online.wsj.com/article/SB124167388473695227.html

[20] GM: http://www.bizzyblog.com/2009/05/22/here-we-go-again-this-time-govt-is-trying-to-shaft-unsecured-gm-creditors/

[21] rebound? what rebound?: http://pajamasmedia.com/blog/economic-rebound-what-economic-rebound/
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #529 on: February 11, 2010, 11:40:24 »
A real plan which could staunch the economic bleeding. American readers feel free to pass this on to your elected representatives (Canadians have a huge stake in preventing an economic meltdown in the United States!). The deficit has exploded from @ $100 billion/year on average during the Bush Administration to $90 billion/month under the Obama administration.

A similar plan can be enacted for Canada as well, eliminating transfers to other governments, subsidies and crown corporations would reduce government spending on the order of $80+ billion dollars, enough to pay off the entire national debt in only six years (and if continued would cover the currently unfunded liabilities [CPP, government pensions etc.] after 12 years). This does not take into account any virtuous circle effects of reducing government operations costs or eliminating the $30 billion/year carrying costs of the debt; major tax cuts can be funded out of those savings:

http://biggovernment.com/tcampbell/2010/02/10/we-can-do-much-more-to-reduce-the-federal-deficit/

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We Can Do Much More to Reduce the Federal Deficit
by Tom Campbell

The White House has just announced its proposed budget for fiscal year 2011, with a projected deficit of a staggering $1.27 trillion.  Last year’s budget estimated a $1.17 trillion deficit, but the actual number now appears to be $1.60 trillion. Applying that same likely growth from projection to actual deficit, we are looking at a federal budget deficit closer to $1.74 trillion this year.

The size of the deficit is unconscionable and unsustainable. As a nation, we now owe more than $12 trillion, a number almost as large as the entire GDP of the United States.  Even worse, we are adding to this deficit at a rate of more than 10 percent of the GDP—an alarming rate that most economists consider dangerous for any economy.

To finance our deficit, we print money and spend it—or we borrow money and spend it.  When we print the money, we set the stage for massive inflation, which will occur as soon as the economy revives. When we borrow the money, we place a lever in the hands of citizens and governments of China and other nations, now our largest creditors (surpassing the 50 percent mark two years ago). It is morally wrong to spend money now and expect our children to pay the price—and it is hazardous to give to foreign sovereigns the tools to destroy our economy if they decide to “call in” their loans.

It is our responsibility and duty to stop this. We must not condemn the next generation to economic ruin because we lack the courage to do what must be done now. As President Reagan famously said, “If not us, who?  If not now, when?”  If we didn’t borrow another dollar, it will still take more than 300 years just to pay back what our country already owes.

We can stop the debt from growing by lowering the federal budget deficit to zero. We’ve done it before and there’s no reason that we cannot do it again. The last time we had a balanced federal budget was in 2000. The mechanism that helped achieve this was the Gramm-Rudman-Hollings Act, a law that has now been allowed to expire. Gramm-Rudman-Hollings required across-the-board cuts if the President and Congress did not reach agreement on set deficit reduction goals. In effect, it supplied the backbone needed to control spending when backbone was lacking. We need to restore Gramm-Rudman-Hollings at once.

We also need leaders in the House, Senate, and White House who agree that the time is now, and the responsibility is ours. I propose that we not only restore Gramm-Rudman-Hollings, but that we dramatically cut the federal budget deficit proposed by the President by more than half.  We not only can achieve this, we must.

Here’s how we can achieve this:

First, cap non-defense discretionary spending to fiscal year 2009 levels for a savings of $101 billion. The White House Budget caps this item at fiscal year 2010 levels of $690 billion, but this category already grew from $589 billion in fiscal year 2009—a 30 percent increase.  They let it rise by 30 percent before deciding to cap it. We should cap it at once.

To achieve this overall cap, many specific budget items in this category could be eliminated entirely including the $3 billion annual expenditure in subsidies for corn ethanol. And we should sell the portfolio of Freddie Mac and Fannie Mae, and end any future government subsidies for them.

There is no evidence that the stimulus bill has produced the 2 million new jobs the President claims, over what the private sector would have produced if the same funds had been allowed to stay with the private sector.  Yet the White House proposes increasing the amount spent from $202 billion in [delete FY] fiscal year 2009 to $353 billion in fiscal year 2010 and $232 billion in fiscal year 2011.  I propose cutting this increase in spending over fiscal year 2009 in half for a savings of $292 billion.

This savings could be used to forgive the FICA tax for businesses that hire employees who have been out of work for at least two moths.  Add this amount to the $33 billion the President has already proposed for tax relief to small business hiring, and we will have increased targeted assistance for new jobs ten-fold

Use the TARP money the banks are returning to pay down the debt for a savings of $200 billion.  The money was approved for a specific purpose: to buy the bad mortgages from banks. Since the banks are now returning the money, it should be used to reduce our federal borrowing. It’s not “free money,” available for other uses, as the White House has proposed.

Medicaid and SCHIP are 7 percent of the federal budget and spending in this category rose nearly 30 percent from fiscal year 2009 to fiscal year 2010. We need to approach Medicaid and SCHIP the way we did welfare in 1996: don’t trim at the edges but announce that there will be a cap and stick with it.  Doing so would save $45 billion.

Taken together, these proposals would save an estimated $750 billion in fiscal year 2010 alone, well more than half of the entire projected deficit. The time to act is now. The clock is running — for our children, our national security and America’s greatness.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #530 on: February 14, 2010, 22:54:04 »
Well the "new economy" is good for some people. Please note this is also the sort of culture that brought the Japanese economy down in the 1990's and threatens the Chinese economy:

http://www.washingtonexaminer.com/politics/Under-Obama_-crony-capitalism-again-rules-the-day-84271222.html

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Under Obama, crony capitalism again rules the day
By: Michael Barone
Senior Political Analyst
February 14, 2010
(AP photo)

In his best-seller "Inside U.S.A.", the hugely readable journalist John Gunther described America as it was in the last year of World War II. He interviewed hundreds of politicians, businessmen and journalists, but only four men rated a separate chapter -- three politicians and Henry J. Kaiser, the California construction magnate who built dams and ships and manufactured concrete and steel and aluminum.

Kaiser was, Gunther wrote, "tough, creative, packed with ideas and energy, above all a man who likes to make things." But he was also, he noted, a "link of enterprise by government, since government was on his side."

That was putting it mildly. Kaiser hired Tommy Corcoran, a brilliant former aide to Franklin Roosevelt, to open doors and got a $645 million contract to build ships and $28 million financing to manufacture magnesium. Corcoran, according to the first-rate biography by longtime Democratic staffer David McKean, got $200,000 in fees. Believe it or not, that was a lot of money in Washington in the 1940s.

Government spent a lot of money in World War II, and mostly spent it well. Kaiser delivered on his contracts and even managed to build ships out of concrete, most of which did not sink. But, as always happens when government is shoveling out money, lobbyists thrived.

Fast-forward to the present day. Lobbyists, reports the Center for Responsive Politics, had a record 2009 in Barack Obama's Washington. Despite candidate Obama's promises to shun them, they raked in $3,470,000,000. Somewhere up there, Tommy Corcoran is chuckling.

Last week, amid Washington's blizzards, Obama was asked about the $17 million bonus awarded to JPMorgan Chase Chief Executive Officer Jamie Dimon and the $9 million bonus for Goldman Sachs CEO Lloyd Blankfein.

"I know both these guys; they are very savvy businessmen," he said. "I, like most of the American people, don't begrudge people success or wealth." So much for campaign-trail denunciations of "fat cat" bankers and bloated bonuses.

From what I know, Dimon and Blankfein are in fact first-rate CEOs, as able in their way as Henry J. Kaiser. Their banks soured on mortgage-backed securities before most of their competitors and started unloading them early or, in Goldman's case, getting them insured by AIG (and getting the government to pay 100 cents on the dollar for them, thanks to Treasury Secretary Timothy Geithner, then head of the New York Fed). They paid their Troubled Asset Relief Program money back as fast as they could, with interest.

But the savviness that Obama handsomely acknowledged has been evident not only in their business judgment but in their politics. Goldman employee contributions to Democrats in 2008 ranked second only to those employed by the University of California. JPMorgan Chase's employees ranked No. 7. The stereotype of Wall Street being Republican is decades out of date.

Crony capitalism is now the order of the day in the United States. The government and the United Auto Workers own General Motors and Chrysler, which aren't likely to pay back their billions in TARP money any time soon, if ever. Meanwhile the government tells Americans to stop driving Toyotas.

