Following the lead of credit rating agencies Moody's and Fitch, Standard & Poor's lowered Los Angeles' bond rating today.
Plagued by a $212 million debt, as well as plunging tax revenues, Los Angeles finds itself in a precarious position. The lowered rating will cost the city millions in additional borrowing costs.
Things are so bad that last week the city announced plans to eliminate 4,000 workers. Though the layoffs are projected to save as much as $300 million, analysts fear that the savings will be offset by the city's still excessive spending.
S&P downgraded Los Angeles from AA to AA-minus. That will increase interest rates for city bonds. Over the next few months, Los Angeles is expected to issue $70 million in bonds to pay for various legal judgements.
Moody's view of Los Angeles had already dropped from "stable" to "negative" last week.
S&P's move came just weeks after it lowered California's bond rating. Already lower than any other state in the union, California's rating was dropped yet again as it remains mired in a massive budget deficit of $20 billion.
The agency lowered the state's general obligation bond rating from A to A-minus. It says it has a negative outlook on California's debt, an indication that it may yet lower the state's bond rating even further.
The state's borrowing costs have increased, and Gov. Schwarzenegger is seeking $7 billion in assistance from te federal government, which has its own staggering debt problem.
S&P’s cut brings it in line with Moody’s rating of Baa1 and Fitch's BBB.
According to the state Treasurer’s office, Moody’s assessment of California’s debt is just three steps above so- called junk, or non-investment grade. Meanwhile, Fitch's rating is now just two steps above junk.
State budget officials have already said they may delay paying some of the state’s bills in March because the state's cash balance will dip below the $2.5 billion cushion they like to maintain.
California Treasurer Bill Lockyer warned that California may need to delay or shut down thousands of infrastructure projects if budget problems prevent it from raising additional funds from investors.
Tuesday, February 23, 2010
Consumer Confidence Plunges As Reality Sets In
Consumer confidence nosedived to a 10-month low in February, according to the Conference Board.
The index, which stood at 56.5 in January, plunged to 46. The economy is considered stable only when the reading surpasses 90.
By this measure, our economy is halfway to stable.
Consumers are clearly worried about their jobs or, for the unemployed, their prospects of finding jobs. They are worried about mortgage payments, or delinquencies and defaults. They are worried about credit card debt, medical debt, and every other manner of debt.
Their anxiety will likely lead to curbed spending, the board said.
That's a problem for the economy since about 70% of economic activity is derived from consumer spending. This lack of consumer confidence dampens hopes of a nascent recovery.
People are simply reacting to what they feel, to what they hear, and to what they see around them. They see empty storefronts and foreclosure signs everywhere. If they haven't lost their jobs, they know people who have.
People aren't buying any of this "greenshoots" nonsense. They obviously dismiss the government's and media's claims of an economic recovery.
Americans are opting for realism over baseless optimism. Reality is setting in. Our current situation is more than jut an economic cycle.
Everything has changed, and may never be the same.
The index, which stood at 56.5 in January, plunged to 46. The economy is considered stable only when the reading surpasses 90.
By this measure, our economy is halfway to stable.
Consumers are clearly worried about their jobs or, for the unemployed, their prospects of finding jobs. They are worried about mortgage payments, or delinquencies and defaults. They are worried about credit card debt, medical debt, and every other manner of debt.
Their anxiety will likely lead to curbed spending, the board said.
That's a problem for the economy since about 70% of economic activity is derived from consumer spending. This lack of consumer confidence dampens hopes of a nascent recovery.
People are simply reacting to what they feel, to what they hear, and to what they see around them. They see empty storefronts and foreclosure signs everywhere. If they haven't lost their jobs, they know people who have.
People aren't buying any of this "greenshoots" nonsense. They obviously dismiss the government's and media's claims of an economic recovery.
Americans are opting for realism over baseless optimism. Reality is setting in. Our current situation is more than jut an economic cycle.
Everything has changed, and may never be the same.
Sunday, February 21, 2010
Millions Set to Lose Unemployment Benefits as Economy Fails to Create Jobs
According to the National Employment Law Project, nearly 1.2 million Americans will lose their unemployment benefits next month unless Congress steps in to extend the filing deadline. By July, that number jumps to almost 5 million.
Under current law, unemployed Americans have access to 26 weeks of state-sponsored insurance benefits. But due to the Great Recession, the federal government has initiated four separate tiers of emergency benefits that can extend the benefits period up to 99 weeks.
However, recipients must exhaust their current benefits before filing for the next tier. Yet, the filing deadline for all tiers is at the end of February. As a result, nearly 1.2 million Americans will either not be able to apply for federal assistance or unable enter the next federal tier.
If Congress doesn't act immediately — with money it doesn't even have — all of these Americans will face an even greater crisis.
The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.
Yet, the cost of extending unemployment benefits to the federal government and the states will be burdensome, and require taking on even further debt.
According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.
The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.
Republican demands for tax cuts directed toward businesses that hire new employees this year will only shortchange an already broke Treasury Department and reeling Social Security Administration.
Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone.
The federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.
Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.
Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.
The unfortunate reality is that job creation has been slowing for decades.
According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year.
But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.
Despite this reality, the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.
Yet, more than 8 million jobs have been lost during the Great Recession, meaning that job creation for the previous decade was actually negative.
That's a very deep hole to work out of.
Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the current jobs deficit.
That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.
Under current law, unemployed Americans have access to 26 weeks of state-sponsored insurance benefits. But due to the Great Recession, the federal government has initiated four separate tiers of emergency benefits that can extend the benefits period up to 99 weeks.
However, recipients must exhaust their current benefits before filing for the next tier. Yet, the filing deadline for all tiers is at the end of February. As a result, nearly 1.2 million Americans will either not be able to apply for federal assistance or unable enter the next federal tier.
If Congress doesn't act immediately — with money it doesn't even have — all of these Americans will face an even greater crisis.
The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.
Yet, the cost of extending unemployment benefits to the federal government and the states will be burdensome, and require taking on even further debt.
According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.
The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.
Republican demands for tax cuts directed toward businesses that hire new employees this year will only shortchange an already broke Treasury Department and reeling Social Security Administration.
Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone.
The federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.
Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.
Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.
The unfortunate reality is that job creation has been slowing for decades.
According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year.
But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.
Despite this reality, the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.
Yet, more than 8 million jobs have been lost during the Great Recession, meaning that job creation for the previous decade was actually negative.
That's a very deep hole to work out of.
Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the current jobs deficit.
That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.
Saturday, February 20, 2010
Shadow Inventory Amounts to Nearly Three Years of Home Sales
According to a report from the credit rating agency Standard & Poor’s (S&P), the “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate.
The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation.
On average, $14.5 billion of seriously delinquent loans or REO property liquidates each month.
S&P estimates the inventory to equal a 33-month supply of homes. All of that inventory will further drive down home prices.
“Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market,” according to the report.
“We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one,” said the analysts.
According to the S&P report, homes are falling into serious delinquency faster than REO transactions are closing.
Following current trends, S&P analysts predict that 70 percent of the mortgages that have received a loan modification will re-default.
The total balance of these re-defaulting loans and the current amount of serious distressed loans will reach $473.4 billion, nearly 30 percent of the total outstanding balance on all privately securitized loans.
Friday, February 19, 2010
Fed President Says US on "Unsustainable Course"
Kansas City Federal Reserve Bank President Thomas Hoenig says U.S. fiscal policy is on an "unsustainable course" and the government must adjust its tax and spending programs or risk a crisis.
"The U.S. government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis," said Hoenig.
"In time, significant and permanent fiscal reforms must occur in the United States."
Hoenig said a government faced with rising debt levels must come up with a credible long-term plan to reestablish fiscal balance.
That plan must be seen as fair, said Hoenig, and those who put it in place must be wiling to disappoint special interests.
"It means, for example, controlling budget earmarks, trimming subsidies to numerous economic sectors, and resolving our banking problems and the perception that Wall Street is favored over Main Street, all of which would otherwise foster mistrust and cynicism among the public," Hoenig said.
The Obama Administration recently sent Congress a $3.8 trillion budget blueprint, with a $1.3 trillion deficit, for fiscal year 2011. That follows a forecasted record deficit of $1.6 trillion in fiscal 2010.
"The U.S. government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis," said Hoenig.
"In time, significant and permanent fiscal reforms must occur in the United States."
Hoenig said a government faced with rising debt levels must come up with a credible long-term plan to reestablish fiscal balance.
That plan must be seen as fair, said Hoenig, and those who put it in place must be wiling to disappoint special interests.
"It means, for example, controlling budget earmarks, trimming subsidies to numerous economic sectors, and resolving our banking problems and the perception that Wall Street is favored over Main Street, all of which would otherwise foster mistrust and cynicism among the public," Hoenig said.
The Obama Administration recently sent Congress a $3.8 trillion budget blueprint, with a $1.3 trillion deficit, for fiscal year 2011. That follows a forecasted record deficit of $1.6 trillion in fiscal 2010.
Wednesday, February 17, 2010
Foreign Demand for US Treasuries Falls by Record Amount
Foreign demand for US Treasury securities fell by a record $53 billion in December.
China led the way, selling $34.2 billion in Treasury securities during the month. And it was the second consecutive month that China reduced its holdings.
The drop was significant since the old record was a $44 billion decline, set in April 2009.
China is saturated with US debt and signaled last year that it would begin reducing some of its holdings, which had doubled since 2007.
The size of China's holdings was so great that, as of September 2008, it had surpassed Japan to become the number one holder of US government debt. With $769 billion in holdings, Japan has now regained the top spot, while China dropped from $790 billion to $755 billion in Treasury holdings.
At the height of the financial crisis in 2008, many investors sought the perceived safety of US Treasuries. But the growing size of US deficits and the national debt may have changed that perception.
China is the biggest US trade partner and the sale of its goods here has helped to finance US deficits. So this selloff is politically sensitive. The US may now have to pay higher interest to compel foreigners to continue buying its debt. And the US can no longer rely on China, so it will have to look elsewhere for buyers.
Japan may not be the most reliable candidate since its debt is now 200% of GDP.
This sea change comes at a difficult time for the US; it now projects a $1.6 trillion budget deficit for FY 2010, which is 11% of GDP.
The trouble in European debt markets — due to the problems in Portugal, Italy, Ireland, Greece and Spain — has recently increased demand for US Treasuries, which could remain attractive as long as the crisis persists.
However, one questions remains: will the Chinese continue the selloff, or will they simply stop buying additional Treasuries?
Though it may just be posturing, two leaders in China's military have publicly called for their government to economically retaliate against the US for selling arms to Taiwan.
However, dumping its Treasuries would do as much damage to the Chinese economy as to the United States because it would further devalue the dollar. That would hurt China's ability to export to the US, and the Chinese economy is totally dependent on exports.
If the Chinese are willing to absorb a serious blow in order to punish the US, they hold an enormous amount of power and leverage. Further dumping of their Treasury holdings may amount to cutting off their nose to spite their face, but trying to understand or predict Chinese behavior may be futile.
