Quick Notes About the "Falling" Unemployment Rate

• In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

 

• In January, the Civilian Labor Force rose by 508,000.

 

• In January, those "Not in Labor Force" rose by an amazing 1,177,000. If you are not in the labor force, you are not counted as unemployed.

 

• Participation Rate fell .3 to 63.7%, taking out a 1984 low

 

• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +243,000 - Establishment Survey
• US Unemployment Rate Declined .2  - Household Survey
• Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November.
• Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

January 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) January 2012 Employment Report.

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Actual employment is about where it was in 2001.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

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Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

The January employment gained in total nonfarm brings the number of net jobs recovered since a trough in February 2010 to 3.2 million jobs, or 36 percent of the 8.8 million jobs lost between January 2008 and February 2010.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat. The average increase in 2011 was of 152,000 per month, barely enough make a dent in the unemployment rate.

Nonfarm Employment - Payroll Survey Monthly Details - Seasonally Adjusted

Average Weekly Hours

Index of Aggregate Weekly Hours

In January 2012 the index of aggregate weekly hours stood 4.8 percent below its peak in January 2008.

Average Hourly Earnings vs. CPI

"Success" of QE2 and Operation Twist

• Over the past 12 months, average hourly earnings has increased by 1.9 percent; while in December, the CPI-U had a 12-month percent change of 3.0 percent.

 

• Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

Birth Death Model Adjustments For 2012

Birth-Death Notes

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid.

Household Survey Data

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In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

That is an amazing "achievement" to say the least.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status

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Part-time status shows little improvement vs. a year ago.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

click on chart for sharper image

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 15.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.

In January, those "Not in Labor Force" rose by a staggering 1,177,000. Things are much worse than the reported numbers indicate.

Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city. Please consider Providence is facing bankruptcy

Rhode Island's capital city will be in bankruptcy by June if it doesn't get help resolving its financial crisis.

That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30.

The budget shortfall was projected at $110 million last March, when Taveras declared a "category five" financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid.

"Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe," the mayor said. "However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget."

Taveras said the city's retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city's pension liability "into the stratosphere" by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.

"These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year," Taveras said, calling the increases "raises," not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions.

Taveras's office released a list showing that the city's highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 if he lives to the age of 100.

Specter of Central Falls

The tiny city of Central Falls became the first Rhode Island municipality ever to file for bankruptcy last August. East Providence's finances were also placed under formal state oversight in November. Woonsocket and Pawtucket recently disclosed surprise deficits, and two-thirds of local pension plans in the state are "at risk."

Retired police officers and firefighters in Central Falls recently reached a tentative agreement with former R.I. Supreme Court Justice Robert Flanders, the city's receiver, that would see their pension payments reduced by as much as 55% if state lawmakers agree to augment that with supplemental payments over the next five years.

Taveras urged Providence's retirees to learn a lesson from what happened in Central Falls, warning he would find a way to reduce the cost of their pension benefits "one way or another."

As of June 30, Providence's city pension system was 32% funded with a shortfall of $901 million, and the city also had a $1.2 billion unfunded liability for retiree health benefits, according to its most recent audit. The entire city budget is roughly $619 million this year.

Unions, Politicians to Blame

Check that out: The entire budget is $619 million, and the city has a shortfall of over $2 billion.

Taveras is barking up the wrong tree arguing "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe".

It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras' comments ring true. 

Absurd Benefits

This statement says it all "Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 [annually!] if he lives to the age of 100.

To double-check my $796,871 annually claim, I used this Compound Interest Calculator.

At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510.

With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void.

Restoring Equity

I would like to see a bankruptcy judge reduce McLaughlin's pension to the average of his last 10 years' salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable.

Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren't for Central Falls).

More Cities, Major Cities Will Follow

Without even looking at the details, it's easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter.

Moreover, it's only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them.

As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers.

Bankruptcy is the only way to shed absurd union contracts and pension benefits.

Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say "no deal". It is taxpayers' best hope of settling the mess in one shot without devastating tax hikes.

Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

Today, under guise of helping "responsible homeowners" president Obama published details of Plan to Help Homeowners and Heal the Housing Market

Key Aspects of the President’s Plan as Presented

• Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:
• Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.
• Streamline the refinancing process for all GSE borrowers who are current on their loans.
• Give borrowers the chance to rebuild equity through refinancing.
• Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules
• Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work: Following the Administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
• Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
• Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.

State of the Union Analysis

I did an analysis of the proposal based on sketchy details, immediately following the president's State of the Union Address.

Obama Proposes Mortgage Bailouts, Handouts, Copouts Exactly One Paragraph After Stating "Top to Bottom: No Bailouts, No Handouts, and No Copouts"; How the Taxpayer Ripoff Works.

 $10 Billion?! Really?

The proposal as outlined rates to take every "responsible" underwater mortgage held by banks, Fannie Mae, Freddie Mac, hedge funds, foreign banks, and pension plans, and transfer all of them to the FHA. The idea this will only cost $10 billion is absurd.

The "small fees on the largest financial institutions" are absolutely guaranteed to not cover the cost of this monstrous proposal. Indeed there is something in Obama's proposal for everyone except "responsible citizens".

"Let’s never forget: Millions of Americans who work hard and play by the rules every day" will be royally screwed by Obama's proposition in the form of higher taxes down the road.

One key point that I  did not consider at the time came for reader David who said "A refinanced mortgage is a properly documented mortgage. So this also helps to clean up the mess of all the MERS, notes with broken signatures, improperly registered, etc."

There is also a change in availability, one has to be current to take advantage. So taking hose points into consideration....

Five Key Aspects of the President’s Plan in Reality

1. Bail Out Banks, Fannie Mae, Hedge Funds, Wall Street, literally everyone holding mortgage-backed paper.
2. Bank of America with all its Countrywide Financial garbage and Wells Fargo with all its Option ARM garbage will be especially big beneficiaries
3. Fix MERS. Every refinanced loan will have clear title
4. Throw homeowners a relatively small bone
5. Screw responsible taxpayers who have no mortgage as well as those who rent

Addendum:

Reader Barry comments on "responsible" taxpayers.

Hello Mish

I lived in a two bedroom apartment for 17 years with my wife, and then my wife and two sons to save up money.

I did not buy a home until 2 1/2 years ago. I bought my home with cash. I have not been to Disneyland, nor have my children been on any fancy vacations (my sons are now 6 and 8).

Since the government doesn't actually earn any money, it just distributes it, how about instead of giving these billions to those who bought homes they shouldn't have, instead they give it to people like me.

Instead of the money going to the banks to pay off mortgages that should never have been granted in the first place, I would use the money to help pay for my son's college education, my retirement, and maybe a new car which will help employ some Detroit workers.

Seriously, why should those "alleged responsible" citizens get any more consideration than I do?

Anyway, thanks for listening,

Barry

In a triumph of freedom and common sense over forced union slavery, the Indiana Senate Sends Right-to-Work Bill for Governor Daniels’s Signature.

Indiana will become the nation’s 23rd right-to-work state after its Senate exempted nonunion employees from paying dues when working alongside their unionized colleagues.

The vote was 28-22, sending the measure to Republican Governor Mitch Daniels for his promised signature. The Republican-controlled House of Representatives passed the bill Jan. 26, ending three weeks of Democratic boycotts that prevented the chamber from operating.

Republican Senator Carlin Yoder, the bill’s sponsor, said unions “will still be allowed to exist.” During floor debate, Yoder said right to work gives “freedom to those who don’t want to be part of something they don’t believe in.”

Twenty-two states, mostly in the Deep South and the Rocky Mountain West, have enacted right-to-work laws. Republican gains in the 2010 elections prompted legislation in states including Wisconsin and Ohio aimed at restricting bargaining rights for government workers’ unions.

The bill will be sent to Daniels’ desk today and, once signed, will take effect March 14.

The bill does not go far enough. What's needed is the termination of all public union collective bargaining rights nationally. Cities and states are in trouble because politicians have been in bed with unions, driving up costs and taxpayers have to foot the bill.

It's time to end union insanity, and more importantly union slavery. This bill is a step in the right direction. To understand why, please consider ...

 
1. Collective Bargaining neither a Privilege nor a Right

 

2. Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

 

3. Teachers' Unions Don't Give a Damn About Kids; Feeling Guilty, But ...

 

4. Senator DeMint Says Team Obama Acts Like Thugs; Death of Right-to-Work?

Last month Trim Tabs estimated December payroll growth was 38,000. ADP estimated payroll growth at 325,000. I estimated +78,000.

The BLS reported +200,000.

For details, please see Nonfarm Payroll +200,000 ; Labor Force Drops Another 50,000 ; Those Not in Labor Force Rises by 194,000 ; Unemployment Rate 8.5%

Was this a miss by Trim Tabs? ADP? Me?