The government was going to remake the health care sector, and so Billy Tauzin and other health care industry lobbyists were busy in the White House cutting deals to keep their clients above water. The government was going to remake the energy sector, and utility CEOs and lobbyists have been busy flaunting their green credentials.

As my Washington Examiner colleague Timothy Carney has been documenting, Big Business has been busy lobbying Big Government for "reforms" that serve big companies' interests. Wal-Mart backs a health care mandate, Philip Morris shapes tobacco regulation, General Electric is setting up a joint venture to trade carbon offsets (wasn't that Enron's line of work back in the day?).

The picture is not pretty. Government's pets or, in the president's words, "savvy businessmen," use government to get policies that will give them competitive advantages and stifle smaller competitors. Pleasing their masters in government is now absorbing the psychic energy of CEOs who used to concentrate on meeting consumers' needs in order to make profits.

Back in the 1940s, there was an excuse for crony capitalism -- there was a war on. And FDR had a gift for picking people who, like Kaiser, delivered the goods. Today that excuse is not available, and it's far from apparent that Obama has that gift.

Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Under-Obama_-crony-capitalism-again-rules-the-day-84271222.html#ixzz0fZY6Ejis
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #531 on: February 17, 2010, 09:12:37 »
A sign of things to come? Unionized public service employees in the United States have the ability to bring down municipal and State governments through massive unfunded pension and benefit liabilities (and as noted in the article, far beyond what private sector employees can hope to get). This isn't unique to the United States either. Just this summer I read a newspaper article in Gagetown which pointed out Fredericton was $20 million in the hole this year alone for public service pensions and benefits, and the situation was forecast to escalate.

http://www.businessinsider.com/henry-blodget-unionized-rhode-island-teachers-refuse-to-work-25-minutes-more-per-day-so-town-fires-all-of-them-2010-2

Quote
Unionized Rhode Island Teachers Refuse To Work 25 Minutes More Per Day, So Town Fires All Of Them

A school superintendent in Rhode Island is trying to fix an abysmally bad school system.

Her plan calls for teachers at a local high school to work 25 minutes longer per day, each lunch with students once in a while, and help with tutoring.  The teachers' union has refused to accept these apparently onerous demands.

The teachers at the high school make $70,000-$78,000, as compared to a median income in the town of $22,000.  This exemplifies a nationwide trend in which public sector workers make far more than their private-sector counterparts (with better benefits).

The school superintendent has responded to the union's stubbornness by firing every teacher and administrator at the school.

A sign of things to come?

Mish Shedlock has the details at Mish's Global Economic Trend Analysis:
Central Falls Rhode Island Fires Every High School Teacher

Here is an interesting email from "Jason" regarding high schools in Central Falls Rhode Island. Jason writes:

    Hi Mish,

    As I'm sure you're aware, Rhode Island has one of the highest unemployment rates in the nation.

    Central Falls is one of the poorest towns in the state. It looks like the pictures everyone's seen of Detroit or Flint. There are lots of boarded up windows, abandoned buildings, decrepit factories with broken windows, etc. It's an absolutely depressed community. According to Wikipedia, the median income in the town is $22k.

    Teacher salaries at the high school average $72-78k. Apparently 50% of the students at the school are failing all of their classes, and the graduation rate is also under 50%. In an effort to turn the school around, the superintendent requested some changes be made whereby the school day would be slightly extended, teachers would perform some extra tutoring, etc.

    The union balked and refused the terms, so now she is firing the entire teaching staff of the high school and replacing them. This is yet another example of unions digging their own graves by refusing to negotiate or accept reasonable terms. Sentiment is on the side of the superintendent, at least among the folks I have discussed the issue with.

    Jason

With that backdrop, please consider Central Falls to fire every high school teacher.

The teachers didn’t blink.

Under threat of losing their jobs if they didn’t go along with extra work for not a lot of extra pay, the Central Falls Teachers’ Union refused Friday morning to accept a reform plan for one of the worst-performing high schools in the state.

The superintendent didn’t blink either.

After learning of the union’s position, School Supt. Frances Gallo notified the state that she was switching to an alternative she was hoping to avoid: firing the entire staff at Central Falls High School. In total, about 100 teachers, administrators and assistants will lose their jobs.

Gallo blamed the union’s “callous disregard” for the situation, saying union leaders “knew full well what would happen” if they rejected the six conditions Gallo said were crucial to improving the school. The conditions are adding 25 minutes to the school day, providing tutoring on a rotating schedule before and after school, eating lunch with students once a week, submitting to more rigorous evaluations, attending weekly after-school planning sessions with other teachers and participating in two weeks of training in the summer.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

Offline GAP

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Re: US Economy
« Reply #532 on: February 17, 2010, 10:02:57 »
Maybe with that example, more school divisions/city/town governments will start getting a backbone......

ps: remember how unions tiptoed around for years after Regan fired all the Air Traffic Controlers....
REMEMBER SOME PEOPLE ARE ALIVE SIMPLY BECAUSE IT IS ILLEGAL TO SHOOT THEM

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Re: US Economy
« Reply #533 on: February 17, 2010, 10:11:48 »
Even some members of the Fed are becoming nervous:

http://www.ft.com/cms/s/0/c918b8dc-1b37-11df-953f-00144feab49a.html?nclick_check=1

Quote
Lone voice warns of debt threat to Fed

By Alan Rappeport in Washington

Published: February 16 2010 20:23 | Last updated: February 16 2010 20:23

The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.

Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.

“Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.

He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.

On Tuesday he said that the worst option for the US was a scenario where the government “knocks on the central bank’s door” and asks it to print more money. Instead, the administration must find ways to cut spending and generate revenue. He called for a “reallocation of resources” and noted that the process would be painful and politically inconvenient.

The US budget deficit is projected to be $8,000bn (€5,800bn, £5,000bn) in the next decade. Barack Obama, US president, recently lifted the government’s borrowing authority to $14,300bn.

If the Fed succumbed to pressure to increase the money supply, Mr Hoenig said, inflation would lead to a loss of confidence in the dollar and in the economy. Meanwhile, a potential stalemate between the fiscal and monetary authorities that govern the economy could allow growing imbalances to go unchecked, thus raising the costs of borrowing and of capital for the US.

The hawkish Kansas Fed president also warned against “dire” consequences of the central bank prolonging its holdings of mortgage-backed securities, which it purchased in an effort to prop up the US housing market. Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.

The Federal Reserve is purchasing $1,250bn in MBS through March. Mr Hoenig said that it must shrink its balance sheet as quickly as possible while being careful and systematic.

Being pulled into the political framework has complicated the Fed’s job, which Mr Hoenig said should remain focused on the Fed funds rate and price stability.

Holding tightly to the notion of Fed independence, he rejected a suggestion published in a paper by Olivier Blanchard, chief economist at the International Monetary Fund, that central banks should set higher inflation targets. He also said he hoped to avoid political pressure to restore quantitative easing policies.

“That’s when independence will be more important than ever,” he said.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #534 on: February 18, 2010, 13:08:28 »
I fail to see how it would be possible to simply stop funding transfer payments to the provinces.  It sounds great on paper, except for the fact that those payments fund a myriad of public works and services that are vital.  The idea that we could somehow see tax cuts as a result is ridiculous - because whatever we might see in savings in federal taxes would be immediately offset by the tremendous rise in provincial taxes that would be needed to continue to manage services.  It would be a classic case of robbing Peter to pay Paul - fine examples of which can be seen in recent Canadian history, like Ontario during the Mike Harris years.  How do you balance the budget and fund tax cuts?  Sell assets and download the costs to other levels of government.  So what happens?  Either services get slashed, or those lower levels of government raise their own taxes to fund the liabilities they've inherited.  Net result?  Nothing!  (well, in Ontario, not nothing.  A lot of out-of-date and convoluted maps from highways being re-numbered, and a hidden deficit that was passed on to the next government).



A real plan which could staunch the economic bleeding. American readers feel free to pass this on to your elected representatives (Canadians have a huge stake in preventing an economic meltdown in the United States!). The deficit has exploded from @ $100 billion/year on average during the Bush Administration to $90 billion/month under the Obama administration.