The problem for the US is that it doesn't just need to sell Treasuries to finance its deficit spending; it needs to sell them to pay off the holders of maturing Treasuries. In other words, it needs to borrow from Peter to pay Paul.
In the absence of enough buyers, the Federal Reserve will simply conjure money out of thin air to pay the Treasury for its bonds. Such action increases the monetary supply and devalues all existing dollars.
That's the price all of us have to pay as China and others dump our bonds, and / or refuse to buy more of them.
China led the way, selling $34.2 billion in Treasury securities during the month. And it was the second consecutive month that China reduced its holdings.
The drop was significant since the old record was a $44 billion decline, set in April 2009.
China is saturated with US debt and signaled last year that it would begin reducing some of its holdings, which had doubled since 2007.
The size of China's holdings was so great that, as of September 2008, it had surpassed Japan to become the number one holder of US government debt. With $769 billion in holdings, Japan has now regained the top spot, while China dropped from $790 billion to $755 billion in Treasury holdings.
At the height of the financial crisis in 2008, many investors sought the perceived safety of US Treasuries. But the growing size of US deficits and the national debt may have changed that perception.
China is the biggest US trade partner and the sale of its goods here has helped to finance US deficits. So this selloff is politically sensitive. The US may now have to pay higher interest to compel foreigners to continue buying its debt. And the US can no longer rely on China, so it will have to look elsewhere for buyers.
Japan may not be the most reliable candidate since its debt is now 200% of GDP.
This sea change comes at a difficult time for the US; it now projects a $1.6 trillion budget deficit for FY 2010, which is 11% of GDP.
The trouble in European debt markets — due to the problems in Portugal, Italy, Ireland, Greece and Spain — has recently increased demand for US Treasuries, which could remain attractive as long as the crisis persists.
However, one questions remains: will the Chinese continue the selloff, or will they simply stop buying additional Treasuries?
Though it may just be posturing, two leaders in China's military have publicly called for their government to economically retaliate against the US for selling arms to Taiwan.
However, dumping its Treasuries would do as much damage to the Chinese economy as to the United States because it would further devalue the dollar. That would hurt China's ability to export to the US, and the Chinese economy is totally dependent on exports.
If the Chinese are willing to absorb a serious blow in order to punish the US, they hold an enormous amount of power and leverage. Further dumping of their Treasury holdings may amount to cutting off their nose to spite their face, but trying to understand or predict Chinese behavior may be futile.
The problem for the US is that it doesn't just need to sell Treasuries to finance its deficit spending; it needs to sell them to pay off the holders of maturing Treasuries. In other words, it needs to borrow from Peter to pay Paul.
In the absence of enough buyers, the Federal Reserve will simply conjure money out of thin air to pay the Treasury for its bonds. Such action increases the monetary supply and devalues all existing dollars.
That's the price all of us have to pay as China and others dump our bonds, and / or refuse to buy more of them.
2010: The Year of the Short Sale
The biggest US banks, including Bank of America, Wells Fargo, Citigroup, and JP Morgan Chase, are preparing to rid themselves of troubled mortgages by engaging in an aggressive program of "short sales," in which homeowners settle debts by selling their properties for less than the mortgage value.
With home values continuing to drop across the US, leaving many mortgage holders underwater, short sales are expected to increase sharply this year.
The number of homes entering, or in, foreclosure is also expected to climb to a record 4.3 million, from 3.4 million in 2009.
By June, more than five million homes (or 10% of all homes with mortgages) are expected to drop below 75% of their mortgage balance,
That's the threshold at which the owner starts to seriously consider just walking away, even if he or she has the money to keep paying, according to a recent NY Times report.
“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”
Compared to foreclosures, banks can cut their losses by 20% with short sales.
BofA executive Matt Vernon says short sales are growing faster than REOs [real estate owned transactions], a positive development for banks.
Mark Zandi, chief economist of Moody’s Economy.com, forecasts short sales and deed-in-lieu transactions will total 20% of all distressed home sales this year, up from 15% last year.
In April, the Obama administration will launch a program that encourages homeowners, lenders and investors to complete short sales by providing up to $3,500 in incentives.
Such an effort will only increase and hasten the number of short sales this year. That will be good not only for banks, but also for prospective buyers.
With home values continuing to drop across the US, leaving many mortgage holders underwater, short sales are expected to increase sharply this year.
The number of homes entering, or in, foreclosure is also expected to climb to a record 4.3 million, from 3.4 million in 2009.
By June, more than five million homes (or 10% of all homes with mortgages) are expected to drop below 75% of their mortgage balance,
That's the threshold at which the owner starts to seriously consider just walking away, even if he or she has the money to keep paying, according to a recent NY Times report.
“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”
Compared to foreclosures, banks can cut their losses by 20% with short sales.
BofA executive Matt Vernon says short sales are growing faster than REOs [real estate owned transactions], a positive development for banks.
Mark Zandi, chief economist of Moody’s Economy.com, forecasts short sales and deed-in-lieu transactions will total 20% of all distressed home sales this year, up from 15% last year.
In April, the Obama administration will launch a program that encourages homeowners, lenders and investors to complete short sales by providing up to $3,500 in incentives.
Such an effort will only increase and hasten the number of short sales this year. That will be good not only for banks, but also for prospective buyers.
Monday, February 15, 2010
Don't Hold Your Breath Waiting For A Housing Recovery
The problems in the residential housing market remain deep. Nationally, home prices are down by about a third from their 2006 peaks, creating millions of underwater borrowers.
Last fall, it was widely reported that one-in-four US mortgages had negative equity.
By various estimates, approximately 11 million to 14 million mortgages are underwater, and the problem is poised to worsen.
U.S. foreclosure filings rose 15 percent in January from a year earlier and exceeded 300,000 for the 11th consecutive month, according to RealtyTrac Inc.
The company predicts that bank seizures (known as REOs, or real-estate-owned) may rise to a record 3 million this year.
Modification programs that were designed to keep delinquent borrowers in their homes have failed and are expected to continue doing so.
That's largely because about 8.4 million jobs have been lost since the recession began in December 2007. The continuing job losses have led to growing delinquencies and foreclosures.
A rising supply of homes puts downward pressure on already slumping home prices. And sales could be slowed considerably when government support for housing, including the Federal Reserve’s $1.25 trillion purchase of mortgage bonds and a first-time buyer tax credit, ends as scheduled next month.
With foreclosure inventories on the rise, banks are rightfully worried. But, by lowering credit standards and unleashing a wave of speculative housing demand, the banks were the ones that helped drive home prices to unrealistic levels in the first place.
As a result, significant trouble still lies ahead for banks, communities, and homeowners.
Federal and state officials are bracing for the next tidal wave of foreclosures—adjustable rate mortgages (ARMs), particularly option payment ARMs.
Option ARMs let borrowers choose to make very low payments for the first five years. During that initial period, borrowers were allowed to pick their payment option, including just the interest.
Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will pick up steam this year.
According to Fitch Ratings, 94 percent of option ARM borrowers elected to make minimum payments only. That portends the trouble that lies ahead.
Even though most option ARMs have not yet adjusted higher, many borrowers are already defaulting anyway. That's an ominous sign.
The bulk of option ARMs recast dates are spread out from 2010 through 2012, meaning the foreclosure waves could drag on for the next few years.
Deutsche Bank projects that 48% percent (or nearly half) of all US mortgages will be underwater by early 2011. That would affect some 25 million homes. If realized, such a projection would be a serious blow to the economy.
No one can be sure just how big the housing inventory really is. As of last August, 72% of foreclosures hadn't yet been put on the market because lenders were waiting to see how much additional loan modification assistance the federal government would provide.
With home prices having already declined by nearly one-third - peak-to-trough - since 2006, a glut of houses hitting the market will cause prices to fall even further. The concern is that they could stay depressed for years to come.
Last June, Deutsche Bank forecast that home prices – covering 100 U.S. metropolitan areas – would continue to decline through the first quarter of 2011, for a total drop of 42% from their 2006 highs.
Moody’s now forecasts that some home prices may not return to their pre-recession levels until 2030. This means that hundreds of thousands of Americans may find it impossible to sell their houses without paying off banks for underwater home loans.
At a minimum, Moody's says that many states (i.e. NY, IL, CA, FL) will not recover until sometime between 2018-2024.
Those waiting for a massive government intervention shouldn't hold their breath. It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American CoreLogic.
The fallout of the housing crash will be an ongoing process, and it appears that we are at least three years from a bottom.
Let's brace ourselves.
Wednesday, February 10, 2010
Derivatives: The $595 Trillion Time Bomb
Derivatives, or credit-default swaps, were the primary reason for the financial crisis that rocked the U.S. in the fall of 2008. That financial crisis morphed into the great economic crisis that the U.S. — and the most of the world — is still trying to recover from.
These derivatives, or swaps, are basically bets between companies and banks. In essence, they are insurance policies that Wall Street uses to protect themselves from unforeseen financial calamities.
Brooksley Born, head of the Commodities Futures Trading commission (CFTC) from 1996-1999, realized that there were trillions of dollars of essentially unregulated over-the-counter derivatives in world markets. Because they weren't regulated, the government had no idea what was going on in those markets.
During Ms. Born's tenure at the CFTC, derivatives amounted to a $27 trillion market that was being traded out of sight. The enormous sums of money being exchanged surreptitiously gave her pause.
"My staff began to say how big this was and how little information they had about it," said Born. "We didn't truly know the dangers in the market because it was a dark market. There was no transparency."
Derivatives contracts are unregulated. They aren't traded on exchanges. They are entered into between private parties and there is no oversight. There is no record-keeping requirement imposed on participants in the market. There is no reporting.
It's the perfect environment for fraud, gross speculation and economic disaster.
All of this made Ms. Born wonder. "What was it that was in this market that had to be hidden? Why did it have to be a completely dark market? So it made me very suspicious and troubled."
With trillions of dollars being traded and promised in secret, if something goes terribly wrong, the high-stakes derivatives market could take down the entire financial system. The largest financial institutions can go down like dominoes.
Though she tried to regulate the derivatives markets, it was all in vain. Born was staunchly opposed by Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and Deputy Secretary Larry Summers. The power trio prevailed and squashed Born's attempts at regulation.
Then Long Term Capital Management started to collapse in 1998. Financial institutions that had bought derivatives believed they had insurance and wanted to collect their collateral.
What they didn't know, but soon discovered, was that many other parties were making the same claims on the same collateral.
Despite the implosion of Long Term Capital, which leveraged $5 billion into more than $1 trillion in derivatives, Greenspan and his cronies prevailed once again. There would be no regulation of derivatives.
By 2007, the OTC derivatives market had grown to $595 trillion. Yes, $595 trillion. It is a disaster of epic proportions waiting to happen.
Derivatives are insuring derivatives, which are based on yet more derivatives. The whole system is a huge Ponzi scheme just waiting to collapse. It was, and still is, a ticking time bomb at the center of the world financial crisis.