Here is the correct answer, whether or not you believe the BLS: I don't know and no one else does either.

Seasonal Adjustments

The BLS numbers are subject to massive revisions. Literally millions of jobs are revised away (or added) months, even years later. December and January are typically the hardest months to estimate, subject to huge seasonal adjustments and later revisions.

Economic Turning Points

Economic turning points compound the problem greatly. The BLS readily admits its birth-death adjustments are hugely wrong at turning points.

Are we at an economic turning point now? I think so, and a turn in supporting data is all I need to convince me. If so, the BLS can be off on its numbers by a great deal.

Trim Tabs Fearless Forecast

The following weekly macro analysis and forecast (via email) is from Madeline Schnapp, Director, Macroeconomic Research, Trim Tabs. The above title is mine.

Jobs: Based on our analysis of real-time income tax withholdings, we estimate that the U.S. economy added only 45,000 jobs in January, little changed from 38,000 in December.

Wages: While the BEA reports that wages and salaries increased 3.8% in December, TrimTabs real-time analysis shows that wages and salaries rose only 2.9%. When TrimTabs data is used to replace the BEA wage and salary estimates, disposable income falls by $45 billion and the savings rate declines from 4.0% to 3.6%.

Unemployment Benefits: Expiring emergency and extended unemployment insurance benefits will likely leave Americans with as much as $25 to $50 billion less cash in 2012.

Bonuses: Wage and salary growth net of inflation weakened to -2.1% y-o-y in January from -0.5% y-o-y in December. While much of the January decline is due to lower bonuses this season relative to last, wage growth is still considerably weaker than it was in December.

Weekly Claims: Weekly initial unemployment insurance claims jumped 21,000 in the latest reporting week, coincident with the decline in seasonal adjustment factors. Last week’s increase suggest recent declines were likely due to seasonal adjustments rather than a significant improvement in the labor market.

GDP: Last week’s preliminary Q4 2011 GDP growth estimate of 2.8% was probably overstated. The price deflator for Q4 2011 was just 0.39%, down from 2.56% in Q3 2011. Also, two-thirds of growth in Q4 2011 was due to a swing in inventories from -1.35% in Q3 2011 to +1.94% in Q4 2011, which is likely to be reversed in Q1 2012. We believe the slowdown in GDP growth from 3.03% in 2010 to 1.72% in 2011 provides a better sense of the trend.

Housing: The housing market is likely to remain weak despite near record low mortgage rates because 23.4 million Americans are unemployed or underemployed, 10.1 million mortgage borrowers are underwater, and 6.2 million mortgage borrowers are delinquent.

Synopsis: We see nothing on the horizon to knock the economy out of its slow growth mode. The economy faces substantial headwinds from negative real wage and salary growth, high unemployment, waning government support, expiring tax incentives, contracting state and local governments, elevated fuel prices, and a sluggish housing market. The economy is highly vulnerable to economic shocks from overseas.

Commentary

Workers in the U.S. are faring much worse than U.S. government statistics indicate. The personal income report released Monday by the Bureau of Economic Analysis (BEA) reported that wages and salaries rose 3.8% y-o-y in December, while our analysis based on withholdings indicates that wages and salaries rose only 2.9% y-o-y.

We believe the BEA is missing the slowdown in wages and salaries because it relies on lagged data to compute current trends. The BEA derives its results from the Quarterly Census of Employment and Wages (QCEW) which it receives a quarter in arrears. The BEA’s wage and salary data for December is derived from QCEW data from Q2 2011, when the economy was picking up steam in response to massive monetary stimulus.

To compute current wages and salaries, the BEA interpolates and extrapolates the lagged QCEW data forward, using inputs from the BLS to make necessary adjustments. Unfortunately, this methodology misses rapid changes in wages and salaries that occur when the economy moves from expansion to contraction or vice versa.

The BEA is overstating employment growth due to distortions caused by huge seasonal adjustments to the BLS employment data. The BEA will probably continue to overstate wages and salaries, personal income, and the savings rate for the period from October through December until April 2012, when QCEW data from Q4 2011 will be available.

Unemployment Insurance and Weekly Claims

Here are two of the many charts from the report.

Weekly Trend of Claims

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Trim Tabs writes ... "At its peak in February 2010, the federal government’s emergency and extended unemployment benefits programs provided assistance to 6.0 million people. Since then, the number of people receiving benefits has steadily declined, and they totaled only 3.4 million as of the week ended January 6. Since only 2.2 million jobs have been created since the recession started in December 2007—fewer than the number of people no longer receiving benefits—it is likely that 1.0 million or more people now lack both benefits and jobs."

Emphasis added.

Involuntary Retirement

I think it is much worse than that. Technically it could be as high as 3.5 million (assuming no one with expiring benefits ever found a job). It would only be a million or so, if all of them did. Neither of those extremes is likely so I will make a rough guess that 2 million lost benefits and still have no job.

However, many of those with expiring benefits likely took what I call "forced retirement". They wanted a job, needed a job, yet had no job and no prospects of a job. To survive, those of sufficient age retired involuntarily to collect social security benefits.

Weekly Trend of Benefits

Trim Tabs writes "According to the BEA, the loss of income from extended and emergency unemployment insurance benefits has amounted to $57 billion since January 2010. In the past twelve months, the loss of income amounted to $23 billion, which is equal to about 13.4% of the estimated $188 billion increase in wages and salaries in 2011. In 2012, we estimate that expiring benefits will reduce incomes by approximately $25 to $50 billion."

It's safe to assume the loss of income is substantial, and it's about to get "more substantial". However, one does need to factor in involuntary retirement and subsequent social security payments.

Social Security Benefits

Social Security Benefits Detail

That's quite a jump. Boomer demographics is clearly at play. But how much is "involuntary retirement"?

Regardless, one thing is certain: That exponential trend is not remotely sustainable.

Forced Lifestyle Changes

One final point about social security: Retirement income does not match employment income. The presumption is "it doesn't have to".

Just how valid is that presumption? Even if it is valid, how many have sufficient savings to retire with the same lifestyle?

For someone with a mortgage and underwater on their house with rising food and energy costs, the presumption is not likely to be correct and/or savings are not likely to be sufficient.

The obvious result is a "forced lifestyle change" and less spending.

This boomer drag on GDP trends is enormous, yet few see it.

Moreover, interests rates of 0% on CDs does not help any. Those on fixed income have been clobbered by Fed policies. I have talked about this numerous times but here is a quick recap of a pair of recent articles.

• Hello Ben Bernanke, Meet "Stephanie"

 

• Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

Recession Rationale Stacked Up

Recent earnings reports have contained numerous misses, economic data has been generally weak in the US and very weak in Europe, and the Fed did not pledge to hold interest rates to zero through the end of 2014 for no reason.

Recession rationale is stacked up, we just need coincident indicators to confirm.

Things are going so well in Greece (just one step away from a deal for weeks on end), that Greek officials attack EU and IMF as debt talks stall

Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country's mounting debts appeared to stall.

Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.

Papademos and his team of aides returned in sombre mood on Tuesday from a round of talks in Brussels and Frankfurt at the offices of the European Central Bank (ECB), despite relief that a German proposal to install an EU commissioner in Athens, with special oversight of Greek finances, had been quashed.

On the negotiations over the bailout funds, Greek MPs have objected to demands by the troika for further wage cuts and reductions in the minimum wage.

"The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."

Greece Must Pledge Tough Reforms for Debt Swap Deal

CNBC reports Greece Must Pledge Tough Reforms for Debt Swap Deal

"The debt swap agreement is ready, but it will not be announced before the end of the week and until the government has made certain commitments on reforms, labour issues and the pension system," said the banker, who declined to be named.

"By delaying the debt swap, European partners are putting pressure on the government and political leaders to make certain commitments."

Prime Minister Lucas Papademos on Tuesday confirmed that Athens was aiming for a definitive agreement on the debt swap by the end of this week -- roughly the same time it expects to conclude talks with lenders in Athens on its second bailout.

Papademos acknowledged that the main sticking points in talks with the so-called "troika" of foreign lenders - the European Central Bank, the EU and the International Monetary Fund -- revolved around spending cuts and labour reform.

On top of biting austerity measures already taken that regularly bring droves of angry protesters onto the streets, Greece's lenders have demanded it make extra spending cuts worth 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defence and health spending.

In a sign of the challenges the government faces in pushing those through, a Greek union official said the country's major unions were gearing up for more anti-austerity protests next month after an early grace period for Papademos's government.

The prospect of elections as early as April has further complicated the talks, with political leaders in Papademos's national unity coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.

Increasingly exasperated by Athens' failure to live up to pledges on the reform front, European partners have demanded all Greek parties commit to measures agreed under the bailout irrespective of who wins the next elections.