A similar plan can be enacted for Canada as well, eliminating transfers to other governments, subsidies and crown corporations would reduce government spending on the order of $80+ billion dollars, enough to pay off the entire national debt in only six years (and if continued would cover the currently unfunded liabilities [CPP, government pensions etc.] after 12 years). This does not take into account any virtuous circle effects of reducing government operations costs or eliminating the $30 billion/year carrying costs of the debt; major tax cuts can be funded out of those savings:

http://biggovernment.com/tcampbell/2010/02/10/we-can-do-much-more-to-reduce-the-federal-deficit/
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Re: US Economy
« Reply #535 on: February 18, 2010, 14:24:48 »
Several points being missed here:

1. If the Federal Liberals had not been downloading their spending onto Ontario, the Harris revolution would have had far greater impact. As it is, anyone can Google relevant figures like tax receipts, economic growth and job creation figures from that period to see the positive effect of tax cuts. The only real fault of the Harris government was not to reduce spending while times were flush (and as noted this was due to extra costs pushed onto them).

2. A great deal of "services" is political rent seeking and only serves those who are claiming our tax dollars. Check the health care thread in the Canadian politics section of Army.ca and you will see that the massive increases in Canadian health care spending have not resulted in real improvements in actual health care, waiting times etc. If provinces and municipalities were forced to budget out of their own resources, massive savings would have to be achieved out of sheer necessity, at the expense of the rent seekers.

3. Re services. Many of these so called services are "entertainment", and often in competition with the private sector. London, to name one example, has several municipal golf courses (among other things) even though there are literally a dozen in or in close proximity to the city.

4. Since labour and capital are mobile now, no province or municipality could massively increase taxes without suffering an instant outflux of investment followed by people. The United States provides evidence, the net outflow of people and investment from high tax "Blue" states to low tax "Red" states is ongoing. The collapse of investment in Michigan or California is now matched by the outflux of people to name two easily Googled examples.

5. Tax savings in the outline are to come from reduction in Federal government operations spending as programs are closed, and reduction in the carrying costs of the debt (about $5 billion/year for the debt alone). Further savings are possible as the economy shakes off the distortions caused by transfer payments, subsidies etc. and investment and job creation take off. This also reduces the size of the $61 billion in transfers to individuals as people are no longer dependant on federal transfers, increasing the virtuous circle. The potential $84 billion in spending cuts due to the ending of transfer payments goes to debt repayment, and becomes available to the productive economy six (if only the debt is paid off) or twelve years (if all unpaid liabilities like pensions are paid off as well) after the program begins.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #536 on: February 20, 2010, 18:42:57 »
Mixed signals in the economy. Since the TARP and stimulus packages didn't work, a lot of cash is floating around, but wealth destruction is continuing apace. I still would lean towards escalating inflation being the greater threat (especially as more money has fewer goods to chase, bidding up the prices), but we are in an unstable equilibrium and economics is a chaotic, non-linear system, and could change in unexpected ways:

http://www.ft.com/cms/s/0/46edaf82-1d5f-11df-b12e-00144feab49a.html?nclick_check=1

Quote
US consumer prices rise just 0.2%

By Alan Rappeport in Washington

Published: February 19 2010 14:27 | Last updated: February 19 2010 14:27

The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982, as aggressive measures to stimulate economic growth failed to inflate the cost of living.

The closely watched “core” consumer price index fell 0.1 per cent in January, labour department figures showed on Friday, as prices for new cars and housing dropped from the previous month. Prices including food and energy rose a less-than-projected 0.2 per cent.

Compared with a year ago, consumer prices are up 2.6 per cent.

Energy prices, which climbed by 2.8 per cent during the month, supported the overall uptick, while the cost of food rose a moderate 0.2 per cent. Medical care increased in price, but this was offset by declining prices for new vehicles and homes, as the car and housing sectors continue to sputter.

“That underlying core inflation pressures remain benign is consistent with our view that core price measures will keep to a disinflationary path this year owing to a very wide output gap,” said Joshua Shapiro, chief US economist at MFR, in a research note to clients.

Friday’s figures follow a higher-than-expected reading on wholesale prices on Thursday. The 1.4 per cent monthly rise was also fuelled by energy prices but there was little sign of inflation in other sectors.

The CPI is unlikely to change the outlook of the Federal Reserve, which has said it expects inflation to remain “subdued” for some time. In a speech on Friday, William Dudley, president of the Federal Reserve Bank of New York, said he expected modest economic growth with price pressures remaining “well contained”.

The Fed has been supporting the economy with “near zero” interest rates but has begun to debate how to start withdrawing some of that support. Although the lack of inflation reduces pressure for the Fed to begin tightening its monetary policy, it said on Thursday it would raise the discount rate at which commercial banks borrow from the central bank in a step to “normalise” its policy.

Michael Feroli, an economist at JPMorgan Chase, argues that deflation risks remain a concern and notes that core prices have been flat in the last three months.

“The policy implications of today’s number are clear, core inflation is moving further below the Fed’s implicit inflation target and in the process real interest rates are moving higher,” Mr Feroli said. “Recent declarations of ‘mission accomplished’ in the fight against deflation risks now look somewhat premature.”
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #537 on: February 20, 2010, 19:44:14 »
By what measure did TARP not work?  It brought the TED spread down rapidly, stabilized most of the US banking system, and has already started to be paid back.  While credit markets in the US are still somewhat tight the plan has very cleary been successful.

Mixed signals in the economy. Since the TARP and stimulus packages didn't work, a lot of cash is floating around, but wealth destruction is continuing apace. I still would lean towards escalating inflation being the greater threat (especially as more money has fewer goods to chase, bidding up the prices), but we are in an unstable equilibrium and economics is a chaotic, non-linear system, and could change in unexpected ways:

http://www.ft.com/cms/s/0/46edaf82-1d5f-11df-b12e-00144feab49a.html?nclick_check=1
Palma Non Sine Pulvere - Nothing Worth Having Comes Easily!

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Re: US Economy
« Reply #538 on: February 20, 2010, 19:53:09 »
By what measure did TARP not work? 

By the simplest measure possible; the "toxic assets" are still in circulation. Just to add an aggravating factor, Freddie and Fannie have received massive new bailouts and are still continuing to underwrite the sorts of mortgages that started the cycle in the first place (and the CRA hasn't been repealed either).

This sort of crony capitalism did in Japan from the early 1990's to today, so it is instructive to look at what happened there to see if there are some lessons to be learned here.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #539 on: February 20, 2010, 20:56:43 »
My wife and I were driving across the Florida panhandle a few days ago. I heard a commercial telling the public that they could own a home with no money down and no credit history. As this just registered in my consciousness partways through the commercial, I have no idea of the lending institution. However it scared the crap out of me.

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Re: US Economy
« Reply #540 on: February 24, 2010, 13:38:29 »
Kind of like riding the brakes while driving....

http://online.wsj.com/article/SB10001424052748704188104575083520811873704.html?mod=djemEditorialPage_h

Quote
Obama's New Investment Tax
A sneaky Medicare levy on dividends and capital gains.

The White House's new health-care proposal promises the "largest middle class tax cut for health care in history," which is a creative way of describing a vast taxpayer-subsidized insurance entitlement. Naturally, the fine print goes on to describe one of the largest tax increases for health care in history, too.

This new ObamaCare bargain would for the first time apply the 2.9% Medicare payroll tax to "interest, dividends, annuities, royalties and rents," so-called passive income that we are told includes capital gains, though the latter wasn't explicitly mentioned in the proposal. This antigrowth investment tax would apply to singles earning more than $200,000 and joint filers over $250,000 and comes on top of the Senate's 0.9-percentage-point increase in the payroll tax, which would bring the combined employee-employer share to 3.8%.

The rate hike on investment income would presumably take effect at the same time the 2001 and 2003 Bush tax cuts are due to expire next year, bringing the top rate to 22.9% as the current top capital gains rate would also rise to 20% from 15%. That's a 52% jump, and the last time investors were slammed with anything comparable was 1986 when the capital gains rate bounced to 28% from 20%—or a 40% increase—as part of the Reagan tax reform that reduced income tax rates.

In part this is a sneaky way of waging the House's war on "the rich" by other means while appearing to compromise. Speaker Nancy Pelosi's 5.4-percentage-point "surcharge" on modified adjusted gross income above $1 million—which also includes capital gains—was supposedly too extreme for the Senate, but the White House is trying to smuggle in its 2.9-percentage-point cousin. Of course, $250,000 is a lot lower income threshold than $1 million, and the rate can always be inched up later once the tax is already in place.

The House surcharge is certainly destructive but it is at least above-board. The White House levy muddies up both the tax code and Medicare financing.

The Medicare payroll levy was designed as a social insurance program with some connection, however attenuated, between taxes paid and benefits received. When Medicare passed in 1965 it was modelled after Social Security and the tax was supposed to be equivalent to a "premium" for guaranteed health-care insurance for seniors; everyone "contributed" at the same rate. Until 1993, the payroll tax was assessed only on the first $135,000 of wages, until the Clinton Administration and the Democratic Congress lifted the Medicare cap entirely.