That crisis has been papered over by massive government and central bank intervention, but it has not gone away. It still lingers, hidden under the surface.
"I think we will have continuing danger from these markets and that we will have repeats of the financial crisis," says Ms. Born. "It may differ in details, but there will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."
Tuesday, February 09, 2010
Latest Oil Finds Amount to Spit In The Bucket
The oil industry was on a hot streak in 2009, making more than 200 discoveries on five continents.
On its face, that certainly seems like good news.
For example, a new field found in Uganda last year is anticipated to yield two billion barrels of oil.
It was referred to as "unquestionably the largest onshore discovery made in sub-Saharan Africa in at least 20 years.”
And the Jubilee oil field, discovered off the coast of Ghana, is estimated to hold between 650 million and 2 billion barrels of recoverable oil. The find was viewed as so important that Exxon put up $4 billion for a stake in the field, the oil giant's biggest investment in a decade.
And last September, oil was discovered in the deep waters off the coast of West African nation of Sierra Leone. It is believed that more oil fields are yet to be discovered and developed of the West African coast, perhaps yielding as much as one billion barrels.
Advances in drilling technologies and exploration strategies are allowing for the discovery and extraction of deep water oil that would have previously been unrecoverable. Twenty-five years ago, oil companies struggled to operate in seas deeper than 600 feet. Now technological innovations mean they can pump crude in waters 6,000 feet deep.
But, as difficult as it is to get to oil as these depths, the rising price of oil and diminishing onshore oil fields have made it worthwhile and cost-effective to go after deep-water oil. That said, these oil fields are still extremely expensive to develop.
But the most striking elements of these finds — cumulatively totaling five billion barrels of oil — is this: the U.S. alone uses 21 million barrels of oil every day. That amounts to 7.7 billion barrels annually. And U.S. oil consumption has been rising at about two percent annually.
And, as a whole, the world uses 85 million barrels of oil daily.
The point is, despite the seemingly good news, the latest finds amount to spit in the bucket. In no way will they make an appreciable difference in the supply/demand ratio.
Recent oil discoveries have been far too small to offset the world's growing population and rising demand for oil.
Just this week, Dubai excitedly announced the discovery of a new offshore oil field, though its size was not revealed. The UAE sits on the world’s fifth largest proven oil reserves, amounting to 97.8 billion barrels of crude oil. But, according to the UAE government website, Dubai’s oil reserves, mostly offshore, are expected to be exhausted within 20 years.
Dalton Garis, of the Abu Dhabi-based Petroleum Institute, warned of the possibility that "prices would have to go above 80 or 90 dollars a barrel for [the new discovery] to be commercially viable."
And last month, a new pool of oil was discovered in southern Egypt that is proving to be more productive than the currently producing zones. The new discovery has a natural flow to surface rate of 220 barrels of oil per day; with artificial lifting, the maximum rate is 1300 barrels per day. That's all. And it's more productive than currently producing zones.
You get the picture.
New oil discoveries totaled about 10 billion barrels in the first half of 2009, according to IHS Cambridge Energy Research Associates. It was quite a pace, as the industry desperately seeks new discoveries in an attempt to keep up with peaking oil fields and rising world demand.
That's why oil companies are searching beneath the ocean floor, even though drilling and extracting are much more difficult and expensive there. With oil currently at $71 per barrel, the price makes such difficult exploration feasible. Some deepwater wells can cost up to $100 million, yet only 30 to 50 percent of exploration wells find oil.
That leaves us in quite the conundrum; we need high oil prices for the industry to maintain deep-water exploration. And if the price falls due to the weak economy and a slumping demand, then exploration will cease, resulting in diminished supplies and higher prices in the future.
The chief executive of the French oil giant Total and the secretary general of OPEC have expressed exactly these concerns.
Ultimately, the recent discoveries do not come close to matching the massive discoveries of previous decades. The last truly substantial discovery was the Kashagan field in the Caspian Sea, which was discovered in 2000. It is estimated to hold over 20 billion barrels of oil.
To put that in perspective, last year the global rate of oil consumption reached 31 billion barrels.
Despite the fact that more than 10 billion barrels worth of oil were discovered last year, the industry's recovery rate — the share of oil that gets pumped out — averages just 30 to 35 percent.
The best hope is this: Shell Oil estimates that 300 billion barrels — and maybe more — might be squeezed out of existing fields, much of it once thought beyond retrieval.
And Peter Jackson of Cambridge Energy Research, has reviewed data from the world's biggest fields and concludes that 60 percent of their reserves remain available. It would be nice if he's right.
Otherwise, the world will need to focus on conservation, efficiency, and alternatives such as natural gas, wind, solar, and advanced battery technology.
One of the ironic outcomes of the Great Recession is this: U.S. oil consumption dropped by 9 percent over the last two years. That may be the only good news resulting from our economic malaise, but it is something we'd be hard pressed to continue hoping for.
Wednesday, February 03, 2010
Federal Budget & Deficits Unsustainable
How ingrained is deficit spending in Congress? Consider this: Over the forty years ending in 2008, federal revenues averaged about 18.3 percent of our economy, while spending averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent.
The federal government's long term “fiscal exposure” — the sum of all the benefits, programs, debt payments, and other expenses — will cost taxpayers huge sums in the future, regardless of whether or not it cuts discretionary spending.
In the first eight years of this century, that fiscal exposure has grown from $20.4 trillion to $56.4 trillion — a 176 percent increase. That is a financial obligation of unimaginable size and scope.
For decades, government revenues have not kept up with spending. Or, perhaps it's best to say that government spending has continually, and significantly, exceeded government revenues. As a result, the government has borrowed vast sums of money — and pays huge sums interest — to make up the difference.
Based on the GAO’s latest long-range alternative budget simulation, within about twelve years, our interest payments will become the largest single expenditure in the federal budget. By 2040, all of our federal tax revenues will add up to cover only our two biggest expenses: interest on our debt plus Medicare and Medicaid. Everything else — Social Security, defense, education, road building, you name it — will fail to be funded.
The Republicans and Democrats are all acting as if they've suddenly found religion as it applies to spending and debt. Last week President Obama proposed freezing one-sixth of the federal budget in order to bring government revenues in line with spending.
While it's a nice gesture, it's largely symbolic and will be ineffectual since it doesn't address the real problems.
We've reached a critical mass where government spending on the military and entitlement programs is literally out of control.
Benefits payments are the biggest chunk of the government’s massive obligation, and total defense spending has increased in recent years as the military fights two foreign wars.
In addition, the government has added new and prodigious resources for homeland security. The U.S. now spends more on its military than all of the other nations on the planet — combined!
Healthcare is one of the biggest drivers of our persistent deficits, since Medicare costs are an enormous piece of the federal budget. At present, healthcare is 18 percent of our GDP, and growing. With an aging, overweight, sick population, there is no end in sight to this problem.
For example, diabetes has become an epidemic, and a very expensive one. The annual cost for treating diabetes now approaches $200 billion.
The U.S. budget deficit is currently 10 percent of GDP. This means that healthcare and deficit spending alone are eating up 28 percent of GDP. And the 2011 budget deficit is projected to be 11 percent.
We will not experience nearly enough economic expansion to grow our way out of this debt problem. Our problems are structural and they run deep.
It is clear that — like it or not — tax increases are coming, as well as cuts to entitlement spending. Means-testing must be introduced, so that richer Americans only get back what they put into the Social Security system, and nothing more.
According to the Social Security Administration, life expectancy at birth in 1930 was just 58 for men and 62 for women, But men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. Meanwhile, the retirement age was set at 65.
However, life expectancy has now reached an average of 78 years (76 for men; 81 for women). And life expectancy at age 65 is now 17 years for men and 20 years for women. This means that by retirement age, men and women can now expect to live to 82 and 85, respectively.
The Social Security payroll tax and wage base were much lower when most current retirees were working and contributing to the system. For example, back in 1960, the maximum amount of payroll tax for one earner was just $288. In 1972, it was only $419 a year. And as recently as 1975, it had only risen to $1,650, annually.
The reality is that many older people paid in relatively little compared to their current benefits. As a result, most retirees get back significantly more than they contributed. Obviously, the system was not designed to support this burden.
To make matters worse, the government spent the accruing Social Security surplus that had developed over the many years when there was more money coming into the system than going out. That should have been put in a "rainy day" fund for when the system faced growing demands, like right now. It's "raining" pretty hard at the moment, and it's going to get worse.
The Baby Boomers — all 76 million of them, amounting to 25% of our population — begin retiring this year, and will continue to do so for the next 18 years. However, a lot of their contributions have already been spent. Yet, they still expect the government to keep its promises.
From 1937 (when the first payments were made) through 2007, the Social Security program had expended $10.6 trillion. But in that same period, the program program received $13.0 trillion in income. The $2.4 trillion surplus was spent by Congress on other programs.
At best, it was a wildly irresponsible misappropriation. At worst it was a criminal theft from the taxpayers.
It's part of a long term pattern of reckless spending designed to appease special interests and to garner votes. The public hates taxes but loves spending programs. Not enough members of Congress are willing to stand up and speak the truth.
But the jig is up. The old ways will no longer work. The chickens are coming home to roost. Our debt is crippling.
In essence, our government is attempting to borrow its way out of a debt crisis. That is oxymoronic, thus it cannot work. The government cannot continue to borrow beyond its income without eventually going bankrupt. History abounds with examples of such failures.
Our government has been paralyzed by partisanship. Both sides give no quarter. Any success had by one side is viewed as a defeat for the other. All progress is thwarted for political reasons.
Spending benefits both sides. Constituents back home love projects and programs. So, the politicians bring home the bacon. Our leaders are more partisan than patriotic.
Republicans tout their passion for tax cuts. But what they don't admit is that budget cuts — the kind that their constituents feel — are very unpopular. Making deep spending cuts amounts to political suicide. So they ignore the fact that there is not enough revenue collected to pay for these programs.
The Republicans were oddly silent about the debt during the Bush years. Yet, they have suddenly found religion on the issue now that Democrats control the Congress and the White House.
Democrats love the same social programs that their constituents love. But they also understand that tax hikes to pay for these programs would be very unpopular, to the point of political suicide. So they ignore the funding problems.
It's six of one, a half-dozen of the other.
For nearly 30 years, our government has spent too much and collected too little. It's now coming to a head and reaching a crisis point. Both sides lack the political courage to be honest with the American people and to make the tough, uncomfortable decisions that are desperately and immediately needed.
All of this deficit spending has been financed through the sale of Treasuries, which have to be paid back with interest. And the Federal Reserve prints money out of thin air — increasing the money supply and devaluing the currency — to buy those Treasuries when there aren't enough takers on the open market.
The government is simply too big. This level of spending is unsustainable. Entitlements need to be immediately restrained.
The military budget needs to be cut in half. We'll still spend more than any other nation, and still maintain the world's most powerful military. But we need to recall most of the 500,000 military personnel, stationed on over 700 military bases, in more than 150 nations. Our footprint is far too big. We're bleeding ourselves to death.