Without a deal and a subsequent release of funds from the bailout plan, Greece would sink into an uncontrolled default that risks spreading turmoil across the euro zone and tipping the global economy back into recession.

Greece is Irrelevant

Let's dispense with the nonsense first. The world economy will not go into a recession over Greece. However, it is highly likely to go into recession regardless of what Greece does. At this point, Greece is irrelevant.

Pertinent Questions

1. Does Germany want a deal?
2. Is the proposal by Germany for Greece to cede budget sovereignty a ploy to win Greek concessions?
3. Will Germany be overridden if it does not want a deal?

The answer to the first question should be clear. Germany has had enough. I wrote about it on Friday in Prepare for Greece to Leave Eurozone; German Government Calls for Greece to Cede Sovereignty Over Tax and Spending Decisions to Eurozone "Budget Commissioner"; Text of the German Demands .

German and IMF demands make meaningless any hint of a deal "soon". Germany has signaled it has had enough and will not throw another 130 billion euros down a rathole. The IMF signaled the same thing but not as emphatically.

Thus, if Germany does not back down and the IMF insists on a 10-page list of “prior actions” a Greek exit from the Eurozone is at hand.

Look for a "bank holiday" in Greece soon.

France Does Want a Deal

Complicating matters for Merkel, France does want a deal, and Sarkozy stepped in to support Greece.

Is this a game by Germany to extract concessions? I do not think so. This goes far beyond hardball. People do not understand the pressure on Merkel within her own party to end these nonsensical bailouts.

Merkel is fighting for her political life. She has no wining plays. In chess terms, she is in a Zugzwang position. Please see Political Zugzwang for a discussion of 4 losing options Merkel faces.

I believe she selected the best one from her perspective: Let Greece go, and fight another day.

Will Germany be Overridden?

The only question of relevance is "Will Germany be Overridden?"

If the EMU and EU leaders know what is good for them, they can take some pressure off Germany, by making demands so great that Greece will not accept them.

That may or may not be the state of the current game, but it sure is a possibility that explains a lot of things, especially the never-ending announcements that a "deal is at hand" and today's declaration of an emergency meeting by Papademos.

Insisting that "all Greek parties commit to measures agreed under the bailout irrespective of who wins the next elections" is an extremely bitter pill, especially given the demands Germany forced on Greece.

Does Germany want Greece to comply with those demands? I highly doubt it. Will Greece comply? I do not know.

Merkel's actions strongly suggest she is rooting this deal collapses in spite of obstacles by placed by Sarkozy who clearly does want a deal.

Last month, European banks tapped the ECB for €489bn in a long-term refinance operation dubbed LTRO. On February 29, another round of LTRO is coming up and expect banks to go for the gusto. Banks like cheap money to speculate and that is exactly what they will do.

The Financial Times reports Banks set to double crisis loans from ECB

European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze.

Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29.

“Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.”

Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.

Unlimited Money for Three Years at One Percent

The ECB is offering unlimited money to banks for three years, at one percent. Banks are salivating because the first round went well. Banks that take it can and will speculate on more government bonds.

The money is supposed to go for bank lending but it won't. Why should they lend? Banks have a guaranteed profit by speculating in Spanish or Italian bonds, assuming of course Spain and Italy do not need a bailout coupled with a writedown on government debt.

However, that's quite a risk, and in my opinion Spain will need such a writedown. If so, Germany will be on the hook once again.

For a discussion about how futile this is, please see Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

Money Supply Will Soar, Lending Won't

Don't expect the next LTRO to make it into the real economy. It won't. Rather the LTRO will fuel more bank speculation and more leverage in government bonds. Money supply will soar, lending won't and this rates to be good for gold.

In the meantime, please sing along with Bachman Turner Overdrive (and the ECB).

Link if video does not play: Bachman Turner Overdrive - You Ain't Seen Nothing Yet.

Prepare for Greece to exit the Eurozone. Germany has made a request that in my opinion practically guarantees that outcome. The Financial Times has a pair of articles on the matter but the conclusion above is mine.

German Government Calls for Greece to Cede Sovereignty to Eurozone "Budget Commissioner"

Please consider Call for EU to Control Greek Budget

The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing “all major blocks of expenditure” by the Greek government.

Even before Germany circulated its proposal, the EU and International Monetary Fund had presented a 10-page list of “prior actions” Athens must implement before the new bail-out is agreed. According to a copy of the document, also obtained by the FT, Greece must cut an additional 150,000 government jobs within three years.

Actual Text of Proposal

The Financial Times posted on its website the complete text of the proposal. Here are snips from Assurance of Compliance in the 2nd GRC Programme

1. Absolute priority to debt service

Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

2. Transfer of national budgetary sovereignty

Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.

Expect Greek "Bank Holiday" Soon

Perhaps I am mistaken but I do not see any chance Greece will agree with this proposal.

German and IMF demands make meaningless any hint of a deal "soon". Germany has signaled it has had enough and will not throw another 130 billion euros down a rathole. The IMF signaled the same thing but not as emphatically.

Thus, if Germany does not back down and the IMF insists on a 10-page list of “prior actions” a Greek exit from the Eurozone is at hand.

Look for a "bank holiday" in Greece soon.

The headline real GDP number of 2.8% does not sound too bad until you dig beneath the surface. A full 1.9 percentages points of that 2.8% was inventory replenishment. Real GDP vs. a year ago is +1.6% and that is on a recession track as well.

Five-Year Treasury Yield Hits Record Low

Bloomberg reports Treasury Five-Year Yield Declines to Record Low as GDP Misses Forecast

Treasury five-year note yields fell to a third consecutive record low after slower-than-forecast U.S. growth added to speculation the Federal Reserve will expand asset purchases to spur economic growth.

Ten-year note yields fluctuated as stockpile rebuilding accounted for 1.9 percentage points of the 2.8 percent economic expansion, sparking concern growth may be weaker than expected in the first three-months of this year. Fed Chairman Ben S. Bernanke said Jan. 25 he’s considering additional bond purchases to boost growth after the Federal Open Market Committee announced that the target lending rate would stay low through late 2014.

Yield Curve over Time

Stock Symbols in Above Chart

• $IRX Brown: 3-Month Yield
• $FVX Blue: 5-Year Yield
• $TNX Orange 10-Year Yield
• $TYX Green: 30-Year Yield

Sustained economic weakness is the only reasonable explanation for this decline in yields. Yes, there is Fed intervention. However, the reason the Fed is intervening is "sustained economic weakness".

However, the Fed's actions are counterproductive. Driving down interest rates does not encourage bank lending, rather it does five things the Fed does not want.

Five Unwanted Results of Fed Policy

1. Low interest rates clobbers those on fixed income - See Hello Ben Bernanke, Meet "Stephanie"

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2. Low interest rates and quantitative easing encourages bond market speculation and sure profits instead of bank lending - See Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

 

3. Low interest rates encourage commodities speculation especially food and energy and that puts a price squeeze on manufactures. Input prices rise, but demand and prices decline. - See Chart of the Day: Apparel Import Data in Square Meters and Dollars; J.C. Penney's Slashes Prices on All Merchandise by "At Least 40%", Offers Every Day Low Pricing

 

4. Low interest rates drives up the price of gold - See Gold, Silver, $HUI React to Bernanke Pledge to Hold Rates near Zero "At Least" through Late 2014; Hello Stephanie, Ben Promises More of the Same

 

5. The beneficiaries of the Greenspan Fed and the Bernanke Fed policies have been the 1% not the 99%

Fed Policy Not Working

Fed policy is not working, nor will it work.

This is what happens when an academic wonk with no real-world practical thinking sits in a box with other academic wonks with no real world experience and they collectively divine economic policy as if they were god.

The Fed is responsible for the housing bubble, the resultant collapse, and the anemic economic recovery.

GDP on Recession Track

Here is an interesting chart from Doug Short regarding Real GDP and the Next Recession

Doug Short writes ...

As the chart illustrates, the latest YoY real GDP, at 1.6% is up from last quarter's 1.5% (to two decimal points it's 1.56% versus 1.46% for Q3). At 1.6% the YoY number is below the level at the onset of all the recessions since quarterly GDP was first calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (at two decimal places it was 1.42% versus today's 1.56%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in the same quarter. In that case the recession began three quarters later in December 2007.

In contrast to popular belief, recessions typically start with GDP in positive territory. As you can see, Real GDP vs. a year ago is +1.6% and that is consistent with a recession track.

It is highly likely Bernanke was aware in advance that a full 1.9 percentages points of that 2.8% rise in GDP was inventory replenishment when he pledged on Wednesday to "Hold Rates near Zero "At Least" through Late 2014" and opened the door for another round of Quantitative easing as well.

Nonetheless, for reasons noted above, another round of quantitative easing will be counterproductive. The beneficiaries of Bernanke policy will be the 1%, not the 99%.