The Clinton move was bad enough but Mr. Obama's plan fundamentally changes the nature of the government's health-care financing. Medicare's liabilities mean that it must receive injections of general revenue, but never before have Medicare's own "dedicated" revenues been siphoned off to fund another entitlement. Essentially, it turns Medicare financing into a wealth transfer program at a stroke.

This will be sold in the name of "fairness," if anyone else in the press corps notices, but the worst implications are economic. The 0.9% increase is another tax on job creation, though Democrats claim they want more jobs. The devious 2.9% hike on investment income will raise the cost of capital, though Democrats claim to want more capital investment. Sometimes we wonder if Democrats even listen to their own rhetoric, or if they assume voters are too dumb to notice their contradictions.

If Americans need another reason to oppose ObamaCare, or more evidence of its destructiveness, here it is.

Printed in The Wall Street Journal, page A16
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #541 on: February 24, 2010, 13:55:34 »
part 1 of 2

Here, reproduced in two parts under the Fair Dealing provisions (§29) of the Copyright Act from Reuters via the Globe and Mail web site, is a thought provoking article on the US dollar:

http://www.theglobeandmail.com/report-on-business/economy/why-the-us-dollar-may-be-heading-for-a-slow-fall/article1478413/
Quote
Why the U.S. dollar may be heading for a slow fall
Investors seen choosing the ‘least ugly' contestant among currencies for now


Steven C. Johnson, Kristina Cooke and David Lawder

New York and Washington — Reuters

Wednesday, Feb. 24, 2010

The only time the U.S. dollar ever took a serious shellacking in the marketplace, the wounds were almost entirely self-inflicted.
Facing mounting inflation and the escalating cost of the Vietnam War, President Richard Nixon, on Aug. 15, 1971, took the United States off the gold standard, which had been in place since 1944 and required that the Federal Reserve  back all dollars in circulation with gold.
The move amounted to a made-in-America double-digit devaluation, shocking the country's foreign creditors.

Deep inside the New York Federal Reserve Bank's fortress in lower Manhattan, Scott Pardee, then 34, was fielding frantic calls from central bankers around the world. They were demanding the United States cover the foreign exchange  risk on their reserves.
 “The whole roof came in on us,” recalled Mr. Pardee, a former New York Fed staffer who is now an economics professor at Vermont's Middlebury College. “That is the kind of situation the U.S. doesn't want to be in.”

Nearly 40 years later, the dollar still dominates world trade. At the height of the financial crisis in 2008, investors fled to the dollar as a temporary haven. But the dollar has been falling steadily since 2002, and as the world economy recovered last year, dollar selling resumed, reviving doubts about how long it could remain the world's unrivaled reserve currency.

The Greek debt crisis, which has sent investors stampeding back into the U.S. currency, has provided a reprieve. The dollar has gained some 10 per cent against the euro since December. And following the Fed's decision last week to hike the discount rate it charges banks for emergency loans, the dollar rose even higher as some investors bet it would benefit from the eventual end to the Fed's post-crisis regime of easy money.

But a number of economists, investors and officials here and abroad interviewed for this story say the longer-term prognosis is far from rosy.

“There'd be hell to pay for the dollar”

As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion - but perhaps not as slow as some might think.

If the world loses confidence in U.S. policies, “there'd be hell to pay for the dollar,” Mr. Pardee said. “Sooner or later, the U.S. is going to have to pay attention to the dollar.”

French President Nicolas Sarkozy, at January's World Economic Forum in Davos, proposed, to scattered applause, creating a new version of the Bretton Woods currency accord, which set up the very gold standard that Mr. Nixon brought crashing down.

Most economists doubt a return to the gold standard is feasible in today's interconnected world, with so much capital crossing borders at the click of a mouse.

Yet, as Gian Maria Milesi-Ferretti, a foreign exchange expert at the International Monetary Fund in Washington, put it: “Post-crisis, a lot more things are on the table. It is true among policymakers and in the markets that people are much more willing to look at unconventional proposals and even some proposals that may seem antiquated.”

Some argue the dollar's recent rally against the euro and yen (it's up almost 6 per cent against the Japanese currency since December) is less a vote of confidence than a realization that it's simply the best of a bad bunch.

Per Rasmussen, a retired currency trader who worked at Chase in the late 1970s in London, called it a “reverse beauty pageant” in which investors pick the “least ugly” contestant.

Since rising above $1.50 in November, the euro has tumbled more than 10 per cent and was last changing hands around $1.3550, near a nine-month low.

The currency has been battered by doubts about whether Greece and other wobbly euro zone economies can manage the spending cuts needed to rein in out-sized budget deficits. The worries have weakened confidence in the whole concept of European monetary union.

Thomas Kressin, who helps manage PIMCO's $100-million GIS FX strategy fund, said the euro is in danger of entering into an extended downtrend that takes it as low as $1.22 - which he described as fair value - over the next three to five years.

But the euro's lurch lower has done nothing to change traders like Axel Merk's dim view of the dollar's future.

Based in Palo Alto, California, Mr. Merk has been trading for 16 years and is currently president and portfolio manager of Merk Investments, the biggest mutual fund manager dealing exclusively with currencies.

He acknowledges he has had to scramble in his short-term funds to avoid being on the wrong side of the euro's nosedive. But over the next decade and beyond, Mr. Merk said the dollar has nowhere to go but down.

Investors will balk at “reckless U.S. fiscal and monetary policies” and start looking for alternatives to the U.S. currency, he said.

Others might take refuge in commodities. A recent U.S. Securities and Exchange Commission filing showed billionaire investor George Soros' New York-based firm more than doubled its bet on the price of gold during the fourth quarter.

Mr. Merk, whose $550-million Hard Currency Fund is designed to profit from a steady dollar decline, said he believes Washington is banking on a gradual dollar devaluation to shrink its monstrous debt and fuel an export boom to propel the economy.

“Now I am convinced that (U.S. authorities) consider a weaker dollar the solution to many of their problems. But you can't turn your policies upside down and expect the rest of the world to put up with it forever.”

That view is at odds with the official line from U.S. policymakers. They insist that “a strong dollar is in the U.S. interest,” a phrase repeated so often by former Treasury Secretary Robert Rubin in the 1990s it became his mantra. The person in the job today, Timothy Geithner, has made this mantra his own.

What's clear is that America's debt-holders aren't the passive, pliant bunch they used to be. Some of the biggest holders of U.S. dollar assets are also among the fastest growing economies and they are hardly bashful about criticizing U.S. policies, particularly now that the financial crisis has eroded America's influence and its reputation for sound economic management.

China alone holds $2.3-trillion in foreign exchange reserves, with nearly $800-billion in U.S. Treasury debt. And at a press conference last year, Premier Wen Jiabao did not mince words: “We have lent a massive amount of capital to the United States and of course we are concerned about security of our assets. To speak truthfully, I do indeed have worries.”

Terrence Checki, who has acted as the Federal Reserve Bank of New York's chief international trouble-shooter for two decades, warns that the U.S. cannot afford to ignore such concerns.

“We are no longer alone as the central axis for the global economy,” he told a gathering of influential bankers and policy-makers during a Foreign Policy Association dinner at New York's St Regis hotel in December.

That, he added, implies “recognizing that our leverage will not be what it once was. We also need to be attentive to the messages we receive, such as rumblings about the dollar and our policies and priorities, even when we disagree with them.”

History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly. In terms of economic might, the United States surpassed Britain in the late 19th century. But it took another 60 years and two world wars to strip sterling of its reserve status.

Even so, some worry time is not on the United States' side. Emerging markets already account for roughly half of global output and that share is rapidly increasing. In 2003, Goldman Sachs said the size of China's economy would surpass that of the United States by 2041. Five years later, it revised the forecast to 2027. China is expected to surpass Japan as the world's second largest economy this year.

“We are plainly overextended in our budgetary terms and in our dependence on foreign capital”

All of which would be fine were it not for the fact that the United States continues to live beyond its means. The recent spike in borrowing and spending following the financial crisis is creating a debt burden that, in the word of Moody's Investors Service, is trending “clearly, continuously upward.”

For the last 60 years, reserve currency status has conferred upon the United States what former French President Valery Giscard d'Estaing, during his time as finance minister, called “the exorbitant privilege.”

Because the dollar is in high demand, U.S. borrowing costs remain low. That makes it easier for the government to fund domestic priorities and military commitments and the average citizen to buy a home or start a business.