We need to stop the knee-jerk reaction of calling all military spending "patriotic" and all cuts "unpatriotic." This is nothing more than irresponsible and dangerous rhetoric. We're going broke and we need to act. The Military-Industrial Complex that President Eisenhower so famously warned about has got us in a stranglehold.
The United States' continually weakening financial position is threatening our place in the world. It is threatening the very lifestyle that Americans take for granted. And it will threaten our ability to refinance our perpetually revolving debt in the not-too-distant future.
Right now, the future looks bleak. It will be replete with tax hikes, jarring spending cuts, rising interest rates, and rising inflation. We've been on this course for decades. Some, like David Walker, the nation's former chief accountant, were sounding the alarm. But there weren't enough like him. And no one in government seemed to be listening.
Our alleged leaders are crippled by politics and obsessed with grandstanding and gamesmanship. Each generation of politicians passed the debt problem along to the next, and just kept on spending like drunken sailors.
Now the bills are coming due. The size of our debts are staring us in the face and can no longer be ignored. The future is now, and it is going to be painful.
Tuesday, January 26, 2010
The Cure For The Crisis Was To Add More Disease
During the financial meltdown in the fall of 2008, central banks around the world — led by the Fed — pumped huge amounts of liquidity in the world financial system to stave off collapse. Much of the money was doled out to the biggest banks. Whatever wasn't printed out of thin air was financed through bond sales.
But the origin of the crisis was debt, and that problem has never been solved. It was just papered over by an absolutely massive government intervention.
The U.S. government, like others around the world, bailed out over-leveraged banks and initiated stimulus programs with borrowed money in the form of bonds. That simply deepened the debt problem and pushed it off into the future. In effect, while treating the symptoms, the disease itself was fueled.
For now, the U.S. continues to assume — or hope — that investors will continue to buy the bonds that finance its habitual deficit spending. That assumption may be overly optimistic.
In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that, “The world does not have so much money to buy more US Treasuries.” He went on to say, “The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.”
With interest rates near zero, a national debt exceeding $12 trillion (a sum so large that it can never be repaid), and a dangerously loose monetary policy, why would foreign governments, or citizens, maintain their faith in the U.S. and continue loaning it such massive sums of money?
What's more, the dollar has been in steady decline for years, causing it to lose value in relationship to foreign currencies. This has effectively increased the price of imports and resulted in Americans buying fewer foreign goods. That means there are fewer dollars available for foreigners to purchase future Treasury securities.
However, the weak dollar has tempted foreign investors, and even central banks, to pour their money into the stock market, excessively inflating its value. It is presently trading at 20 times earnings.
Though the dollar increased by 40 percent between 1995 and 2002, it then began a descent in 2003. That ultimately resulted in a 21 percent decline over the last decade, measured against a basket of six other currencies. Only a perceived flight to safety during the 2008 credit crisis kept the dollar's performance from being even worse.
But the dollar's decline in the last decade was only part of a much longer trend. Over the 25-year period since 1985, the dollar has lost more than half of its value.
That has not gone unnoticed. According to the IMF, around 40% of global reserves are now in dollars compared to 55% a decade ago. The difference has been lost to a range of currencies such as the euro, the yen, and particularly the Swiss franc.
Meanwhile, China has been adding to its gold holdings as an alternative to the dollar, which has clearly been losing favor.
Since the end of WWII, the U.S. has had the unique and extraordinary privilege of being the issuer of the world’s reserve currency. That position inspired confidence in the rest of the world and compelled them to buy our bonds. But those bonds look a lot less appealing these days.
The U.S. sold $2.1 trillion of notes and bonds last year. However, Treasuries were the worst performing sovereign debt market in 2009, losing 3.5%, on average. That won't encourage buyers this year. And the low yield on Treasuries only serves to further diminish their appeal.
Australia and Norway have already begun to raise interest rates, making their bonds more alluring to investors. And other central banks are expected to follow early this year. The Federal Reserve will try to hold the line in a futile effort to stimulate the U.S. economy. But sooner or later, it will have to cave to the demands of investors.
When the Fed eventually does raise rates, it will have a variety of consequences. Rising market interest rates automatically devalue older bonds issued at lower fixed rates. That will be none too pleasing to current holders of Treasuries.
Yet it appears that there may not be nearly as many of those bond holders as the Treasury would have us believe.
Last month, Sprott Asset Management told its investors that the Treasury is essentially creating its own debt market by conjuring up phony investors. According to Treasury data, a group cryptically referred to as "other investors" purchased $510 billion of Treasuries in just the first three quarters of last year, after buying just $90 billion in 2008.
This makes no sense whatsoever. Who on the planet, in these times, could afford to — or be willing to — increase their Treasury holdings more than five-fold, year-over-year? The whole claim appears to be a ruse for the Fed, as it printed half a trillion dollars to buy Treasuries.
So it's just a Ponzi, or pyramid, scheme. And like all, it's doomed to collapse.
By Sprott's analysis, America isn't finding enough investors to buy its massive supply of bonds. China's warning that there isn't enough money in the whole world to support the U.S.'s enormous appetite for debt sales seems accurate.
But the U.S. is not alone in its monumental debt problem.
If Portugal, Ireland, Iceland, Greece or Spain (known as the PIIGS) should default on their debt this year, or next, it could prove to be the canary in the coal mine for the rest of the world, including the U.S.
Ultimately, nothing has changed. The solution to the credit / financial crisis simply amounted to rearranging the deck chairs on the Titanic; nothing is different, except appearances. In the meantime, the problem of unsustainable debt has only grown worse, except that now much of the burden has been shifted to the taxpayers.
Politicians may crow about the need to reduce spending, but that won't get at the structural deficits that we are stuck with. And "pay as you go" won't chip away at our staggering debt burden, or pay the whopping interest payments on that debt.
As stated, our problems are structural, and they will haunt us for years to come.
Sunday, January 24, 2010
Populism Rising Against Bernanke
There is so much populist rage against Wall Street, that Ben Bernanke's confirmation -- once thought to be a foregone conclusion -- is now in jeopardy.
Senators of all stripes have publicly stated that they will vote against Bernanke. These include Independent Bernie Sanders, Democrats Russ Feingold, Barbara Boxex, and Byron Dorgan, plus Republicans Richard Shelby, David Vitter, Jim Bunning, John Cornyn, and Jim DeMint.
All told, at least 17 senators have indicated they'll vote against Bernanke, according to Reuters.
It seems that Scott Brown's victory this week has senators fearing a backlash, and consequently no Senate seat is deemed safe this fall.
Simply opposing President Obama may be the motivation of the Republicans. But many senators may seek to appear allied with ordinary Americans disgusted with Wall Street's greed and manipulation.
No Fed chairman has been rejected by the Senate. Sixteen senators opposed Paul Volcker in 1983, the most "no" votes ever cast against a Fed chairman. He was eventually confirmed by a vote of 84-16.
But more Americans than ever are dubious about the Fed's role, its intentions, and whether it really cares about the interests of the American people.
A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street.
The rising tide of voter rage may result in a growing sense populism in Washington.
But the Fed's spin machine is working hard to spread fear of a double-dip recession, and a stock market collapse, should Bernanke be defeated.
The amount of fear-mongering being spewed is remarkable. As the spin goes, if Bernanke goes down businesses will cut spending and investing, and stop hiring. Higher interest rates and inflation will follow. Uncertainty, anxiety, and shaken confidence will spread like a contagion.
Oh, the humanity!
The casual observer will contend that all of those things are already happening. And an informed observer knows that they will continue to do so, regardless of Bernanke's eventual fate.
Don't believe the hype.
The Fed is the root of our economic problems. It has continually created the bubbles and abysmally failed in its mission to control inflation, maintain full employment, and successfully manage both credit and interest rates, which are continually manipulated with devastating consequences.
Bernanke's confirmation would be an endorsement of the status quo, and that is not acceptable.
Senators of all stripes have publicly stated that they will vote against Bernanke. These include Independent Bernie Sanders, Democrats Russ Feingold, Barbara Boxex, and Byron Dorgan, plus Republicans Richard Shelby, David Vitter, Jim Bunning, John Cornyn, and Jim DeMint.
All told, at least 17 senators have indicated they'll vote against Bernanke, according to Reuters.
It seems that Scott Brown's victory this week has senators fearing a backlash, and consequently no Senate seat is deemed safe this fall.
Simply opposing President Obama may be the motivation of the Republicans. But many senators may seek to appear allied with ordinary Americans disgusted with Wall Street's greed and manipulation.
No Fed chairman has been rejected by the Senate. Sixteen senators opposed Paul Volcker in 1983, the most "no" votes ever cast against a Fed chairman. He was eventually confirmed by a vote of 84-16.
But more Americans than ever are dubious about the Fed's role, its intentions, and whether it really cares about the interests of the American people.
A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street.
The rising tide of voter rage may result in a growing sense populism in Washington.
But the Fed's spin machine is working hard to spread fear of a double-dip recession, and a stock market collapse, should Bernanke be defeated.
The amount of fear-mongering being spewed is remarkable. As the spin goes, if Bernanke goes down businesses will cut spending and investing, and stop hiring. Higher interest rates and inflation will follow. Uncertainty, anxiety, and shaken confidence will spread like a contagion.
Oh, the humanity!
The casual observer will contend that all of those things are already happening. And an informed observer knows that they will continue to do so, regardless of Bernanke's eventual fate.
Don't believe the hype.
The Fed is the root of our economic problems. It has continually created the bubbles and abysmally failed in its mission to control inflation, maintain full employment, and successfully manage both credit and interest rates, which are continually manipulated with devastating consequences.
Bernanke's confirmation would be an endorsement of the status quo, and that is not acceptable.
Fed "Profits" are a Counterfeiting Fraud
Earlier this month, it was reported that the Federal Reserve made record profits in 2009, amounting to $52 billion.
The Fed says it will return $45 billion to the U.S. Treasury — the highest earnings in the central bank's 96-year history.
This is a rather stunning explanation, since the Fed simply prints money out of thin air, and did so to the tune of $142 trillion over the two year period ending in November.
Did that just blow your socks off? That means the money supply more than doubled. In fact, it went up nearly 2 1/2 times, devaluing our money in the process.
This chart is quite staggering.
And that's only what the Fed admits to. But we know that the Fed continually, institutionally, and pathologically lies.
The U.S. Treasury sold more than $2.1 trillion in Treasury bonds and notes last year, much of it bought by the Fed with it's freshly created funny money.
By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier.
The whole thing is a charade. The Fed prints money backed by nothing and calls it a profit. This is ridiculous to the point of absurd. These are not earnings. It is manipulation, a smoke and mirrors campaign.
The Fed is referred to as a quasi government/private hybrid. But it acts entirely as a private enterprise, not a government agency.
What other government agency buys government debt? The State Department? The Labor Department? Education? Housing and Urban Development?