Inquiring minds are reading the complete text of President Obama's State of the Union Address to see what distortions, lies, and hypocrisy it contains.

I found a nice Orwellian set of paragraphs smack in the middle of his speech.

And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

Let’s never forget: Millions of Americans who work hard and play by the rules every day deserve a Government and a financial system that do the same. It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.

Top to Bottom: More Bailouts, More Handouts, More Copouts

While reading the first paragraph above I knew without a doubt a huge bailout proposal was coming up.

Sure enough, the very next paragraph contained a massive bailout proposal and in more ways than is readily apparent at first glance. For starters "responsible homeowners" don't need mortgage relief. Secondly, $300 a month is a lot of dough so I would like to see an accounting.

Finally, and most importantly, every loan that is refinanced will be paid off in full. Thus, any bank, hedge fund, mortgage provider, or GSE that is paid off on a nonperforming loan will be immediately made whole.

This is a massive backdoor bailout of banks, mortgage companies, hedge funds, foreign banks, and anyone else holding mortgage related garbage.

In case you were wondering about the massive rally in bank shares this year, this proposal just might have something to do with it.

The Orwellian irony of it all comes in the third paragraph with Obama's bald-faced lie "It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts."

How the Taxpayer Ripoff Works

The New York Times explains the ripoff in President to Offer Way for Easing Home Debt

The White House plans to propose legislation that could allow a few million homeowners to reduce monthly mortgage payments by refinancing their current loans into new ones guaranteed by the Federal Housing Administration.

The program would broaden the availability of government-backed mortgages to include many borrowers whose loans are held by private companies and who have been unable to persuade those lenders to reduce their interest rates. Existing federal programs focus mostly on borrowers whose loans are owned by the government.

The new program will be directed at people whose mortgage debts exceed the value of their homes, according to a senior administration official who spoke on the condition of anonymity because the details have not yet been finalized. The official estimated that the program could benefit two million to three million homeowners who have loans that are not guaranteed by the government, and that the program’s cost would not exceed $10 billion.

$10 Billion?! Really?

The proposal as outlined rates to take every "responsible" underwater mortgage held by banks, Fannie Mae, Freddie Mac, hedge funds, foreign banks, and pension plans, and transfer all of them to the FHA. The idea this will only cost $10 billion is absurd.

The "small fees on the largest financial institutions" are absolutely guaranteed to not cover the cost of this monstrous proposal. Indeed there is something in Obama's proposal for everyone except "responsible citizens".

"Let’s never forget: Millions of Americans who work hard and play by the rules every day" will be royally screwed by Obama's proposition in the form of higher taxes down the road.

Anyone wondering what kind of economically-illiterate, big-brother expansionist ideas Newt Gingrich might embrace as president can find the answer in several recent articles regarding his positions on marijuana usage, food stamps, drug testing, and surprisingly even "free radios".

Please consider Gary Johnson hammers Newt for ‘hypocrisy’ on executing marijuana users

Former New Mexico Gov. Gary Johnson went on offense against Newt Gingrich Monday, attacking the former House speaker’s proposal to execute marijuana users as hypocritical, considering the GOP contender has himself admitted to smoking pot.

Johnson is currently seeking the Libertarian Party nomination for president, and is a proponent of legalizing the drug.

“Ideas are important, especially in a presidential campaign,” said Johnson. “But some of Speaker Gingrich’s ideas over the years are nothing short of scary. Under his legislation, anyone coming home to the U.S. and caught carrying enough marijuana (2 oz.) to distribute would be sentenced to life imprisonment with no parole — or if caught twice, would be sentenced to death.”

Gingrich defended the legislation, the Drug Importer Death Penalty Act of 1996, in November as a way to get tough on Mexican drug cartels.

Newt: Give the death penalty to drug cartel leaders

Next up, please consider Newt: Give the death penalty to drug cartel leaders

Republican presidential candidate Newt Gingrich says he supports using the death penalty as punishment for leaders of drug cartels who bring drugs into America.

Gingrich made the comments when asked in an interview with Yahoo! News if he still stands by a bill he introduced in Congress in 1996 allowing those convicted of smuggling drugs to be put to death.

“I think if you are, for example, the leader of a cartel, sure,” Gingrich told reporter Chris Moody. “Look at the level of violence and the level of violence that they’ve done to society.”

Elaborating, he said: “You can either be in the Ron Paul tradition and say there’s nothing wrong with heroine and cocaine or you can be in the tradition that says, ‘These kind of addictive drugs are terrible, they deprive you of full citizenship and they lead you to a dependency which is antithetical to being an American.’”

Gingrich Lies About Paul's Position on Drug Usage

For starters Gingrich purposely lied about Paul's position. Ron Paul never said "there's nothing wrong with drug usage". Indeed he has stated over and over he does not favor their use.

What Paul has said, is he does not believe government should prosecute those who take drugs. I don't either. Legalizing drugs would take the profit out of them, stop countless robberies by addicts seeking to get drugs, and lower their overall usage.

Primary and Secondary Beneficiaries of Gingrich's Expanded War on Drugs

The primary beneficiaries of Gingrich's expanded war on drugs would be the gang-bangers, drug lords, and smugglers from Mexico. Higher costs and reduced supplies mean more profits for those who succeed at smuggling.

The war on drugs can never succeed here. Unlike Singapore, the US is not going to put to death everyone who sells marijuana. Nor should we in the first place. It is not the government's role to interfere in the personal lives of citizens.

The secondary beneficiary of Gingrich's proposal would be prison guards and union leaders.

Indeed it is the unions who were behind California's inane strike-three law. Californian's pay out the nose and unions have benefited massively by the economically inept and morally corrupt ideas Gingrich espouses for the entire nation.

Yahoo News Interview with Gingrich

Finally please consider Newt Gingrich on drug laws, entitlements and campaigning: The Yahoo News interview

Three Republican presidential candidates have shown an openness to handing over control of drugs and medical marijuana to the states. Would you continue the current federal policy making marijuana illegal in all cases or give the states more control?

I would continue current federal policy, largely because of the confusing signal that steps towards legalization sends to harder drugs.

I think the California experience is that medical marijuana becomes a joke. It becomes marijuana for any use. You find local doctors who will prescribe it for anybody that walks in.

Why shouldn't the states have control over this? Why should this be a federal issue?

Because I think you guarantee that people will cross state lines if it becomes a state-by-state exemption.

I don't have a comprehensive view. My general belief is that we ought to be much more aggressive about drug policy. And that we should recognize that the Mexican cartels are funded by Americans.

Expand on what you mean by "aggressive."

In my mind it means having steeper economic penalties and it means having a willingness to do more drug testing.

In 1996, you introduced a bill that would have given the death penalty to drug smugglers. Do you still stand by that?

I think if you are, for example, the leader of a cartel, sure. Look at the level of violence they've done to society. You can either be in the Ron Paul tradition and say there's nothing wrong with heroin and cocaine or you can be in the tradition that says, 'These kind of addictive drugs are terrible, they deprive you of full citizenship and they lead you to a dependency which is antithetical to being an American.' If you're serious about the latter view, then we need to think through a strategy that makes it radically less likely that we're going to have drugs in this country.

Places like Singapore have been the most successful at doing that. They've been very draconian. And they have communicated with great intention that they intend to stop drugs from coming into their country.

In 1981, you introduced a bill that would allow marijuana to be used for medical purposes. What has changed?

What has changed was the number of parents I met with who said they did not want their children to get the signal from the government that it was acceptable behavior and that they were prepared to say as a matter of value that it was better to send a clear signal on no drug use at the risk of inconveniencing some people, than it was to be compassionate toward a small group at the risk of telling a much larger group that it was okay to use the drug.

It's a change of information. Within a year of my original support of that bill I withdrew it.

Ron Paul and Barney Frank have introduced a similar bill almost every year since.

You have to admit, Ron Paul has a coherent position. It's not mine, but it's internally logical.

Speaking of Ron Paul, at the last debate, he said that the war on drugs has been an utter failure. We've spent billions of dollars since President Nixon and we still have rising levels of drug use. Should we continue down the same path given the amount of money we've spent? How can we reform our approach?

I think that we need to consider taking more explicit steps to make it expensive to be a drug user. It could be through testing before you get any kind of federal aid. Unemployment compensation, food stamps, you name it.

It has always struck me that if you're serious about trying to stop drug use, then you need to find a way to have a fairly easy approach to it and you need to find a way to be pretty aggressive about insisting--I don't think actually locking up users is a very good thing. I think finding ways to sanction them and to give them medical help and to get them to detox is a more logical long-term policy.

Sometime in the next year we'll have a comprehensive proposal on drugs and it will be designed to say that we want to minimize drug use in America and we're very serious about it.

Since we are in Florida, can you provide an idea of how your administration would handle relations with Cuba?