It also means the United States need not borrow or repay debts in foreign currencies, making the value of its currency a less urgent concern than it would be for other borrowers who borrow and pay for imports with dollars.

But such easy access to capital has led to huge deficits. With Americans spending more than they save, the money to finance the shortfalls has to come from abroad.

 “We are plainly overextended in our budgetary terms and in our dependence on foreign capital; we resort to the kindness of strangers to meet our deficits,” said former Federal Reserve Chairman Paul Volcker at an Economic Club of New York speech last month. Volcker is now head of President Barack Obama's Economic Recovery Advisory Board.

That kindness probably has a limit.

China and Russia have both talked publicly about long-term alternatives to the dollar. Some central banks, including Russia's, have said they intend to hold a greater amount of their foreign exchange reserves in other currencies.

Chinese central bank governor Zhou Xiaochuan also made waves last year when he said the dollar should one day be replaced, perhaps by a “super-sovereign” reserve currency based on Special Drawing Rights, the IMF's in-house unit of account.

Economists have interpreted the comments as an attempt to give the yuan, China's currency, a more prominent role in global finance, in keeping with the nation's growing clout on the world stage.

Of course, that won't happen overnight.

“There might be some progress towards multi-polarization of the international monetary regime, but there will be no immediate change to the dollar's role as the main international currency,” said Zhang Zhigang, chief economist with the China Center for International Economics Exchanges.

But over the last year, China has voted with its pocketbook. It quietly struck currency swap accords worth some 650 billion yuan ($95-billion) with central banks in Asia, Latin America and Eastern Europe that allow importers to pay for Chinese goods in yuan instead of dollars.

That could set the stage for greater use of the yuan for offshore financial and investment purposes. And that is a precondition if the currency is to achieve greater international status.

For now, however, central bank reserve managers have few options beyond the dollar. No country is close to outranking the United States - economically, militarily or politically.

The euro, which many see as the dollar's most immediate rival, is tied to an economic area with no common political or fiscal policy. That's part of what makes solving Greece's debt woes so difficult.

It also lacks a common bond market. Veteran Brown Brothers Harriman currency strategist Marc Chandler likens Europe's sovereign bond markets to those for U.S. municipal debt - lots of issuers of varying size and credit quality, but none that on its own can rival the deep, liquid U.S. Treasury market.

The U.S. Treasury, in an addendum to its October 2009 currency report, cited the disparate sovereign debt markets as the key reason the euro doesn't take an equal share of global reserves, even though the eurozone approximates the United States in economic power.

But other rivals will likely continue to gain strength. Ten years ago, China “was hardly even on the radar screen” in Washington, said Jeffrey Garten, a professor at the Yale School of Management and a former undersecretary of commerce during the Clinton administration.

“So people who say their currency is nowhere near an international currency and that it's going take at least 20 or 30 years -- I think they're living in a dreamworld,” Mr. Garten said.

As they open up and develop their capital markets, emerging economies such as China, Brazil or India could see their currencies occupy a larger portion of central bank reserves in coming decades, according to the October U.S. Treasury report.

It also asserts that as long as the United States maintains sound macroeconomic policies and open, deep and liquid financial markets, the dollar will remain “the major reserve currency.”

Some worry, however, that the parlous state of U.S. public finances makes betting on long-term dollar dominance dicey. The White House this month said the 2010 budget deficit would reach $1.565-trillion - at nearly 11 percent of output, the largest shortfall since World War II.

But America was running large trade and budget deficits before the financial crisis. “We went into the crisis in a weak fiscal position,” said C. Fred Bergsten, a former assistant Treasury secretary and current director of the Washington-based Peterson Institute for International Economics.

Dean Baker, co-director of the Center for Economic Policy Research in Washington, said U.S. finances are still manageable and a weaker dollar is necessary to boost exports, cut the trade deficit and end a multi-decade spending binge.

Provided America invests in education and infrastructure, maintains high output and productivity and keeps people employed, he said it can overcome the challenges it faces.

“We are moving to a world that's going to be multi-polar, a world where the dollar is not going to be as dominant as today,” he said. “But if we do things to keep the U.S. economy strong, we will be able to finance ourselves going forward.”

The United States found ready buyers for roughly $1.7-trillion in new debt issued in fiscal year 2009, which brought total debt held by the public to $7.89-trillion, some 55 per cent of output.

It is ill that men should kill one another in seditions, tumults and wars; but it is worse to bring nations to such misery, weakness and baseness
as to have neither strength nor courage to contend for anything; to have nothing left worth defending and to give the name of peace to desolation.
Algernon Sidney in Discourses Concerning Government, (1698)
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Re: US Economy
« Reply #542 on: February 24, 2010, 13:58:04 »
Part 2 of 2
Quote
“The bottom line is that we can't keep borrowing at this pace forever”

There are, however, some early signs that buyers may be growing sated. Treasury plans to issue another $1.5-trillion to $2-trillion this year - a record $126-billion this week alone. Yet auctions for $41-billion in long-dated debt earlier this month attracted only modest interest. The yield demanded by buyers of fresh 30-year debt was the highest in more than two years.

The United States still pays less than 4 per cent on its 10-year Treasury notes - well below an average of 7-9 per cent in the 1980s and 1990s. But economists also worry about the government's unfunded pension and health care liabilities.

Last year, Dallas Fed President Richard Fisher estimated that the United States may be on the hook for as much as $99-trillion, much of it tied to Medicare. That's about seven times the size of the entire U.S. economy.

“The bottom line is that we can't keep borrowing at this pace forever,” said Kenneth Rogoff, Harvard University economist and former chief economist at the IMF. “That only works if the Chinese are willing to lend us unlimited amounts of money at near-zero interest rates, and that just isn't going to last forever.”

When it ends, Mr. Rogoff said the U.S. will have to deal with higher interest rates, higher taxes and slower growth, all of which will further undermine its economic might.

Of course, much as the United States depends on Chinese savings to finance its deficit, China depends on U.S. consumers to keep buying its exports.

Few think this mutual dependence can last indefinitely. U.S. authorities and a number of economists claim the problem is China's inflexible exchange rate that pegs the yuan to the dollar, thus keeping it undervalued to support exports.

Analysts at the Washington-based Peterson Institute say that given China's massive growth, the yuan may be undervalued against the dollar by as much as 40 per cent.

Since President Barack Obama assumed office, the U.S. has twice declined to label China a currency manipulator, a move that could trigger trade sanctions. But the administration has repeatedly complained of China's unfair trade advantage.

Recently, the White House even pledged to double U.S. exports in five years, a goal that economists say would require a significantly weaker dollar.

It's not clear how much other nations, particularly China, will go along.

In the post-Cold War era, currency talks are the rough equivalent of nuclear arms reduction negotiations. In language evocative of the U.S.-Soviet face-off, Chinese military officers have proposed punishing Washington with “a strategic package of counter-punches” that includes dumping U.S. government bonds.

While the military plays no role in setting China's foreign exchange holdings, the comments underscored the rising level of tension and mistrust between the two powers.

“The Chinese are in the classic dollar trap”

Nicholas Lardy, a senior Peterson Institute fellow, dismisses such threats, noting that China's vast dollar wealth would start to evaporate and its currency to rise if it started unloading Treasuries.

“The Chinese are in the classic dollar trap. They have so many dollars that they can't diversify,” he said.

Marc Leland, head of Leland & Associates and deputy undersecretary of the Treasury during the first Reagan administration, said: “It's only leverage if one thinks they can pull the trigger. I don't think they can.”

Morgan Stanley Asia chairman Stephen Roach isn't so sure. He said that if the U.S. eventually resorts to trade sanctions against China - not unthinkable in a U.S. election year, with the unemployment rate near 10 pe rcent - Beijing would likely retaliate.

China might boycott a Treasury auction, he said, which could cause the dollar to plummet and interest rates to spike.

“I spend a lot of my time talking to the Chinese about that, and if it happened, I think they would feel compelled to stand up and take strong retaliatory actions, even though, yes, there would be consequences for them as holders of Treasuries and other dollar-denominated assets,” Mr. Roach said.

Mr. Merk, the investor who is betting against the U.S. currency, said the dollar's future may depend on Washington assuming a more humble attitude.

“Once you believe that you are better and greater than everyone else, you have a problem,” he said, “because today, the competition is right around the corner.”

That may be especially true for any winner of a reverse beauty context.


Like it or not, our economic future is tied, closely, some argue too closely (but they fail to offer realistic alternatives) to the US and to the fate of the US dollar.