The answer is no, no, no, and no. That's because it would amount to a shell game, a ruse of borrowing from Peter to pay Peter.
Fed profits are nothing more than a lie. It's the same thing as "loaning" yourself money and calling it earnings, or profit.
When all of this money is brought into creation without a corresponding increase in goods and/or labor, inflation ultimately results.
Inflation is simply the increase of the money supply. That has occurred at an alarming and unprecedented rate. The subsequent increase in prices, most commonly viewed as "inflation" by the media and general public, is only a matter of time.
Hundreds of years of history prove this. It's happened over and over again, around the world.
The Fed's actions amount to larceny and counterfeiting on a massive scale. It is criminal activity by a criminal enterprise.
And we should never forget that. It's more evidence that the Fed's and government's books are cooked, and that neither can be trusted for honesty or objectivity.
There will be an enormous price to be paid. Our money is being devalue and, ultimately, that's all inflation really is.
All of this Fed printing will have some rather regrettable associated costs. We need to prepare ourselves for eventual and looming price inflation.
And that will cost us greatly.
Friday, January 22, 2010
Our Corporatocracy Is Now Official
In the 2008 election, Barack Obama and John McCain combined to spend about $1 billion. And the combined expenditures of the entire 2008 cycle came to a record-shattering $5.3 billion in spending by candidates, political parties and interest groups on the congressional and presidential races.
But with the Supreme Court's latest ruling on corporate financing of federal campaigns, that tally will amount to a mere pittance. The floodgates have officially been opened.
And how did the Supreme Court arrive at its ruling?
Well, according to the Court, a humongous, multi-billion dollar corporation is the equivalent of a single, individual citizen.
Go figure.
At least one justice disagrees, quite sensibly.
"Corporations are not human beings... corporations have no consciences, no beliefs, no feelings, no thoughts, no desires.... they are not themselves members of 'We the People' by whom and for whom our Constitution was established." — Justice John Paul Stevens
What we as a nation have to face is that the last plank of democracy has been shattered.
We are now officially a corporatocracy.
But with the Supreme Court's latest ruling on corporate financing of federal campaigns, that tally will amount to a mere pittance. The floodgates have officially been opened.
And how did the Supreme Court arrive at its ruling?
Well, according to the Court, a humongous, multi-billion dollar corporation is the equivalent of a single, individual citizen.
Go figure.
At least one justice disagrees, quite sensibly.
"Corporations are not human beings... corporations have no consciences, no beliefs, no feelings, no thoughts, no desires.... they are not themselves members of 'We the People' by whom and for whom our Constitution was established." — Justice John Paul Stevens
What we as a nation have to face is that the last plank of democracy has been shattered.
We are now officially a corporatocracy.
Friday, January 15, 2010
A World Upside Down: on Wall St., Down is Up and Bad is Good
However, JPMC also reported its profit rose more than four-fold to $3.28 billion in the last three months of 2009.
Got that? Revenues were nearly $1 billion below expectations, yet profits were up in a huge way.
How can this rather incongruous pair of events coincide?
For starters, record-low interest rates — set at near zero by the Federal Reserve — have allowed banking companies to profit while lending money at higher rates.
Secondly, the bank's earnings resulted from profits in its investment banking and asset management business, which flourished during the now 10-month-old stock market rally. The New York mega bank brought in billions just through trading in the booming financial markets.
In Wall Street's strange world, the stock market thrives even as the economy remains anemic. Go figure.
Banks reduced lending in 2009 by about 18%, year-over-year. Much of the money that wasn't lent ended up in the stock market, and the returns have been good for Wall St. — so far.
To celebrate, the overly indulgent fat cats at JPMC announced that they will be handing out bonuses totaling $9.3 BILLION to themselves. That amounts to an average bonus of $379,000 for all of JP Morgan's investment bankers, sales staff and traders.
However, despite all of its own good news and great fortune, JP Morgan Chase made some rather grim projections for larger economy, warning that defaults on mortgages and other loans may not have yet peaked. The Wall St. giant also said it remains cautious about the potential for a second downturn in the economy.
Part of that may be due to the fact that the bank lost $306 million during the fourth quarter in its credit card services business, and predicted losses will remain elevated in the first half of 2010.
So, in summary: JPMC's revenues fell short of expectations, and its stock priced dropped. But profits were way up, allowing for bonuses nearly four-fold higher than last year. The stock market is booming. But the overall economy remains feeble. Looking forward, the projections for the economy aren't good and a second downturn may loom.
So, there's good news for JP Morgan and its Wall St. cronies, and lots of bad news for the rest of America.
Is your cup half full, or half empty?
Wednesday, January 13, 2010
Debt Market Collapse Could Worsen in 2010
The debt-securitization markets have been the source of roughly 60 percent of all credit in the United States in recent years. These markets finance corporate loans, home mortgages, student loans and more.
The private securities market — backed by home mortgages — has collapsed, from $744 billion at the peak of the housing boom in 2005, to $8 billion during the first half of 2009.
Many of these markets have been operating only because the government is propping them up. And now the Fed has put them on notice that it plans to withdraw its support this spring.
The hope is that private investors will return to the markets, which they abandoned during the financial crisis.
The government has since spent more than $1 trillion trying to restore the markets. So what happens when it finally extricates itself?
The Fed is virtually the only buyer for mortgage-backed securities, purchasing about 80 to 85 percent of the market.
As it stands, banks are not lending. And later this year, they face accounting rule changes and capital requirements that could further restrict their ability to make loans.
As a result, much will be revealed this spring, and throughout the year. The worst may lie ahead.
The Fed’s trillion-dollar intervention got it a mess of toxic mortgage securities. And it refuses to reveal exactly what it paid for them and from whom they bought them.
Removing these toxic mortgages from bank balance sheets recapitalized and reinvigorated both the banks and markets, allowing home-mortgage rates to remain low for both purchases and refinancing. Most of those mortgages are guaranteed by US taxpayers through the tanking mortgage giants Fannie Mae and Freddie Mac.
In addition, the Fed has maintained artificially low interest rates of nearly zero for an extended period. That, combined with the government's home buyer credits, may simply being re-inflating the housing bubble all over again.
When the government support finally ends, and when interest eventually go up (which they indeed will), home prices will fall even further as inventories increase.
The government expects foreclosures and losses in the housing sector to be so large that it recently removed the $400 billion cap on bailout money to Fannie and Freddie. That is an alarm signal by the Treasury about what lies ahead.
This year will lead to further turmoil in the mortgage and other debt markets. The government support will end, and there is no other entity that can sustain these markets. Credit has dried up, and will continue to do so.
Banks reduced lending in 2009 by about 18%, year-over-year. All indications point to a continuation of this trend in 2010.
Instead of lending, banks have pumped up the stock and bond markets with oodles of speculative cash fed to them by the government.
And as the nation has witnessed with great distress, what goes up eventually comes back down.
The private securities market — backed by home mortgages — has collapsed, from $744 billion at the peak of the housing boom in 2005, to $8 billion during the first half of 2009.
Many of these markets have been operating only because the government is propping them up. And now the Fed has put them on notice that it plans to withdraw its support this spring.
The hope is that private investors will return to the markets, which they abandoned during the financial crisis.
The government has since spent more than $1 trillion trying to restore the markets. So what happens when it finally extricates itself?
The Fed is virtually the only buyer for mortgage-backed securities, purchasing about 80 to 85 percent of the market.
As it stands, banks are not lending. And later this year, they face accounting rule changes and capital requirements that could further restrict their ability to make loans.
As a result, much will be revealed this spring, and throughout the year. The worst may lie ahead.
The Fed’s trillion-dollar intervention got it a mess of toxic mortgage securities. And it refuses to reveal exactly what it paid for them and from whom they bought them.
Removing these toxic mortgages from bank balance sheets recapitalized and reinvigorated both the banks and markets, allowing home-mortgage rates to remain low for both purchases and refinancing. Most of those mortgages are guaranteed by US taxpayers through the tanking mortgage giants Fannie Mae and Freddie Mac.
In addition, the Fed has maintained artificially low interest rates of nearly zero for an extended period. That, combined with the government's home buyer credits, may simply being re-inflating the housing bubble all over again.
When the government support finally ends, and when interest eventually go up (which they indeed will), home prices will fall even further as inventories increase.
The government expects foreclosures and losses in the housing sector to be so large that it recently removed the $400 billion cap on bailout money to Fannie and Freddie. That is an alarm signal by the Treasury about what lies ahead.
This year will lead to further turmoil in the mortgage and other debt markets. The government support will end, and there is no other entity that can sustain these markets. Credit has dried up, and will continue to do so.
Banks reduced lending in 2009 by about 18%, year-over-year. All indications point to a continuation of this trend in 2010.
Instead of lending, banks have pumped up the stock and bond markets with oodles of speculative cash fed to them by the government.
And as the nation has witnessed with great distress, what goes up eventually comes back down.
Saturday, January 09, 2010
Is China's Growth an Illusion?
"China is Dubai times 1,000 — or worse.” — James Chanos, founder and President of Kynikos Associates
There are quite a few economists and academics who question China's rapid and astounding growth, among them Bob Chapman, Gordon Chang, Richard Duncan, Jim Grant and Jim Chanos, a millionaire hedge fund manager.
After all, China's 8% GDP growth is quite remarkable in these times of worldwide economic contraction.
The problem is that, with a totalitarian government, how can you believe any of their "official" data? You can't even believe U.S.government data, so how can you put any faith in China's?
There is so much contradictory information regarding China.
New data this week show China continuing its ascent into economic superpower status, rising above Germany as the world’s top exporter and overtaking the U.S. in domestic auto sales.
However, the IMF says China is #100 among world nations in per capita income; the CIA says China is #106.
China has considerable problems: One billion of its citizens are still peasants. It has one-fifth of the world's population and it has to feed all those people. Much of it's landscape is an ecological wasteland and an environmental disaster.
With worldwide consumer demand continuing its long decline, China appears at risk of overproducing goods that no one wants.
"Demand in China is over-inflated, that is clear," says Chanos.
And bank lending is estimated to have doubled last year from 2008. That, combined with enormous flows of speculative foreign capital into China, may have created enormous asset bubbles.
If China tanks, we can only hope that the era, and the widely accepted policy, of speculation and debt will finally come to an undignified end.
“Bubbles are best identified by credit excesses, not valuation excesses. And there’s no bigger credit excess than in China,” says Chanos.
Tuesday, January 05, 2010
The Christmas Surprise, aka The Christmas Heist
Call it the Christmas surprise.
The Treasury Department announced it had removed the $400 billion financial cap on the money it will provide to mortgage giants Fannie Mae and Freddie Mac to keep them afloat.
Taxpayers have already shelled out $111 billion to the pair. Now there is no end in sight.
A senior Treasury official said losses are not expected to exceed the government's estimate last summer of $170 billion over 10 years.
However, the government has not been accurate, or forthcoming, about the true scope of the problem or about the reality of potential losses.