I think we need a very aggressive model. I describe it as a Cuban Spring. If you have a U.S. government that says Assad should go, why aren't they aggressively saying Castro should go?

Would you open up trade relations with Cuba as president?

It's probably not part of it, but I think you would look at under what circumstance would you change and could you offer the Cuban people. For example, immediately after a free election, all the embargoes would drop as of that day. You could have the carrot of saying, the second there's a free election, we should do everything we can to help the Cuban economy flourish.

President Obama has opened more air travel to the island. Would you shut down those flights?

No, but I would very aggressively move towards maximizing dissent inside Cuba. Mostly covert, and also just subsidies. Go back and look what we did in Poland for example when we aggressively supported Solidarity.

What kinds of items would you subsidize?

You might try to find a way to give virtually every Cuban a free radio. You might want to try to find a way to maximize your ability to broadcast into Cuba so that you have a continuous alternative model of information.

Free Radio Insanity

I do not care whether Gingrich is speaking figuratively or literally, the idea of free radios is complete nonsense.

Exactly would the founders of the constitution think about giving free radios to everyone in another nation?

I will tell you what they would think. They would think just as I do, that the proposal is economic insanity as well as foolish intervention into the affairs of other nations. 

Icing on the Nutcake

If you are seeking icing on the nutcake then check out Gingrich's statement on Ron Paul regarding drug usage: "You have to admit, Ron Paul has a coherent position. It's not mine, but it's internally logical."

Ron Paul has a logical position. Gingrich doesn't. The war on drugs has been a miserable failure. Gingrich wants to make it an even bigger failure, and a very costly one at that too.

Has Gingrich figured out the cost of arresting and imprisoning everyone who  sells drugs? The answer is obviously not.

Three Questions for Gingrich

1. How much will it cost to administer drug tests to everyone getting a government subsidy?
2. How much more chipping away at states' rights does Gingrich want?
3. How can this proponent of big government even call himself a Republican?

Mish Food Stamp Proposal

When it comes to food stamps I have a far better set of ideas than drug testing.

• Do not let those on food stamps buy frozen pizza, potato chips, snacks of any kind, soft drinks, etc.
• Explicitly limit food stamp users to generic (store brand vs. name brand) dried beans, rice, peanut butter, pasta, canned vegetables, canned soup, soda crackers, fresh vegetables, fresh fruit, frozen (not bottled) juice, poultry, ground beef, chuck steak, bread, cheese, powdered milk, eggs, margarine, and general baking goods (flour, sugar, spices).
• Calculate a healthy diet based on current prices, number in the family, ages of recipients, and base food stamps allotments on that diet.

My proposal will give not only lower the cost of the food stamp program, healthy diets would lower Medicaid and Medicare costs as well. Moreover my proposal would give people a strong incentive to get off the food stamp program without intrusive, costly big-brother ideas like drug testing which cannot possibly work for the simple reason that anyone who fails will steal to get food rather than starve. Also note that Gingrich's proposal would harm innocent kids on the program. My idea would help them nutritionally.

Given that Gingrich himself admits "Ron Paul has a coherent, logical position" pray tell why can't we try it?

Fannie Mae and Freddie Mac have already cost US taxpayers over $200 billion. If Obama gets his way on mortgage writedowns, the GSEs estimate it would take another $100 billion.

Since such estimates are always overly-optimistic by a factor of 3 to 10, I estimate the cost to taxpayers would be $300 billion minimum.

Please consider Fannie, Freddie writedowns too costly: regulator

The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds.

In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.

It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.

"Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure," FHFA's acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.

About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in the letter.

Another barrier to principal writedowns, aside from pushing losses at the two firms even further, DeMarco said, was the costs associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.

The Federal Reserve, in a white paper to Congress earlier this month, said write-downs "had the potential to decrease the probability of default" and "improve migration between labor markets."

However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard -- the concept that rescue efforts breed further behavior that exacerbates the existing problem -- and could prompt other borrowers to stop making timely loan payments.

Calculating the Maximum Cost

At least we know an approximate maximum cap. Negative equity totals $750 billion. Add in cost on implementing the program, graft, fraud, etc. and the cap (right now) is a conservative $760 billion or so. Factor in declining property values and a conservative cap is $800 billion or so.

Obama Seeks Vote-Buying Opportunity

Notice the ridiculous comment by the Fed: write-downs "had the potential to decrease the probability of default". Of course they do.

Write off the entire loan and there would be no chance of default. That does not mean it's a smart thing to do. Unless of course you are President Obama seeking to buy votes in November.

Both Newt Gingrich and Rick Santorum have accused Ron Paul of being an isolationist. Is that really the case? Ironically, I propose that Newt Gingrich, Mitt Romney, and Rick Santorum are the isolationists.

However, before one can make a case for or debate anything, there must be an agreement on terms and an understanding of what isolationist means.

The best place to start is a compelling article written by Sheldon Richman on the Future of Freedom Foundation website.

Opposing Imperialism Is Not Isolationism

I am going to take liberty and post Richman's Opposing Imperialism Is Not Isolationism in entirety. If he objects, I will condense it down. Here goes.

When pundits and rival politicians call Ron Paul an “isolationist,” they mislead the American people — and they know it.

They know it? How could they not: Ron Paul is for unilateral, unconditional free trade. He believes any American should be perfectly free to buy from or sell to any person in the world. In that sense — the laissez-faire sense — he favors globalization, which, applied consistently, would require a worldwide free market. He’s such a strong advocate of free trade that he objects to the world’s governments, led by the U.S. government, setting up international bureaucracies, such as the World Trade Organization, to manage trade. He thinks trade should be a totally private matter. That’s a solid classical-liberal, or libertarian, position.

So why is Paul repeatedly called an isolationist?

Apparently in today’s political world, being an isolationist means opposing the U.S. government’s policing the rest of the world through invasion, occupation, and war — that is, militarism. The word “isolationist” has always suggested a fear of foreigners, and no doubt those who apply the word to Paul want to cash in on that sense. So we are left with the daffy conclusion that Ron Paul is a xenophobic, head-in-the-sand isolationist precisely because he prefers peaceful trade with foreigners rather than invasion, occupation, and demolition of their countries.

If that’s what it means to be an isolationist, count me as one too.

It’s easy to understand why this inappropriate label is stuck on Paul. Establishment conservatives and progressives are terrified by him and desperately want him to go away. They’re terrified because he has done the worst thing imaginable: he has held up a mirror and reminded them of what they are.

He has shown establishment conservatives and even so-called Republican moderates (such as Mitt Romney and Jon Huntsman) that they are, and long have been, apologists for empire and therefore betrayers of the republican (small-r) ideals they say they embrace. When Paul condemns past, present, and future aggressive wars (such as the one being planned for Iran); when he calls for closing America’s 900 military installations in over 40 countries and removing America's troops from 130 countries; when he advocates an end to all economic and military aid to foreign governments (including Israel’s); and when he opposes wholesale violation of the Bill of Rights (see the PATRIOT Act and the National Defense Authorization Act), he is saying to his Republican rivals, You have helped destroy individual liberty by shamefully supporting the U.S. global empire, which brutalizes foreign populations, fosters an exploitative military-industrial complex, violates civil liberties, and burdens the American people with obscene debt, taxation, and Federal Reserve monetary manipulation.

That charge must be hard to take from a fellow Republican. So his rivals strike back in the way they know best: they smear Paul. The thought of a staunch antiwar, pro-Bill of Rights candidate running against Barack Obama scares the daylights out of them, because they know only one way to run against a Democrat: accuse him of being an appeaser and a socialist.

This is absurd, however, because Obama is neither. He has steadfastly carried on the empire’s program of global militarism and corporatism. If you doubt it, look at his foreign-policy record and the long list of Wall Street people who advise him and give him money.

Which brings us to the progressives. If you think establishment conservatives are scared of Ron Paul, imagine how Obama and his supporters must feel. Can you imagine their having to run against a staunch antiwar, pro-Bill of Rights opponent? This is the same Obama who has maintained Guantanamo, launched more deadly drone attacks than George W. Bush, signed into law the authority to detain individuals indefinitely without charge or trial, claimed he may kill even American citizens without due process, cracked down harshly on whistle-blowers, protected torturers from legal consequences, invoked state secrets to quash lawsuits by torture victims, and on and on.

Most progressives live in a fantasy world where they are champions of peace, tolerance, and the rule of law, when in fact they support — and refuse to criticize — a man who has mimicked George W. Bush in virtually every way.

How can they tolerate a man — Ron Paul — who reminds them of that?

Sheldon Richman is senior fellow at The Future of Freedom Foundation in Fairfax, Va., author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine. Visit his blog Free Association at www.sheldonrichman.com. Send him email.

Is Ron Paul an Isolationist?