We, the whole world, were accustomed to a bipolar world, in strategic military terms, from the ’50s through to the end of the ‘80s but this is the first time in a very, very long time that we have experienced anything but a unipolar monetary world – for 500 years we have depended upon silver or gold backed currencies, most lately the pound and, now, the dollar. We may have to get used to a world in which there is no single, national, reserve currency with all the economic leverage that provides. 
It is ill that men should kill one another in seditions, tumults and wars; but it is worse to bring nations to such misery, weakness and baseness
as to have neither strength nor courage to contend for anything; to have nothing left worth defending and to give the name of peace to desolation.
Algernon Sidney in Discourses Concerning Government, (1698)
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Re: US Economy
« Reply #543 on: March 05, 2010, 09:59:13 »
An 8.8% reduction in spending is a "nightmare scenario"? Considering the deficits are running in the trillion dollarrange, I would suggest these "austerity program" cuts are only 1/3 of what is actually needed (to reach a balanced budget so no new interest charges are accrued), and since the writer uses the "cut the musical ride" approach but does not look at exploding entitlements very closely, even this proposed program would have only a limited impact.

The writer also has a very implicit Keynesian bias towards the idea that only government spending can create employment, and makes no attempt to see if tax cuts or the elimination of economic distortions caused by these programs would provide investment to create new jobs:

http://www.businessinsider.com/this-is-what-the-us-government-austerity-budget-could-look-like-2010-2

Quote
The Nightmare Scenario: How The U.S. Government Would Look Under An Austerity Budget
 
As lending to sovereigns dries up, the world is talking about austerity budgets.

For now though, despite sky-high debts, the US can borrow at ease

But what would the United States look like under one?

The Irish have instituted a wide ranging austerity budget that has cut everywhere in order to bring the country's debt as a percentage of GDP back into line with Euro requirements.

So let's imagine for a moment...
Who would get killed in a US austerity budget >
 
The Unemployed Get Burned

Image: AP
Irish Money Reduction To Unemployed: 425 Million Euros ($578 million)

Similar U.S. Program: Unemployment Insurance, which has experienced significant extensions since the start of the recession.

Source: Irish Budget
 
Job Seekers Get Crushed

Job Seekers Get Crushed

Image: AP
Irish Money Reduction For Job Seekers: 197 Million Euros ($268 Million)

Similar U.S. Program: Unemployment Insurance: Welfare for unemployment has been reformed in America to only pay out those seeking employment.

Job Growth Spending Gutted

Image: AP
Irish Cut To Enterprise And Trade Spending: 50 Million Euros ($68 Million)

Similar U.S. Program Cut: Recovery Act and traditional Labor Department Spending.

Child Spending Gets Slashed

Image: AP
Irish Money Reduction On Child Spending: 221 Million Euros ($300 Million)

Similar U.S. Program: The Administration for Children and Families, which, under the U.S. Department of Health and Human Services, provides benefits for low income families in need of assistance for their children.

Drug Spending Gets Destroyed

Image: AP
Irish Money Reduction On Prescription Medicines: 141 Million Euros ($192 Million)

Similar U.S. Program: Medicare prescription drug coverage.

Dental Services Cut

Image: AP
Irish Money Reduction: 30 Million Euros ($41 Million)

Similar U.S. Program: Medicare and Medicaid dental services.

Retirees Ransacked

Image: AP
Retirement Age Increases From 65 To 66 Years

Similar U.S. Program: Social Security benefits begin at age 62, but full retirement for many Americans won't be until age 67. Merging the two into one date at 66 would be a similar result to the Irish plan.

Public Servant Pay Punished

Image: AP
Irish Money Reduction: 1 Billion Euros ($1.36 Billion)

Similar U.S. Program: Government wide salary reduction based upon the Irish rules of:

5% Cuts for first 30,000 Euros ($41,000) in salary.

7.5% For the next 40,000 Euros ($54,000) in salary.

10% On the next 55,000 Euros ($75,000) in salary.

Public Service Retirements Pulverized

Image: AP
Irish Money Reduction: Retirement benefits to be paid as average of career earnings, rather than final earnings in highest paid employment.

Similar U.S. Program: More across the board cuts in entitlements for retired and future government retirees.

Carbon Tax Hammers Polluters

Image: AP
Irish Money Increase Via Carbon Tax: 330 Million Euros ($448 Million)

Similar U.S. Program: Cap and Trade, but a tax has also been suggested.

Potential Increase In U.S. Tax Intake: 87.5 Billion Euros ($119.2 Billion) (interpolation; only if carbon emitters sit still and do not change their behaviour to reduce their tax exposure)

Spending on Education and Science Slashed 2.6%

Image: AP
Irish Cut In Science And Education Spending: 200 Million Euros ($272 Million)

Similar U.S. Program Cut: $4.01 Billion

Health And Children Spending Cut 3.5%

Image: AP
Irish Cut: 400 Million Euros

Similar U.S. Program Cut: $28.966 Billion

Welfare Payments Slashed by 4.1%

Image: AP
Potential Reduction In U.S. Welfare Spending for 2010: $22.837 Billion

Defensed Spending Sliced By 4.7%

Image: AP
Irish Cut To Defense Spending: 43 Million Euros ($58 Million)

Similar U.S. Program Cut: $41.633 Billion

Total Budget Gutted By 8.8%
Irish Budget Cut: 4.051 Billion Euros ($5.52 Billion)

Similar U.S. Budget Cut: $328.497 Billion


Source: Irish Budget and USGovernmentSpending.com
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #544 on: March 05, 2010, 13:30:29 »
To me this article is just stating the obvious, to others not so much.  ;)

NEW YORK TIMES

March 5, 2010
Op-Ed Columnist
Senator Bunning’s Universe
By PAUL KRUGMAN
So the Bunning blockade is over. For days, Senator Jim Bunning of Kentucky exploited Senate rules to block a one-month extension of unemployment benefits. In the end, he gave in, although not soon enough to prevent an interruption of payments to around 100,000 workers.

But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe.

And the difference between the two universes isn’t just intellectual, it’s also moral.

Bill Clinton famously told a suffering constituent, “I feel your pain.” But the thing is, he did and does — while many other politicians clearly don’t. Or perhaps it would be fairer to say that the parties feel the pain of different people.

During the debate over unemployment benefits, Senator Jeff Merkley, a Democrat of Oregon, made a plea for action on behalf of those in need. In response, Mr. Bunning blurted out an expletive. That was undignified — but not that different, in substance, from the position of leading Republicans.

Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax.

Now, the House has already passed a bill that, by exempting the assets of couples up to $7 million, would leave 99.75 percent of estates tax-free. But that doesn’t seem to be enough for Mr. Kyl; he’s willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent. That’s a very clear statement of priorities.

So, as I said, the parties now live in different universes, both intellectually and morally. We can ask how that happened; there, too, the parties live in different worlds. Republicans would say that it’s because Democrats have moved sharply left: a Republican National Committee fund-raising plan acquired by Politico suggests motivating donors by promising to “save the country from trending toward socialism.” I’d say that it’s because Republicans have moved hard to the right, furiously rejecting ideas they used to support. Indeed, the Obama health care plan strongly resembles past G.O.P. plans. But again, I don’t live in their universe.

More important, however, what are the implications of this total divergence in views?

The answer, of course, is that bipartisanship is now a foolish dream. How can the parties agree on policy when they have utterly different visions of how the economy works, when one party feels for the unemployed, while the other weeps over affluent victims of the “death tax”?

Which brings us to the central political issue right now: health care reform. If Congress enacts reform in the next few weeks — and the odds are growing that it will — it will do so without any Republican votes. Some people will decry this, insisting that President Obama should have tried harder to gain bipartisan support. But that isn’t going to happen, on health care or anything else, for years to come.

Someday, somehow, we as a nation will once again find ourselves living on the same planet. But for now, we aren’t. And that’s just the way it is.



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Online E.R. Campbell

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Re: US Economy
« Reply #545 on: March 05, 2010, 14:10:31 »
Paul Krugman is "stating the obvious" for those who know that the currency can be debased, over and over and over again, for purely partisan, political gain.

Sen. Bunning is also "stating the obvious:" chickens come home to roost; bills must be paid; inflation - fueled by zealous, devil take the hindmost overspending - is the real enemy of the poor because it lowers the value of what little they have.
 