At this point, we should not believe any government estimates or claims.
It's important for us to reflect on the fact that in July 2008, the Congressional Budget Office said that the government rescue of Fannie and Freddie would cost $25 billion, at most.
The Budget Office said there was a better than even chance that the rescue package would not even be needed before the end of 2009 and would not cost taxpayers any money.
Instead, what has happened is that losses have been so spectacular that the $400 billion cap was quietly removed on Christmas Eve, a traditionally slow news day when most Americans were busy celebrating the Christmas holiday and not paying attention.
The Treasury made the change before year-end to avoid having to ask Congress for another bailout, which would be politically risky in the 2010 election year.
It's also worth noting that the head of the CBO at the time was Peter Orszag, who is now White House Budget Director. What this proves is that being wildly incompetent, or grossly misleading, is actually rewarded.
Bert Ely, a banking consultant in Alexandria, Virginia, said that lifting the cap raises significant concerns and could spell big trouble ahead.
"The companies are nowhere close to using the $400 billion they had before, so why do this now? It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."
Exactly. Sudden moves of such magnitude don't occur in a vacuum. The government clearly knows what's coming and it is preparing for a tsunami of losses.
Without government aid, the two firms would have already gone under, leaving millions of people unable to get a mortgage.
Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages.
The combination of high unemployment, adjustable-rate mortgages that will reset this year, and a likely increase in mortgage rates, will all combine to result in further foreclosures this year.
Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. This year, about $70 billion of interest-only loans will reset. That will result in a massive number of additional defaults.
If the news of unlimited taxpayer support isn't disturbing enough, here's something additionally outrageous: The CEOs of Fannie and Freddie could get paid as much as $6 million apiece for 2009, despite the companies' dismal performances last year.
How's that for justice?
What's clear is that there is no justice. Bankers and lenders have created a "heads I win, tails you lose" environment, and our government has aided and abetted them.
This is no moral hazard anymore. There are no consequences for poor decision-making. There are only private gains and public losses. A government-backed, corporate socialism has arisen in modern America. This is not true, democratic capitalism.
All this latest news should do is lessen America's already diminished view of our government, its competence, and its truthfulness. The government's loss estimates have proven to be wildly inaccurate.
The reality is that without the huge government subsidization of the US housing market through Fannie and Freddie, the enormous housing bubble probably wouldn't have occurred in the first place. The balance sheets of Fannie Mae and Freddie Mac have grown by a stunning $4 trillion.
We, the American taxpayers — including those of us who didn't overextend ourselves, those who bought homes they could actually afford, those who didn't view their home as a financial investment or get-rich-quick scheme, and those who never even bought a home — are all stuck with this gargantuan bill.
It will just be added to the already existing national debt, which will never be successfully paid off. It just keeps growing, and accruing additional interest.
We will remain perpetually in debt, much to our own detriment.
The Treasury Department announced it had removed the $400 billion financial cap on the money it will provide to mortgage giants Fannie Mae and Freddie Mac to keep them afloat.
Taxpayers have already shelled out $111 billion to the pair. Now there is no end in sight.
A senior Treasury official said losses are not expected to exceed the government's estimate last summer of $170 billion over 10 years.
However, the government has not been accurate, or forthcoming, about the true scope of the problem or about the reality of potential losses.
At this point, we should not believe any government estimates or claims.
It's important for us to reflect on the fact that in July 2008, the Congressional Budget Office said that the government rescue of Fannie and Freddie would cost $25 billion, at most.
The Budget Office said there was a better than even chance that the rescue package would not even be needed before the end of 2009 and would not cost taxpayers any money.
Instead, what has happened is that losses have been so spectacular that the $400 billion cap was quietly removed on Christmas Eve, a traditionally slow news day when most Americans were busy celebrating the Christmas holiday and not paying attention.
The Treasury made the change before year-end to avoid having to ask Congress for another bailout, which would be politically risky in the 2010 election year.
It's also worth noting that the head of the CBO at the time was Peter Orszag, who is now White House Budget Director. What this proves is that being wildly incompetent, or grossly misleading, is actually rewarded.
Bert Ely, a banking consultant in Alexandria, Virginia, said that lifting the cap raises significant concerns and could spell big trouble ahead.
"The companies are nowhere close to using the $400 billion they had before, so why do this now? It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."
Exactly. Sudden moves of such magnitude don't occur in a vacuum. The government clearly knows what's coming and it is preparing for a tsunami of losses.
Without government aid, the two firms would have already gone under, leaving millions of people unable to get a mortgage.
Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages.
The combination of high unemployment, adjustable-rate mortgages that will reset this year, and a likely increase in mortgage rates, will all combine to result in further foreclosures this year.
Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. This year, about $70 billion of interest-only loans will reset. That will result in a massive number of additional defaults.
If the news of unlimited taxpayer support isn't disturbing enough, here's something additionally outrageous: The CEOs of Fannie and Freddie could get paid as much as $6 million apiece for 2009, despite the companies' dismal performances last year.
How's that for justice?
What's clear is that there is no justice. Bankers and lenders have created a "heads I win, tails you lose" environment, and our government has aided and abetted them.
This is no moral hazard anymore. There are no consequences for poor decision-making. There are only private gains and public losses. A government-backed, corporate socialism has arisen in modern America. This is not true, democratic capitalism.
All this latest news should do is lessen America's already diminished view of our government, its competence, and its truthfulness. The government's loss estimates have proven to be wildly inaccurate.
The reality is that without the huge government subsidization of the US housing market through Fannie and Freddie, the enormous housing bubble probably wouldn't have occurred in the first place. The balance sheets of Fannie Mae and Freddie Mac have grown by a stunning $4 trillion.
We, the American taxpayers — including those of us who didn't overextend ourselves, those who bought homes they could actually afford, those who didn't view their home as a financial investment or get-rich-quick scheme, and those who never even bought a home — are all stuck with this gargantuan bill.
It will just be added to the already existing national debt, which will never be successfully paid off. It just keeps growing, and accruing additional interest.
We will remain perpetually in debt, much to our own detriment.
Saturday, January 02, 2010
Populist Bank Reform
Since April, the Big Four banks -- JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo -- all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.
These big, bailed-out banks then spent millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and the regulation of the derivatives that played such a huge part in the meltdown.
The five largest US banks control roughly half of the industry's $13.3 trillion in assets. The 8,176 community banks control just 15%.
But local banks often have a positive impact on their communities. So, why not move your money out of one of the big banks and put it into a community bank?
If enough people who have money in one of the Big Four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it once again becomes the productive, stable engine for growth it's meant to be.
The FDIC deposit insurance is just as good at small banks as the behemoths.
Watch Eugene Jarecki's amazing video at www.moveyourmoney.info to learn more about how easy it is to move your money. And pass the idea on to your friends (help make this video – and this idea – go viral!).
JP Morgan/Chase, Citi, Wells Fargo, and Bank of America may be "too big to fail" -- but they are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system.
Let them gamble with their own money, not yours. Let's turn big banks into smaller banks. We'll all be better off – and safer – as a result.
These big, bailed-out banks then spent millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and the regulation of the derivatives that played such a huge part in the meltdown.
The five largest US banks control roughly half of the industry's $13.3 trillion in assets. The 8,176 community banks control just 15%.
But local banks often have a positive impact on their communities. So, why not move your money out of one of the big banks and put it into a community bank?
If enough people who have money in one of the Big Four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it once again becomes the productive, stable engine for growth it's meant to be.
The FDIC deposit insurance is just as good at small banks as the behemoths.
Watch Eugene Jarecki's amazing video at www.moveyourmoney.info to learn more about how easy it is to move your money. And pass the idea on to your friends (help make this video – and this idea – go viral!).
JP Morgan/Chase, Citi, Wells Fargo, and Bank of America may be "too big to fail" -- but they are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system.
Let them gamble with their own money, not yours. Let's turn big banks into smaller banks. We'll all be better off – and safer – as a result.
Wednesday, December 30, 2009
Sprott Wonders If Treasury Has Created Its Own Epic Ponzi Scheme
Sprott Asks If Treasury Has Created Its Own Epic Ponzi Scheme
Sprott Asset Management, which has about $4 billion under management, just released its December newsletter. To say the least, it's quite provocative.
Titled, "Is It All Just a Ponzi Scheme?," the newsletter makes the case that the Treasury Department has invented its own bond market.
This isn't an entirely new thesis; Dr. Chris Martenson has been saying the same for months. But Sprott's research is very compelling.
In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion.
So who bought all the rest?
According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008.
Can the Treasury maintain this charade in 2010? If they can't conjure up more phantom buyers, the bond market will dry up and the only alternative will be the Federal Reserve's printing press.
Either way, it's an ugly and frightening scenario.
Like any pyramid or Ponzi scheme, the system is in continuous need of new money to refinance debts and keep itself afloat.
I encourage everyone — all concerned citizens — to read this crucial report, which can be viewed here in PDF form.
Monday, December 28, 2009
US GPD Fueled by Debt
In what should hardly come as a surprise, US third-quarter GDP has once again been revised downward from the initial projection of 3.5% annual growth. The figure was initially revised downward to 2.8%, and now it has been further revised down to 2.2%.
That means the government overestimated the nation's third-quarter economic performance by 37%, a rather large error.
GDP numbers are often revised, seemingly at will, allowing the government to control the message and spin the story. After six consecutive quarters of negative GDP, the government was desperate to create some good news. As it turns out, that news was too good to be true.
Our meager third-quarter growth was largely the result of further government spending, not private sector spending. Auto purchases were in fact undergirded by government support.
Under the latest revision, the government's Cash for Clunkers program now accounts for 66% of the remaining GDP "growth," up from 47% in the initial report. This is an error of $185 billion, which is larger than the $152 billion Bush stimulus package of 2008.
The reality is that this 2.2% growth was fueled by even further government debt, as well as consumer debt. The latter is exactly what got us into this economic malaise in the first place, and the average US household is still overburdened and saddled with debt.
According to data released in July by the Federal Reserve Board, revolving consumer debt in the United States totals about $928 billion.
Federal Reserve surveys suggest that about 75% of households have at least one credit card and 25% have none. If we count only those households that report actually having one or more credit cards, the average household credit card debt is $10,482.
However, the Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what is viewed as a more sustainable level of 100%.
When one considers that consumer spending makes up more than two-thirds of the U.S. economy, and about one-fifth of the global economy, you realize it won't be able to play a leading role in any recovery. Seventeen percent of US workers are either unemployed or under-employed.
The federal government has jumped into the breach to try to make up for the resulting decline in consumer spending. But that is only increasing an already whopping federal debt.
U.S. government debt has reached 85% of annual economic output and is showing no signs of slowing; the White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, it has to service all that debt – in addition to current debt – with interest.
Paying down this enormous national debt will eventually require Americans to pay more taxes. That will only hamper consumer spending even further. Consumers will ultimately feel the combined burdens of private and public debt because we all owe a share of the national debt.
A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product.