I was going to title my post "Is Ron Paul an Isolationist?" but after perusing the Future of Freedom Foundation website that I just discovered this evening, I noticed that title was already taken.

Here are snips from The Future of Freedom article Is Ron Paul an Isolationist? written by Laurence Vance.

Speaking in South Carolina just before Christmas, Newt Gingrich “sharply criticized Mr. Paul for what he said were his isolationist views on foreign policy.”

While stumping in Iowa the week before the Iowa caucuses, Rick Santorum “urged Republicans to carefully study Mr. Paul’s isolationist foreign policy views.”

Tune in to the leading conservative talk-show hosts or read the comments posted by their followers on right-wing websites and you will hear and see Ron Paul regularly described as an isolationist.

Okay, so what would an isolationist America look like? What if the United States really retreated from the world stage, avoided engagement with the rest of the world, and actually did isolate itself from every other country?

Under a real foreign policy of isolationism, the United States would refuse to participate in the Olympics, refuse to make treaties, refuse to issue visas, refuse to allow foreign goods to be imported, refuse to allow U.S. goods to be exported, refuse to allow foreign students to study at American universities, refuse to allow American students to study at foreign universities, refuse to allow foreign investment, refuse to extradite criminals, refuse to exchange diplomats, refuse to allow cultural exchanges, refuse to participate in disaster-relief efforts, refuse to allow travel abroad, refuse to engage in diplomacy, refuse to deliver mail to or receive mail from foreign countries, refuse to allow emigration, and refuse to allow immigration.

Here is Rick Santorum on Ron Paul’s “dangerous” foreign policy: “One thing he can do as commander in chief is he can pull all our troops home. He can shut down our bases in Germany. He can shut down the bases in Japan. He can pull our fleets back.” According to Santorum and his fellow conservative and Republican warmongers Gingrich, Rick Perry, Michele Bachmann, Herman Cain, Mitt Romney, Rush Limbaugh, Mark Levin, Sean Hannity, and the Weekly Standard, Ron Paul is an isolationist, not because he wants America to be isolated from the rest of the world, but because he wants to terminate the empire, stop fighting foreign wars, close the foreign military bases, cut the bloated military budget, end foreign aid, halt all offense spending, bring all the troops home, limit the military to the actual defense of the United States, and stop being the policeman of the world.

A noninterventionist foreign policy is a policy of peace, commerce, travel, cultural exchange, diplomacy, neutrality, and free trade.

A noninterventionist foreign policy means no preemptive strikes, invasions, occupations, bombings, threats, sanctions, embargoes, foreign aid, assassinations, imperialism, meddling, bullying, regime changes, nation building, entangling alliances, spreading democracy, NATO-like commitments, peacekeeping operations, forcibly opening markets, policing the world, and no foreign military bases.

It is a sad day for America and Americans when not supporting an aggressive, belligerent, interventionist, and meddling foreign policy means that you are an isolationist.

Is Ron Paul isolationist?

Is France isolationist because its navy doesn’t patrol our coasts? Is Canada isolationist because it doesn’t have military bases below the 49th parallel? Is Germany isolationist because it doesn’t have tens of thousands of troops stationed in the United States? Is Brazil isolationist because it doesn’t kill Americans with drone strikes? Is Russia isolationist because it doesn’t build military bases in scores of countries? Is Moldova isolationist because it doesn’t send its soldiers to fight foreign wars? Was Ronald Reagan an isolationist because he pulled U.S. troops out of Lebanon?

Noninterventionism is not isolationism. It is practical, sane, moral, just, and right. It is the foreign policy of the Founding Fathers — and Ron Paul.

Laurence M. Vance is a policy advisor for the Future of Freedom Foundation and the author of The Revolution That Wasn’t. Visit his website: www.vancepublications.com. Send him email.

That was a lengthy, yet incomplete snip.

With those two compelling articles, I added a link to The Future of Freedom Foundation under the category "Taxpayer Friendly Sites" on the left hand side of my blog.

Mission Statement

I wholeheartedly endorse the Mission of FFF.ORG as follows.

Mission

The mission of The Future of Freedom Foundation is to advance freedom by providing an uncompromising moral and economic case for individual liberty, free markets, private property, and limited government.

Please give the site a good look and help spread the word.

Who are the "Real" Isolationists?

The irony of the Ron Paul "isolationist" accusation is the other republican candidates, especially Mitt Romney, are the true isolationists. Mitt Romney has come flat out and said he will increase tariffs on China which would likely start protectionist trade wars much like the Smoot-Hawley Tariff act that intensified the downturn of the great depression.

Republicans who campaign on the basis of "small government" and "constitutional principles" yet support troops in 140 countries, manipulation of interest rate by the Fed, and isolationist tariff policies are nothing but enormous hypocrites.

Citing the latest report on "Debt and Deleveraging" by the McKinsey Global Institute, Ambrose Evans-Pritchard proclaims America overcomes the debt crisis as Britain sinks deeper into the swamp.

Britain has sunk deeper into debt. Three years after bubble burst, the UK has barely begun to tackle the crushing burden left by Gordon Brown. The contrast with the United States is frankly shocking.

US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus.

One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.

In hindsight, the US property boom was remarkably modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America’s ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.

Personally, I am coming to the conclusion that the US crisis in 2008-2009 was largely a case of botched monetary policy and could easily have been avoided. The growth of M3 money -- which the Fed stopped tracking thanks to a young Ben Bernanke -- was allowed to balloon in the bubble, then collapse in 2008.

US Did Not Overcome Debt Crisis

There is a big difference between alleged "light at the end of the tunnel" and "America Overcomes Debt Crisis" as Pritchard claims. US consumers may be one-third of the way through, but US debt-to-GDP ratios are low only because unsustainable government spending has taken up the slack.

The US has not started government debt deleveraging and until that is nearly finished there will not be light at the end of the tunnel, let alone the end of the crisis. Optimistically, the best one can possibly assert is one can possibly see light at the end of the "consumer tunnel". The government tunnel immediately follows.

Moreover, one should not be "tempted to ask what all the fuss was about in the US". Just because other nations are worse, does not mean the US had no problem.

Five-Pronged Solution

US monetary policy and ECB monetary policy is partially to blame for these crises as Pritchard says. Reckless fiscal policies by governments everywhere is another part of the problem. The five-pronged solution which Pritchard does not mention is ...

1. Get rid of the central banks
2. Get rid of fractional reserve lending
3. Return to a gold standard.
4. Minimize governments 
5. Embrace free market policies

Please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited for a discussion of how a gold standard can fix trade imbalances.

Eurozone Structural Problems

The European crisis now was foreseen in advance by many, including Pritchard.

Certainly the ECB's "one size fits Germany" interest rate policy fueled the property bubbles in Spain and Ireland, as well as imbalances in Italy, Greece, and Portugal.

Unlike the US, the eurozone has the structural additional problem of being a monetary union without a fiscal union. Not one such currency union in history has ever survived.

Bailing out Greece and Portugal and Ireland will not fix structural problems including the ECB's "one size fits all" interest rate dilemma.

Debt and Deleveraging

Here are some excerpts from the McKinsey Global Institute PDF.

Click on any chart below for a sharper image.

Executive Summary

The deleveraging process that began in 2008 is proving to be long and painful, just as historical experience suggested it would be. Two years ago, the McKinsey Global Institute published a report that examined the global credit bubble and provided in-depth analysis of the 32 episodes of debt reduction following financial crises since the 1930s. The eurozone’s debt crisis is just the latest reminder of how damaging the consequences are when countries have too much debt and too little growth.

In this report, we revisit the world’s ten largest mature economies to see where they stand in the process of deleveraging. We pay particular attention to the experience and outlook for the United States, the United Kingdom, and Spain, a set of countries that covers a broad range of deleveraging and growth challenges.

Deleveraging Only Just Begun

1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.

2 Defined as an increase of 25 percentage points or more.

3 Or latest available.

The United States: A light at the end of the tunnel

Since the end of 2008, all categories of US private-sector debt have fallen relative to GDP. Financial-sector debt has declined from $8 trillion to $6.1 trillion and stands at 40 percent of GDP, the same as in 2000. Nonfinancial corporations have also reduced their debt relative to GDP, and US household debt has fallen by $584 billion, or a 15 percentage-point reduction relative to disposable income. Two-thirds of household debt reduction is due to defaults on home loans and consumer debt. With $254 billion of mortgages still in the foreclosure pipeline, the United States could see several more percentage points of household deleveraging in the months and years ahead as the foreclosure process continues.

[Mish Note: notice the key phrase "months and years ahead"]

Even when US consumers finish deleveraging, however, they probably won’t be as powerful an engine of global growth as they were before the crisis. One reason is that they will no longer have easy access to the equity in their homes to use for consumption. From 2003 to 2007, US households took out $2.2 trillion in home equity loans and cash-out refinancing, about one-fifth of which went to fund consumption.