It is ill that men should kill one another in seditions, tumults and wars; but it is worse to bring nations to such misery, weakness and baseness
as to have neither strength nor courage to contend for anything; to have nothing left worth defending and to give the name of peace to desolation.
Algernon Sidney in Discourses Concerning Government, (1698)
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Re: US Economy
« Reply #546 on: March 14, 2010, 00:28:09 »
Who is that John Galt guy anyway?

http://www.denverpost.com/harsanyi/ci_14658950

Quote
Harsanyi: Beware the Amazon

By David Harsanyi
Posted: 03/12/2010 01:00:00 AM MST

Tyranny is afoot. And this evil arrives in the guise of second- hand books and cheap Chinese trinkets. So beware.

Actually, if anyone ever needed an obvious illustration of how government overreach can damage an economy, they need look no further than the Colorado legislature's foolish attempt to wheedle a few extra bucks out of consumers via an Internet sales tax.

After legislation forcing online companies to collect sales tax passed, Amazon.com moved to protect its consumers and long-term interests by severing its ties with Colorado. Unfortunately, this meant closing its associates program, which involved an estimated 5,000 jobs.

Amazon's actions were not surprising, as it did the same in North Carolina and Rhode Island (a state, incidentally, which reportedly saw no additional revenue generated after passing a similar law taxing Internet sales).


"They've done nothing here but spit in our face," bristled Colorado Senate Majority Leader John Morse in a ludicrous rant on YouTube, wherein he went on to describe Amazon's actions as "such tyranny!"

Tyranny? Imagine that.

Since we're throwing incendiary words around, it should be noted that Morse's actions are a far better fit for the definition. The dictionary, after all, defines tyranny as "oppressive power exerted by government" or a "government in which absolute power is vested in a single ruler."

Besides, Amazon does not possess the power to compel its will on any Colorado citizens. All Amazon can do is pick up and leave. The state, on the other hand, does have the ability to coerce both taxpayers and corporations.

Once you get past the hyperbole of embarrassed legislators, the argument— and it has appeal — is that there is a lack of "fairness." Why should out-of-state online stores have an advantage over the traditional stores in the state?

Well, Amazon came up with better technology, it offers better services and, thus far, it has had a far superior business model. That's why. Let's leave the slippery concept of "fairness" to toddlers and legislators.

Amazon and other similar online stores offer a near-infinite array of choices at affordable prices. Their success hurts many on-the-ground businesses, no doubt, but it also benefits millions of consumers who save money. The tax savings that consumers cull from Internet purchases will be spent elsewhere, and more than likely in brick-and-mortar establishments.

But let's not forget that legislators also packed the bill with punitive measure and mandates that resemble, gulp, "tyranny."

Not only must online businesses notify consumers to pay taxes, but they would be mandated to hand over consumer sales records, and if not, pay fines for every violation — many beyond their control.

And as a recent Tax Foundation study on "Amazon laws" concluded, online companies would have to deal with more than 8,000 different tax computations should every state join Colorado's effort. Amazon would be nuts not to fight.

Still, you can understand why some folks are mad. ProgressNow, a liberal advocacy group, has launched a boycott of Amazon, which is a fine way to make a point, though I suspect its impact will be as small as the national Whole Foods boycott (which started after CEO John Mackey had the gall to offer some constructive ideas on health care reform).

One only wishes that citizens could boycott irascible and intrusive state legislators — with their knee-jerk, ill-informed, anti-capitalist sentiment — who are willing to risk the jobs of thousands of citizens for a couple million bucks in the state's coffers.

Alas, no such luck.

E-mail David Harsanyi at dharsanyi@denverpost.com and follow him on Twitter at @davidharsanyi.

Read more: http://www.denverpost.com/harsanyi/ci_14658950#ixzz0i7rW1JSu
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #547 on: April 05, 2010, 15:11:24 »
You can either take a look at the facts or:

http://www.smalldeadanimals.com/archives/013716.html

Quote
Blame Bush

    There are a few little-regarded truths that have been buried under the relentlessly spewed pile of lies that were used to demonize George W. Bush and the Republican Congress from the day Al Gore failed to carry his own home State in the 2000 Election until… well… it’s still pretty much a leftist pastime.

    The horror of “the last 8 years” has become it’s own self-perpetuating meme. The problem is that it’s a meme without meaning. Two of those eight years – now stretched to three out of the last nine – saw fiscal and regulatory policies determined by the Democrat Congressional majority, elected in 2006. Every economic indicator available shows that this is where America’s recent tribulations began.

    The real horror – the years since the Democrat Congress rose to absolute power – hasn’t seen much discussion. It’s “all Bush’s fault”, as they say. But as the last ten years recede into the rear view mirror, we can see them in context. And 20/20 hindsight can often be quite revealing.

Read the whole thing, then pass it along to your friends.

h/t Cal2
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #548 on: April 05, 2010, 23:36:13 »
More dominoes stacked up in a row:

http://www.city-journal.org/2010/20_2_strategic-mortgage-default.html

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Luigi Zingales
The Menace of Strategic Default
Homeowners who walk away from their mortgages undermine our financial system.
Spring 2010

Eighteen years ago, when I bought my first apartment in Chicago, I asked my broker whether, if I defaulted on my mortgage, the lender could come after my income after repossessing the house. I had heard that some states didn’t allow that, and I wondered if Illinois was among them. To my surprise, the broker didn’t know, either, but she promised to find out. It clearly wasn’t a burning question for her, since she still wasn’t able to answer it the next time we met. Our ignorance wasn’t unique. Confident that house prices would never stop rising, most Americans never bothered to check what would happen if they defaulted. After all, who would walk away from a house worth more than the mortgage?

Today, the matter is far from theoretical for the 15.2 million American households holding mortgages that exceed the value of their homes. It will help determine how many of them choose to “default strategically”—that is, walk away from their mortgages even when they can afford them, because they’ve determined that it’s no longer worth it to keep paying. And that, in turn, will help determine the future health of the American housing market—and thus of the U.S. economy.

Many people think that we don’t have to worry about widespread strategic defaults. When I discussed the problem with a board member of one of the top four American banks, he categorically denied its existence: “The idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded.” A study from the Federal Reserve of Boston seems to confirm his skepticism. Evaluating Massachusetts homeowners during the 1990–91 recession, it found that only 6.4 percent of “underwater” borrowers—that is, those burdened with mortgages that exceeded the value of their homes—ended up in foreclosure. And not all of those households were defaulting strategically; many, presumably, were actually unable to pay their mortgages.

Unfortunately, such evidence may not tell us much about the likelihood of strategic default today. During the 1990–91 recession in Massachusetts, home prices fell just 22.7 percent from peak to trough, and most borrowers had made 20 percent down payments—so few owed much more than their houses were worth. Even people who had bought at the peak owed, on average, just 3 percent more than the value of the house. Over the last few years, by contrast, home prices have fallen by 40 to 50 percent in several areas, and many borrowers had put very little or nothing down when they bought their houses. Furthermore, during the current recession, the problem affects not only those who bought houses at the peak but also those who took advantage of rising house prices to take some money out in a refinancing. This wasn’t the case in 1990–91, when home-equity lines of credit were extremely rare.

Strategic default is hard to define, of course, and presents difficulties for researchers. What exactly does it mean to be able to pay a mortgage? If I default because I’m unwilling to work extra hours to pay my mortgage, is that a strategic default or a necessary one? Nevertheless, a growing body of evidence suggests that in the current recession, strategic default exists and is rising.

The most convincing evidence comes from a study by Experian and the consulting firm Oliver Wyman that tries to measure strategic default by identifying people who go straight from having always been current on their mortgages to being 180 days late—while staying current on all their other debt obligations, such as credit cards and auto loans. The idea is that if somebody pays the credit card but not the mortgage, it’s probably because he wants to default on the mortgage, not because he must. The study estimates that in 2008, 17 percent of all U.S. defaults were strategic, though that figure differs tremendously across groups and regions. For instance, 27 percent of defaults among people with high credit scores appear to be strategic, a figure that jumps to 40 percent in California.

A study by the Amherst Securities Group takes a different approach. It shows that in areas where homeowners generally weren’t underwater, under 1.5 percent of subprime mortgages became nonperforming each month during the third quarter of 2009. But in areas where the average mortgage exceeded the current value of a house by 20 percent or more, the rate of monthly subprime defaults was 4.5 percent. The difference between the two rates probably isn’t due to homeowners’ ability to pay, because the study corrects for unemployment. The assumption, therefore, is that it’s due to homeowners’ willingness to pay when they see how much more expensive their mortgages are than their houses. The difference between the two default rates—the 1.5 percent “natural” rate and the 4.5 percent rate in areas where home prices dropped significantly—suggests that in those areas, two-thirds of defaults seem to be strategic.