However, in May, Business Week reported that, even before this year's unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government’s share to more than 40%.
Our entire economic system is based on perpetual growth. However, there is no real growth; there is only more debt.
Tuesday, December 22, 2009
Unemployment Benefits Extended Up To 99 Weeks; May Cost $140 Billion
Unemployment has been so widespread, so lasting and so costly that the federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.
Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone. The federal government is obligated to lend them the money to cover that gap.
Many states will be faced with the unpleasant choice of raising taxes, cutting benefits, or both. Nationally, the average tax is about 0.6 percent of payroll; the average weekly check is about $300.
Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps.
Unemployment benefits are typically paid for 26 weeks. But, due to the length and severity of the recession, Congress has repeatedly extended that period since June 2008.
The emergency extensions had previously allowed laid-off workers to collect benefits for up to 46 weeks in some states. But in other states the benefits had stretched up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.
However, that period has now been extended up to 99 weeks in some states.
Saturday morning, the Senate approved a $626-billion defense bill that included a two-month extension of unemployment benefits for the long-term jobless.
The benefits of 1.5 Americans were set to expire at the end of this year. Those benefits will now be paid through the end of February.
According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.
This is in sharp contrast to the unemployment benefit costs of just two years ago. Back in 2007, the cost of unemployment benefits was only $43 billion dollars. Since that time, unemployment has ballooned from 4.8% to 10%.
Obviously, the unemployment problem will not improve significantly in the next two months, and Congress will once again be faced with the task of extending benefits further. The cost to the federal government and the states will be burdensome, and require taking on even further debt.
Even before the last round of extended benefits in November, the White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.
The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.
Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone. The federal government is obligated to lend them the money to cover that gap.
Many states will be faced with the unpleasant choice of raising taxes, cutting benefits, or both. Nationally, the average tax is about 0.6 percent of payroll; the average weekly check is about $300.
Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps.
Unemployment benefits are typically paid for 26 weeks. But, due to the length and severity of the recession, Congress has repeatedly extended that period since June 2008.
The emergency extensions had previously allowed laid-off workers to collect benefits for up to 46 weeks in some states. But in other states the benefits had stretched up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.
However, that period has now been extended up to 99 weeks in some states.
Saturday morning, the Senate approved a $626-billion defense bill that included a two-month extension of unemployment benefits for the long-term jobless.
The benefits of 1.5 Americans were set to expire at the end of this year. Those benefits will now be paid through the end of February.
According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.
This is in sharp contrast to the unemployment benefit costs of just two years ago. Back in 2007, the cost of unemployment benefits was only $43 billion dollars. Since that time, unemployment has ballooned from 4.8% to 10%.
Obviously, the unemployment problem will not improve significantly in the next two months, and Congress will once again be faced with the task of extending benefits further. The cost to the federal government and the states will be burdensome, and require taking on even further debt.
Even before the last round of extended benefits in November, the White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.
The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.
Sunday, December 20, 2009
The 10 Countries Most Likely To Default
The recent economic meltdown in Dubai may turn out to be the proverbial canary in the coal mine.
The Emirate's massive debt problem may ultimately serve as a warning of the troubles brewing in other nations. Could other sovereign debt defaults be on the horizon?
Remarkably, there are countries even worse off than Dubai.
The Business Insider recently ranked "The 10 Countries Most Likely to Default."
#10 Lebanon
Cumulative Probability of Default: 17 %
Reuters: "Lebanon, one of the most heavily indebted states in the world, completed a debt swap in March for around $2.3 billion of foreign currency paper maturing this year.
Strong economic growth has helped reduce Lebanon's ratio of debt to gross domestic product to 153 percent in June from around 180 percent three years ago. The country's gross debt stands at $48 billion."
#9 State of California
Cumulative Probability of Default: 18 %
Though it is just a U.S. state and not an independent nation, the Golden State has the world's eighth largest economy, and it is a mess. California’s budget deficit will balloon to $20.7 billion during the next year and a half, the nonpartisan Legislative Analyst’s Office predicted in a November report. As of November, year-to-date revenues were more than $1 billion below what had been expected.
According to The Press Enterprise, “California will pay $6 billion in debt service in the current fiscal year, or nearly 7 percent of the state’s general fund. And that expense is only for part of the bonds voters and legislators have approved: California has $83.5 billion in outstanding debt, including $64 billion in general obligation bonds. But the state has $47.5 billion in already authorized bonds that it has yet to sell, too.”
#8 Lithuania
Cumulative Probability of Default: 19 %
Bloomberg: "Lithuania will probably miss a 2011 European Union deadline to bring its deficit in line with the bloc’s budget threshold, ruling out euro adoption before 2013, Finance Minister Ingrida Simonyte said..
The former Soviet state’s budget shortfall will swell to 9.8 percent of gross domestic product this year, and narrow to 9.7 percent in 2011"
#7 Iceland
Cumulative Probability of Default: 23%
Bloomberg: "Iceland’s economy contracted the most on record last quarter after the island’s banking failure left locals poorer and as businesses lacked funds for investment.
Gross domestic product shrank an annual 7.2 percent, after contracting a revised 6.2 percent in three months through June, Reykjavik-based Statistics Iceland said on its Web site. From the previous quarter, GDP shrank 5.7 percent."
Iceland’s banking collapse last year plunged the Atlantic island into its worst economic decline since gaining independence from Denmark in 1944 and forced the government to seek an international bailout to avert default."
#6 Emirate of Dubai
Cumulative Probability of Default: 29%
Dubai's inability to pay its debts on time forced it to request a six-month extension on loan repayments. That news rocked world markets and sent shivers throughout the financial world. Dubai may simply be the beginning of further sovereign defaults in the coming year.
#5 Latvia
Cumulative Probability of Default: 30%
Bloomberg: "Latvia’s economy contracted a preliminary 18.4 percent in the third quarter, the biggest decline in the EU. The country’s banks may have the highest need for new capital in eastern and central Europe along with Lithuania because they rely on collateral that’s been falling in value amid house price declines, Fitch Ratings said in a report today...
The country is rated two levels below investment grade at BB by Standard & Poor’s. Moody’s Investors Service ranks Latvia at the lowest investment-grade level of Baa3."
#4 Pakistan
Cumulative Probability of Default: 36%
Business Recorder: "The country's external debts and liabilities have posted a raise of some three billion dollars to a new peak of 55.2 billion dollars by end of September 2009."
#3 Argentina
Cumulative Probability of Default: 49%
WSJ: "Fitch Ratings said Argentina's credit ratings are likely to remain in highly speculative territory even if its planned $20 billion debt exchange is executed successfully, noting the country's continuing economic and financial pressures as well as high debt ratios.
Argentina's Senate voted to approve a bill that would allow the government to reopen a 2005 debt restructuring. At issue are about $20 billion in face value of bonds that weren't included in a 2005 transaction. Economy Minister Amado Boudou said recently that the government plans to reopen the offer under similar terms to try to attract as many of those investors as possible."
#2 Ukraine
Cumulative Probability of Default: 55%
Bloomberg: "Ukraine will keep its B2 credit rating, with a negative outlook, the ratings company said in a statement released late yesterday, after Ukrzaliznytsya defaulted on a principal payment on a Barclays Capital-led syndicated loan on Nov. 20...
The B2 rating reflects “weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies,” Moody’s said. “While some of these problems may well reflect political in-fighting in the run-up to the presidential election, the fiscal loosening inherent in recent legislation -- which may raise the budget deficit by up to 7 percent of gross domestic product in 2010 -- is a serious concern. Hence, the negative outlook on the B2 sovereign rating remains in place.”
#1 Venezuela
Cumulative Probability of Default: 60%
WSJ: "one week ago, the government was forced to begin shutting down seven small banks that together represent up to 12% of banking system deposits, after the public began to get wind of some of the banks allegedly using depositors' funds for corrupt ends.
Those takeovers alone would have frayed nerves in financial markets. But Chavez piled on by saying he would nationalize the entire banking system if needed. The comments, last Wednesday, sent Venezuela's bolivar currency and sovereign bond prices tumbling."
Somehow, Greece didn't make this list. Perhaps it should have.
Late Wednesday, Standard & Poor's downgraded Greece to a BBB+ rating, matching a downgrade from Fitch Ratings just over a week ago, on concerns the country will struggle to rein in a deficit that stands at more than 12% of gross domestic product.
The Emirate's massive debt problem may ultimately serve as a warning of the troubles brewing in other nations. Could other sovereign debt defaults be on the horizon?
Remarkably, there are countries even worse off than Dubai.
The Business Insider recently ranked "The 10 Countries Most Likely to Default."
#10 Lebanon
Cumulative Probability of Default: 17 %
Reuters: "Lebanon, one of the most heavily indebted states in the world, completed a debt swap in March for around $2.3 billion of foreign currency paper maturing this year.
Strong economic growth has helped reduce Lebanon's ratio of debt to gross domestic product to 153 percent in June from around 180 percent three years ago. The country's gross debt stands at $48 billion."
#9 State of California
Cumulative Probability of Default: 18 %
Though it is just a U.S. state and not an independent nation, the Golden State has the world's eighth largest economy, and it is a mess. California’s budget deficit will balloon to $20.7 billion during the next year and a half, the nonpartisan Legislative Analyst’s Office predicted in a November report. As of November, year-to-date revenues were more than $1 billion below what had been expected.
According to The Press Enterprise, “California will pay $6 billion in debt service in the current fiscal year, or nearly 7 percent of the state’s general fund. And that expense is only for part of the bonds voters and legislators have approved: California has $83.5 billion in outstanding debt, including $64 billion in general obligation bonds. But the state has $47.5 billion in already authorized bonds that it has yet to sell, too.”
#8 Lithuania
Cumulative Probability of Default: 19 %
Bloomberg: "Lithuania will probably miss a 2011 European Union deadline to bring its deficit in line with the bloc’s budget threshold, ruling out euro adoption before 2013, Finance Minister Ingrida Simonyte said..
The former Soviet state’s budget shortfall will swell to 9.8 percent of gross domestic product this year, and narrow to 9.7 percent in 2011"
#7 Iceland
Cumulative Probability of Default: 23%
Bloomberg: "Iceland’s economy contracted the most on record last quarter after the island’s banking failure left locals poorer and as businesses lacked funds for investment.
Gross domestic product shrank an annual 7.2 percent, after contracting a revised 6.2 percent in three months through June, Reykjavik-based Statistics Iceland said on its Web site. From the previous quarter, GDP shrank 5.7 percent."
Iceland’s banking collapse last year plunged the Atlantic island into its worst economic decline since gaining independence from Denmark in 1944 and forced the government to seek an international bailout to avert default."
#6 Emirate of Dubai
Cumulative Probability of Default: 29%
Dubai's inability to pay its debts on time forced it to request a six-month extension on loan repayments. That news rocked world markets and sent shivers throughout the financial world. Dubai may simply be the beginning of further sovereign defaults in the coming year.
#5 Latvia
Cumulative Probability of Default: 30%
Bloomberg: "Latvia’s economy contracted a preliminary 18.4 percent in the third quarter, the biggest decline in the EU. The country’s banks may have the highest need for new capital in eastern and central Europe along with Lithuania because they rely on collateral that’s been falling in value amid house price declines, Fitch Ratings said in a report today...
The country is rated two levels below investment grade at BB by Standard & Poor’s. Moody’s Investors Service ranks Latvia at the lowest investment-grade level of Baa3."
#4 Pakistan
Cumulative Probability of Default: 36%
Business Recorder: "The country's external debts and liabilities have posted a raise of some three billion dollars to a new peak of 55.2 billion dollars by end of September 2009."
#3 Argentina
Cumulative Probability of Default: 49%
WSJ: "Fitch Ratings said Argentina's credit ratings are likely to remain in highly speculative territory even if its planned $20 billion debt exchange is executed successfully, noting the country's continuing economic and financial pressures as well as high debt ratios.
Argentina's Senate voted to approve a bill that would allow the government to reopen a 2005 debt restructuring. At issue are about $20 billion in face value of bonds that weren't included in a 2005 transaction. Economy Minister Amado Boudou said recently that the government plans to reopen the offer under similar terms to try to attract as many of those investors as possible."
#2 Ukraine
Cumulative Probability of Default: 55%
Bloomberg: "Ukraine will keep its B2 credit rating, with a negative outlook, the ratings company said in a statement released late yesterday, after Ukrzaliznytsya defaulted on a principal payment on a Barclays Capital-led syndicated loan on Nov. 20...
The B2 rating reflects “weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies,” Moody’s said. “While some of these problems may well reflect political in-fighting in the run-up to the presidential election, the fiscal loosening inherent in recent legislation -- which may raise the budget deficit by up to 7 percent of gross domestic product in 2010 -- is a serious concern. Hence, the negative outlook on the B2 sovereign rating remains in place.”
#1 Venezuela
Cumulative Probability of Default: 60%
WSJ: "one week ago, the government was forced to begin shutting down seven small banks that together represent up to 12% of banking system deposits, after the public began to get wind of some of the banks allegedly using depositors' funds for corrupt ends.
Those takeovers alone would have frayed nerves in financial markets. But Chavez piled on by saying he would nationalize the entire banking system if needed. The comments, last Wednesday, sent Venezuela's bolivar currency and sovereign bond prices tumbling."
Somehow, Greece didn't make this list. Perhaps it should have.
Late Wednesday, Standard & Poor's downgraded Greece to a BBB+ rating, matching a downgrade from Fitch Ratings just over a week ago, on concerns the country will struggle to rein in a deficit that stands at more than 12% of gross domestic product.
U.S. Already $296 Billion in Red for 2010
According to the Congressional Budget Office, the government spent $292 billion more than it took in during October and November.
It was a record 14th straight monthly deficit.
However, according to the Treasury Department, the budget deficit was $176.4 billion in October and $120.3 billion in November, meaning that the deficit actually amounts to more than $296 billion.
The 2010 fiscal year began on October 1, meaning that just two months in, the nation is already nearly $300 billion in the red.
The deficit was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.
Tax revenues have plunged just as spending on safety-net programs like unemployment insurance and food stamps have skyrocketed.
The CBO noted that government outlays through the first two months were $559 billion, meaning that the government had already spent more than double what it had taken in.
The Obama Administration expects the 2010 deficit to set a new record at $1.5 trillion.
There is a widespread sentiment among economists that all of this red ink will lead to higher interest rates and borrowing costs. That outcome would hinder any potential recovery, though it would reward savers.
The National Debt is presently $12.1 trillion, and climbing at a rate of $1 million every minute.
Meanwhile, the gross domestic product has been shrinking during the economic contraction, and will be $13.7 trillion for 2009.
Obviously, the National Debt and the GDP are moving in opposite directions. We've been warned repeatedly that this situation is simply unsustainable. None other than the government's former top accountant, David Walker, has made this point numerous times.
The meager economic growth in the third quarter was the result of nothing more than government spending. Any further growth in the fourth quarter will be the result of even more than the same.
No matter how deep the hole gets, our elected leaders can't stop digging.
One in every six dollars in the U.S. economy is now the product of government spending. At a minimum, that is both unhealthy and unproductive.
The government, and the public, can continue to ignore this for a little while longer, but at our own peril. Sooner or later, there will be very uncomfortable, and destructive, implications.
The U.S. debt clock can be seen here.
It was a record 14th straight monthly deficit.
However, according to the Treasury Department, the budget deficit was $176.4 billion in October and $120.3 billion in November, meaning that the deficit actually amounts to more than $296 billion.
The 2010 fiscal year began on October 1, meaning that just two months in, the nation is already nearly $300 billion in the red.
The deficit was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.
Tax revenues have plunged just as spending on safety-net programs like unemployment insurance and food stamps have skyrocketed.
The CBO noted that government outlays through the first two months were $559 billion, meaning that the government had already spent more than double what it had taken in.
The Obama Administration expects the 2010 deficit to set a new record at $1.5 trillion.
There is a widespread sentiment among economists that all of this red ink will lead to higher interest rates and borrowing costs. That outcome would hinder any potential recovery, though it would reward savers.
The National Debt is presently $12.1 trillion, and climbing at a rate of $1 million every minute.
Meanwhile, the gross domestic product has been shrinking during the economic contraction, and will be $13.7 trillion for 2009.
Obviously, the National Debt and the GDP are moving in opposite directions. We've been warned repeatedly that this situation is simply unsustainable. None other than the government's former top accountant, David Walker, has made this point numerous times.
The meager economic growth in the third quarter was the result of nothing more than government spending. Any further growth in the fourth quarter will be the result of even more than the same.
No matter how deep the hole gets, our elected leaders can't stop digging.
One in every six dollars in the U.S. economy is now the product of government spending. At a minimum, that is both unhealthy and unproductive.
The government, and the public, can continue to ignore this for a little while longer, but at our own peril. Sooner or later, there will be very uncomfortable, and destructive, implications.
The U.S. debt clock can be seen here.
Saturday, December 19, 2009
Bank Failure Tally Reaches 140
Seven banks across six states were shut down on Friday, bringing the total number of failed banks this year to 140.
Friday's closures will cost the FDIC an estimated $1.7 billion.
An average of 11 banks have failed every month this year. The spike in failures has raised concerns about the FDIC's deposit insurance fund, which has slipped into the red for the first time since 1991.
This year's tally of bank failures is the highest number since 1992, when 181 banks failed. But the total is far from 1989's record high of 534 closures which took place during the savings and loan crisis, when the insurance fund also carried a negative balance.
FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry.
The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.
So far, the total cost of these 140 failures to the FDIC fund is more than $30 billion.
Friday's closures will cost the FDIC an estimated $1.7 billion.
An average of 11 banks have failed every month this year. The spike in failures has raised concerns about the FDIC's deposit insurance fund, which has slipped into the red for the first time since 1991.
This year's tally of bank failures is the highest number since 1992, when 181 banks failed. But the total is far from 1989's record high of 534 closures which took place during the savings and loan crisis, when the insurance fund also carried a negative balance.
FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry.
The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.
So far, the total cost of these 140 failures to the FDIC fund is more than $30 billion.
Wednesday, December 16, 2009
U.S. Debt Bomb Ticking Away
According to Morgan Stanley, total U.S. credit market debt as a percentage of GDP is higher now than at the peak of the Great Depression.
Now, as then, the government and financial sector are attempting to stave off the economic contraction through debt-financed spending.
But, at present, the collateral supporting much of our public and private debt is worth less than the debt it is supposed to be supporting.
The U.S. is by far the world's biggest debtor nation. US private sector debt is now 350 percent of GDP.
Currently, there is about $3.75 in debt for every $1 in national income. Yet, the national economy can normally support around $1.50 in debt for every dollar of income.
The fact that U.S. and global debt levels are higher now than during in the 1930s leads to the conclusion that the current deleveraging will likely be a staggering economic event.
The dollar has declined 40 percent in value in the last seven years.
Meanwhile, the national debt is soaring and the monetary base has increased by 142 percent over the past two years.
Yet, government spending continues, unabated. Our national debt now exceeds $12 trillion. Military and war spending are a significant aspect of our excess.
In real dollars, defense spending in both the Korean war and the Vietnam conflict, was not as high as it is today. According to Lawrence Korb, the former assistant secretary of defense in the Reagan administration, the indirect costs of our two current wars — veterans benefits, long-term care of the physically and mentally wounded, and interest on the national debt — could bring their total cost to $5 trillion.
President Obama's latest Afghanistan troop increase will bring total forces to nearly 100,000 — at a cost of $100 billion a year. That's nearly $1 million per soldier.
The U.S. dedicates more money to military spending each year than the rest of the world combined. That kind of spending has unintended consequences.
This week, the House will vote to raise the U.S. debt limit by as much as $1.9 trillion. This will raise the cap on government borrowing to about $14 trillion, or equal the size of our nation's GDP.
It will be the ninth hike since 2002, and the fourth in just 18 months. The government has raised the debt limit more than 90 times since 1940.
Such an increase would be more than twice the size of each of the past three debt limit increases. The move will allow lawmakers to avoid having to raise the limit again before next year’s midterm elections.
A surging budget deficit has pushed US government debt to nearly 98 percent of the gross domestic product. If the U.S. was forced to conduct its finances like a corporation, it would be nearly insolvent.
About 46 percent of America’s debt is held overseas by countries such as China and Japan. Interest payments on those debts consume about a tenth of the United States budget.
Remarkably, that percentage is actually down from recent years as interest rates have dropped. When rates eventually go back up, as they inevitably will, the interest payments will rise in response.
Debt payments are already larger than the budgets for NASA ($19 Billion), the Department of Energy ($25.5 billion), the Department of Education ($53 Billion), and Department of Transportation ($73 Billion).
To fund this overspending (aka federal budget deficits), the U.S. Treasury makes and sells a fresh batch of IOUs every quarter. It then uses the cash from these sales to pay off old Treasury debt that has come due, while also maintaining the interest payments on the rest of the paper that is still outstanding.
The government cannot raise enough revenue through taxation to satiate its unwavering desire for rampant spending. The public wouldn't tolerate it and would vote incumbents out of office. So, the Fed prints money (backed by nothing) and then buys Treasuries to finance our government's relentless deficit spending.
And even if the government tried to raise taxes (largely on the highest income earners), it might forestall any potential recovery.
These record deficits have arrived just as the long-feared explosion in spending on Medicare and Social Security begins. As a result, the hole we're in will just keep getting deeper.
The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.
The Treasury Department’s private-sector advisory committee on debt management has warned of the risks ahead.
“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee in November.
In essence, we've been warned.
"Right now, this year, we have 1.6 trillion in debt coming due. That's roughly twice individual income-tax revenue. Our only plausible strategy for paying that back is to borrow more money." – Leonard Burman, an economist at Syracuse University
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