Survey-based evidence also suggests that strategic default has become widespread. A survey conducted by the Chicago Booth/Kellogg School Financial Trust Index, which I helped design, asked a representative sample of 1,000 Americans how many people they knew who had defaulted and how many of those people had defaulted even if they could still afford to pay their mortgages. According to the respondents in March 2009, 23 percent of their acquaintances’ defaults were strategic. By September, that fraction had increased to 36 percent.

Though the rate of strategic default is hard to determine, one thing seems certain: the more you owe, relative to the value of your house, the likelier you are to default strategically. Nobody will do that if his mortgage is just 10 percent larger than his house is worth. Of households that owe 50 percent more than their houses are worth, the same survey suggests, 25 percent will default strategically. And a New York Fed study estimates that of households that owe 62 percent more than their houses are worth, a full half will default strategically. The good news is that many homeowners seem unwilling to default even when they owe a lot more than their houses are worth. The bad news is that we aren’t sure why they hold off—or how long they’ll continue to.

In fact, what’s surprising isn’t how many homeowners choose to default strategically, but rather how few do so, given the strong monetary incentives. In many areas, prices have fallen so steeply that the monthly mortgage on a house—if it was acquired just before the housing bubble burst—is twice as expensive as the monthly rent on an identical house. If you were holding such a mortgage, why wouldn’t you default?

The law doesn’t provide much incentive to stay put. It’s true that 39 states permit a lender to come after a borrower’s other assets and income if he defaults (as I would have discovered, had I done my homework 18 years ago). And it’s also true that even in the 11 states that don’t allow that, the restriction applies only to original home loans used to purchase property, not to home-equity lines of credit, while there is some legal uncertainty regarding mortgages issued to refinance existing mortgages. Nevertheless, lenders rarely slap borrowers with a deficiency judgment—a court injunction to pay the difference between the face value of a mortgage and the proceeds that the lender earns by repossessing and selling the house. The procedure is costly and generally not worth the expense because of the limited assets that most Americans own aside from their homes.

The tax code likewise doesn’t impede people from defaulting strategically. Until recently, it’s true, people had to pay taxes on any forgone debt. If you walked away from a house worth, say, $100,000 less than you owed the bank for it, that $100,000 was essentially income, and you had to pay income tax on it. However, in December 2007, Congress made mortgage debt cancellation nontaxable for personal residences. Congress’s aim was to facilitate the renegotiation of underwater mortgages, but the move had an unintended consequence: reducing the cost of walking away.

What does prevent people from strategic default, it seems, is their sense of what’s right. More than 80 percent of Americans think that it’s immoral to default on a mortgage if you can afford to pay it, according to a recent paper by Luigi Guiso, Paola Sapienza, and myself, and these people are 77 percent less likely to declare their intention to default strategically than people who don’t find the act immoral. Perceived social norms also seem to affect the propensity to walk away: knowing somebody who defaulted strategically, or living in an area where many people have done so, makes a person much more likely to declare his willingness to follow suit.

Recently, though, some scholars have begun questioning the moral imperative not to default. Roger Lowenstein, writing in the New York Times, wonders why we should expect homeowners not to default strategically, when banks routinely do so with their underwater investments. Similarly, Lowenstein likens strategic defaults to the “walkaways” that prominent companies have made, such as Tishman Speyer’s default on its Stuyvesant Town property in New York. The analogy isn’t apt, however, because in commercial real estate, contracts explicitly state that borrowers can transfer ownership of the collateral in lieu of repaying the debt. With such an agreement in force, there is no moral obligation to pay any residual debt after the property has been transferred. Such a provision is not present in home mortgages in most states.

University of Arizona law professor Brent White goes further, arguing that defaulting on a mortgage when its value exceeds the value of the house is the rational thing to do and that homeowners refrain only because of media “scare stories” pushed by powerful lenders. He suggests that the government should encourage borrowers to default when it’s in their economic interest, which would force banks to renegotiate the loans. His solution is akin to encouraging people not to pay taxes in an effort to induce the government to reduce fiscal pressure: it might work, but at the cost of putting the entire system at risk.

How much risk? If the underwater homeowners who currently refuse to default changed their minds and decided to abandon their mortgage commitments, the results could be catastrophic. The more people walk away, the more houses get auctioned off, further depressing real-estate prices. This additional decline would push more homeowners into negative territory, leading to still more defaults. Adding to the deadliness of this cycle would be the fact that as more strategic defaults occurred, the social stigma associated with them would lessen. Such a continued collapse is already a distinct possibility in several states: Nevada (where two-thirds of all homeowners are underwater), Arizona (51 percent), Florida (49 percent), Michigan (48 percent), and California (42 percent). Every time a borrower defaults, moreover, he makes future mortgages more expensive (because lenders have to cover the cost) and the mortgage market more inefficient (because many potential borrowers are shut out). This higher cost and reduced availability of credit would depress house prices even more, jeopardizing the possibility of an economic recovery.

Undermining the social norm to repay mortgages, as Lowenstein and White do, is thus a very bad idea. You might just as well say that when a theater is going up in flames, it’s “rational” to trample other people in rushing to the exits.

Not only did the real-estate crisis shove millions of homeowners underwater; it also jeopardized the very social norms that it rests upon. To prevent a complete breakdown in social norms—a breakdown that could take decades to reverse—it’s necessary to facilitate mortgage renegotiations, especially in the areas most affected by the drop in home prices. Unfortunately, the major lenders oppose any reduction of mortgage principal. They’re playing a dangerous game of chicken, gambling that the real-estate market will recover and that any dollar of principal reduction now will be a dollar less in profit for them later. (Even if the market doesn’t recover, they don’t have much to lose, since if they collapse they’re likely to become wards of the state.)

Eric Posner and I have proposed a simple solution to the problem of underwater mortgages. We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses’ future appreciation. To keep homeowners honest—that is, to prevent them from doing minimal upkeep in the knowledge that they stood to gain less from a home-price increase—the capital gain would be measured based on an average of houses selling in the area, rather than on the change in the value of the actual house.

This proposal eliminates all the incentives for a strategic default without excessively rewarding the borrowers. In fact, the proposal’s main appeal is that it tries to split the costs and benefits fairly between lenders and borrowers, without having taxpayers subsidize both, as the Obama administration’s interventions have done. Unfortunately, that makes our proposal unpopular. Since it doesn’t unduly favor any constituency, it isn’t supported by any. And since it doesn’t spend tax revenue, it isn’t favored by politicians, who never tire of rescuing some people with other people’s money.

Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.

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Re: US Economy
« Reply #549 on: April 09, 2010, 09:22:37 »
Don't expect a gradual decline:

http://www.theatlantic.com/business/archive/2010/04/going-greek/38668/

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Going Greek

Apr 8 2010, 3:19 PM ET
Greece's fiscal problems are turning into one of those endless sagas, the kind we watch unfold at Thanksgiving every year.  Aunt Daphne is going to leave Uncle John!  No, they're in counseling! Wait, now Aunt Daphne is breaking up with the counselor, too!  The rumors are starting to take on a toxic life of their own, driving up the yields demanded on Greek debt--which in turn, makes it less likely that they'll be able to finesse the crisis with a moderate infusion of outside cash.

Paradoxically, that seems to be good news for us, pushing our debt yields lower; we are the proverbial "any port in a storm". This phenomenon is what makes it so difficult to assess the risk of US fiscal trouble.  On the one hand, the US budget is clearly on a completely unsustainable path, and frankly, our household budgets don't look so much better.  This should make investors nervous about our bonds.

And as far as I can tell, they are.  But they're even more nervous about bonds everywhere else . . . because everywhere else has worse demographic problems, and a less impressive history of economic growth.  So they aren't signalling their nerves the way we'd expect, by slowly and steadily pushing up bond yields.

But that in itself is a vulnerability. If at any point we are not seen as the safest game in town, we will take a gigantic--the better word might be "catastrophic"--hit on our bond interest.  If there's somewhere safer to park our money, suddenly we lose the premium we currently enjoy for having bonds considered the "risk free" rate.  So while our super-sterling credit rating may delay the onset of a fiscal crisis, if we ever let it get to that point, the onset may be even more sudden and disasstrous than these things usually are.  All the more reason to start getting our fiscal house in order now.
Dagny, this is not a battle over material goods. It's a moral crisis, the greatest the world has ever faced and the last. Our age is the climax of centuries of evil. We must put an end to it, once and for all, or perish - we, the men of the mind. It was our own guilt. We produced the wealth of the world - but we let our enemies write its moral code.