Without the extra purchasing that this home equity extraction enabled, we calculate that consumer spending would have grown about 2 percent annually during the boom, rather than the roughly 3 percent recorded. This “steady state” consumption growth of 2 percent a year is similar to the annualized rate in the third quarter of 2011.

US government debt has continued to grow because of the costs of the crisis and the recession. Furthermore, because the United States entered the financial crisis with large deficits, public debt has reached its highest level—80 percent of GDP in the second quarter of 2011—since World War II.

The next phase of deleveraging, in which the government begins reducing debt, will require difficult political choices that policy makers have thus far been unable to make.

That last sentence, coupled with the fact that consumer deleveraging is only 1/3 finished is precisely why the headline title by Pritchard that "America Overcomes the Debt Crisis ..." is quite inaccurate.

Not only that, but growth assumptions remain absurdly high as do earnings forecasts.

The McKinsey study is certainly supportive of my employment thesis: Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation

Moreover, and importantly, risks are all skewed to the downside because the European recession is going to prove to be a major disaster as noted in Italy Faces 2-Year Recession says IMF; European Recession Neither Mild Nor Short

Spotlight on UK and Spain

10 Largest Economies Composition of Debt

1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government.

2 Q1 2011 data.

UK household debt, in absolute terms, has increased slightly since 2008. Unlike in the United States, where defaults and foreclosures account for the majority of household debt reduction, UK banks have been active in granting forbearance to troubled borrowers, and this may have prevented or deferred many foreclosures. This may obscure the extent of the mortgage debt problem. The Bank of England estimates that up to 12 percent of home loans are in a forbearance process. Another 2 percent are delinquent.

Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States. Moreover, around two-thirds of UK mortgages have floating interest rates, which may create distress if interest rates rise—particularly since UK household debt service payments are already one-third higher than in the United States.

Spain: The long road ahead

The global credit boom accelerated growth in Spain, a country that was already among the fastest-growing economies in Europe. With the launch of the euro in 1999, Spain’s interest rates fell by 40 percent as they converged with rates of other eurozone countries. That helped spark a real estate boom that ultimately created 5 million new housing units over a period when the number of households expanded by 2.5 million. Corporations dramatically increased borrowing as well.

As in the United Kingdom, deleveraging is proceeding slowly. Spain’s total debt rose from 337 percent of GDP in 2008 to 363 percent in mid-2011, due to rapidly growing government debt. Outstanding household debt relative to disposable income has declined just 6 percentage points. Spain also has unusually high levels of corporate debt: the ratio of debt to national output of Spanish nonfinancial firms is 20 percent higher than that of French and UK nonfinancial firms, twice that of US firms, and three times that of German companies. Part of the reason for Spain’s high corporate debt is its large commercial real estate sector, but we find that corporate debt across other industries is higher in Spain than in other countries. Spain’s financial sector faces continuing troubles as well: the Bank of Spain estimates that as many as half of loans for real estate development could be in trouble.

Spain has fewer policy options to revive growth than the United Kingdom and the United States. As a member of the eurozone, it cannot take on more public debt to stimulate growth, nor can it depreciate its currency to bolster its exports. That leaves restoring business confidence and undertaking structural reforms to improve competitiveness and productivity as the most important steps Spain can take. Its new government, elected in late 2011, is putting forth policy proposals to stabilize the banking sector and spur growth in the private sector.

Note how Spain was massively skewered by the ECB's "one size fits Germany" interest rate policy. That structural problem remains in spite of all the can kicking by the US and ECB with lending schemes and the LTRO.

Let's return to the report for one more chart from the report.

US Household Debt Ratios

There are a lot of optimistic assumptions in that report. The above chart highlights one of the biggest assumptions.

Certainly one can make a case that the change from single-household worker families to dual-household worker families (both husband and wife working), accounts for the rise is sustainable debt loads from 1955 to 1985.

How much of the rest is sustainable? I suggest little to none of it is. The stock market boom of the 90's followed by housing bubble in the 2000's is what made families "feel" wealthy.

Negative Stock Market Returns for another Decade?

With global growth slowing, coupled with an enormous change in boomer demographics, combined with massive amounts of deleveraging still to come in the top 10 economies, the likelihood the stock market puts in another sustainable boom as it did in the 90's is highly unlikely. When households feel wealthy they are apt to take on more debt.

In a debt deleveraging cycle, not only does feeling wealthy go away, so does the likelihood of strong returns in the stock market. Indeed, I have made the case for Negative Returns for Another Decade

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

 

• Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model; Negative Returns for a Decade Revisited

 

• Value Restoration Project: Stock Market Valuations and Trends Over Time

For the sake of argument let's assume an optimistic case of 4-5% annualized returns for another decade. Is that enough to keep that household debt trend intact?

Of course not. The idea the trendline itself should go up over time is complete silliness unless there is a structural change as there was in the 60's and 70's when women went to work en masse.

Nonetheless, the McKinsey Global Institute report is well worth a look in entirety. Click on the first link at the top for an opportunity to download the full 64-page report.

Obvious flaws aside, the report is a great read containing a wealth of information on debt levels of countries and what has been done to address the issues so far.

The manufacturing slowdown in China continues for the third consecutive month prompting a Bloomberg headline China Manufacturing Boosts Case for Easing

A Chinese purchasing managers’ index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

China’s central bank last month reduced banks’ reserve requirements for the first time in three years to encourage lending and Premier Wen Jiabao this month reiterated a pledge to “fine-tune” policies as needed to support growth.

The nation’s central bank is allowing the five biggest lenders to increase first-quarter credit by a maximum of about 5 percent from a year earlier, said two people at state lenders who have knowledge of the matter. Separately, the banking regulator is weighing a plan to relax capital requirements, according to four people with knowledge of the matter.

China’s gross domestic product increased 8.9 percent in the last three months of 2011 from a year earlier, the fourth straight quarterly slowdown and the weakest pace in 10 quarters. Growth may drop to below 8 percent this quarter, according to estimates from UBS AG, Nomura Holdings Inc. and Societe Generale SA, as export demand cools further and the government maintains its campaign to rein in housing costs.

Home prices fell last month in 52 of 70 Chinese cities from November, according to government data released Jan. 18. The world’s largest exporter posted the smallest gains in overseas sales and in imports for two years in December from a year earlier, excluding holiday distortions.

Romney’s Tough China Talk

Please consider Romney’s Tough China Talk May Fall Flat in SC

While Mitt Romney is a long way from the White House, he already knows what he would do on his first day in the Oval Office: crack down on Chinese “cheating” on trade.

Romney vows to designate China a “currency manipulator” and impose duties on its imports if the yuan isn’t allowed to float freely. As Republicans prepare for tomorrow’s presidential primary in South Carolina, that pledge may cheer companies such as steelmaker Nucor Corp. (NUE), which has a plant in Darlington and is among those blaming Chinese subsidies for eroding profits.

Yet South Carolina, long a battleground for textile makers fighting to block imports, is increasingly prospering through overseas ties and could suffer in any trade war. Companies such as France’s Michelin & Cie., Germany’s Bayerische Motoren Werke AG and Sweden’s Husqvarna AB employ more than 102,000 state residents. And a dozen Chinese manufacturers have set up shop.

“We can’t be protectionist; look at who our biggest employers are,” said Bob Faith, former state commerce secretary, who cited several foreign-owned companies. “That is South Carolina, and these are South Carolina jobs.”

China ‘Threat’ Plays

“The ‘Communist Chinese are a threat to our economy and way of life’ gets play among a broad spectrum conservative base no matter where you sing that tune,” e-mailed Scott Huffmon, director of the Social and Behavioral Research Laboratory at Winthrop University in Rock Hill. “It just so happens that the 2012 tour is swinging through S.C. this week.”

Other Republican candidates have warned of China’s emergence. Former House Speaker Newt Gingrich has described the nation’s rise as a “threat,” although he says the U.S., which ran a $26.9 billion trade deficit with China in November, can defeat the challenge by rebuilding its manufacturing base and maintaining a strong defense.

At a candidates’ debate last night in North Charleston, Representative Ron Paul said Americans “shouldn’t be frightened about trade” because it often helps them to save money by buying cheaper products from overseas. Former Senator Rick Santorum said the corporate tax rate should be cut to zero for companies that manufacture in the U.S. to stem the loss of American jobs.

I do not know if his Romney's talk will fall flat in South Carolina, but I do know the results will be a disaster if actually implemented. Expect to see a net loss of jobs if Romney is economically-stupid enough to do what he says.

If Romney increases tariffs three things will happen, all of them bad.

1. Prices will rise
2. Growth will slow
3. China will retaliate with tariffs of its own or by buying more goods from Europe instead of  goods from US produces 

In essence everyone will pay higher prices for goods and services in hopes of bring back a few hundred manufacturing jobs (while losing tens-of-thousands of jobs in the ensuing economic slowdown). Once again, Ron Paul is the only candidate on the right side of this issue.

Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs).

It's easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession.

Base Money Supply

Money Multiplier Theory

The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth.

Alternate (Correct) Bank Lending Theory

1. Banks do not lend simply because they have the money
2. Banks lend as long as they have credit-worthy customers provided the banks are not capital impaired
3. Reserves are not an issue. Lending comes first, reserves follow if needed.

With some charts below created by my friend "BC" let's take a look at Bernanke's efforts to stimulate lending.

Bank Loans Divided by Base Money Supply

Annualized Percent Change in Bank Loans Divided by Base Money Supply

Loans to GDP

Loans to GDP Annualized Percent Change

Loans to Private GDP

Loans to Private GDP Annualized Percent Change

M2 Multiplier: M2 Money Supply Divided by Base Money

M2 Velocity: GDP Divided by M2

The above charts show that it is taking more and more money just to keep the economy afloat.

US deficit spending is $1.4 trillion dollars, Bernanke is flooding banks with cash, interest rates are at record lows, mortgage rates are at record lows, and velocity of money is falling like a rock.

Excess Reserves

Of the $1.8 trillion Bernanke has added to base money supply since the start of the recession, nearly all of it is sitting parked at the Fed as excess reserves.

Interest Paid on Excess Reserves

As you can see, banks have parked close to $1.6 trillion with the Fed earning .25 percent annually. This is free money to the banks to the tune of $4,000,000,000 per year for doing nothing.

In short, banks would rather have $4 billion in free money at a measly .25 percent than make much more money by lending it out. This indicates two things:

1. Money Multiplier Theory is nonsense
2. Banks are still capital impaired and/or banks have no credit-worthy borrowers who wish to borrow money

If and when banks do start lending, it will not be because all those excess reserves have tempted them. Rather it will be because banks feel they have credit-worthy borrowers.

In the meantime, debt deflation rolls on, distorted of course by global central bank stimulus everywhere one looks, notably (the Fed, ECB, China, Bank of England) and coming up shortly, the Bank of Japan.

As I have stated before, competitive global currency debasement is a good environment for gold.

Hoping to seize the deficit reduction initiative from Republicans (it does not take much because Republicans have no proposals on the plate) President Obama is out to prove he is a genuine deficit fighter. With much fanfare Obama launched his idea to streamline government. The proposal requires Congressional approval.

Laughably, out of an enormous annual budget of $3.7 trillion, the president's proposal, assuming it worked (and that is not a safe assumption), would save a mere $300,000 a year. To top it off the president wants to create a new cabinet-level position out of the process.

Is this the best anyone can do?

Republicans are against the idea. If it was a Republican president asking to do the same thing, it's safe to point out that Democrats would be against the idea.

The New York Times reports Obama Bid to Cut the Government Tests Congress

Mr. Obama called on lawmakers to grant him broad new powers to propose mergers of agencies, which Congress would then have to approve or reject in an up-or-down vote. If granted the authority, he said, he would begin pruning by folding the Small Business Administration and five other trade and business agencies into a single agency that would replace the Commerce Department.

The White House estimated that the consolidation would save $3 billion over 10 years and result in reductions of 1,000 to 2,000 jobs. The savings is a mere rounding error in the $3.7 trillion annual budget, but the numbers may be less important than the message that Mr. Obama wants to cut wasteful spending.

It is not clear whether Congress, where much of Mr. Obama’s legislative agenda has languished, will go along with this initiative. Republicans were immediately skeptical, suggesting that the White House was more interested in honing its re-election message than in reducing the size of government.

Even Democratic leaders expressed misgivings about folding the Office of the United States Trade Representative, a stand-alone agency with just 227 employees, into a large bureaucracy, saying it could harm American trade policy.

“Making it just another corner of a new bureaucratic behemoth would hurt American exports and hinder American job creation,” said Senator Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee, in a statement with Representative Dave Camp, the Republican chairman of the House Ways and Means Committee.

The White House has been working on this plan since the president announced his streamlining goals last January. He recycled a colorful example of duplication from his State of the Union address: the Interior Department has jurisdiction over salmon in freshwater, while Commerce handles them in saltwater.

Under the terms of the reorganization, five agencies — the Small Business Administration, the United States Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation and the Trade and Development Agency, plus the business and trade functions of the Commerce Department — would be consolidated into a single agency focused on helping the private sector.

Mr. Obama said he would elevate the director of the Small Business Administration, now Karen Mills, to his cabinet. The United States trade representative would retain cabinet rank, the White House said.

Streamlining Perspective 

The president's proposal does not eliminate anything. Instead it merges small bureaucracies into even bigger bureaucracies much like banks evolved into what should be known as "too big to succeed". Moreover, Obama's proposal creates a new cabinet-level position in the process.

I am confident the president's plan will cost money in spite of what the president says. My rationale is simple: you don't add cabinet-level positions without adding costs. And those costs are sure to escalate over time no matter how well-intentioned initially.

I have a better idea, and it comes straight from the lead-in image to the New York Time's article.

Please take a look at that chart.

I count 17 green dots, 7 red dots, and 32 blue dots in a bureaucratic tangle of interconnected responsibilities. President Obama wants to untangle some of those lines making them more efficient.

Pay specific attention to the caption.

A Business Looking for Government Resources Starts Here

I have a simple question: Why should any business be seeking government (taxpayer) resources?

Instead of merging bloated bureaucracies into even bigger bloated bureaucracies, I propose elimination of 17 green bureaucracies, 7 red bureaucracies, and 32 blue bureaucracies.

Whereas Obama's plan will do next-to-nothing, my plan would save billions of dollars a year. Don't look for Democrats or Republicans (other than Ron Paul) to support it, because both parties pay lip service to actually reducing government.

There are numerous signs the entire Eurozone is in recession, including Germany. Nonetheless economic dunces talk as if recession can be avoided. For making just that claim, I blasted the IMF on Monday in Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year".

Let's ponder a sampling of data released today that proves without a doubt Europe is already in recession.

German Economy Contracts in $4th Quarter

Bloomberg reports Germany May Be on Brink of Recession

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent.

“All in all, the German economy has remained relatively resilient,” said Annalisa Piazza, an economist at Newedge Group in London. “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”

2012 Forecast

German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.

Preposterous Growth Forecast

The growth forecast for Germany and the Eurozone are both preposterous.

If Europe heads into a prolonged recession (and it has already started), Germany cannot help but get sucked into it. Approximately 28 percent of German GDP is derived by exporting goods to EU countries and Switzerland.

Think German exports to the rest of Europe are going to rise forever? Think again, starting with a look at the Eurozone's 4th largest economy.

Spain's Industrial Output Plunges 7%

Economic Times reports Spain's Industrial Output Plunges 7%.

Spain's industrial output plunged by 7.0 percent in November compared to a year earlier, its biggest drop in more than two years, official data showed on Wednesday.

Economists have warned that Spain may have already entered a recession, with a likely contraction in the last quarter of 2011 and the first quarter of 2012.

The official growth forecast for 2011 stands at 0.8 percent.

The fall in production accelerated in November after a decline of 4.2 percent in October, according to Wednesday's figures.

"All the industrial sectors displayed negative year-on-year rates," the institute said in a statement.

The fall in production was sharpest in the consumer goods sector, at 16.3 percent. Energy fell 5.2 percent.

Industrial production fell 1.4 percent on average from January to November compared to the same period a year earlier, the figures showed.

The November figure was the worst since October 2009 when output fell 9.1 percent during the first wave of the economic crisis.

Spanish Minister Sees Recession Risk

Bloomberg reports Spain Industrial Output Falls, Minister Sees Recession Risk

Spanish industrial production fell the most in two years in November as Budget Minister Cristobal Montoro warned that the euro area’s fourth-largest economy is on the edge of a recession.

Spain’s economy is close to entering a recession, Montoro told lawmakers in Madrid as they began examining Prime Minister Mariano Rajoy’s first package of austerity measures. The plan was announced on Dec. 30 after the new government learned that the 2011 budget gap will be a third larger than forecast.

Interpreting Bureaucratese

Spain has been in recession for two quarters already (assuming it ever got out of recession that started in 2007), yet talk is still Spain "may" fall into recession. Just what the heck does it take for these bureaucratic clowns to admit the obvious?

Actually, if one knows how to interpret  "bureaucratese" they already have. When bureaucrats talk of "risk of recession" it is a sure-fire sign the economy is already in one.

UK Trade Deficit Widens

Please consider Pound Weakens to Three-Month Low Versus Dollar After Trade Deficit Widens

The pound fell to a three-month low versus the dollar after a government report showed the trade deficit widened more than economists forecast, fueling bets the central bank will need to add more stimulus to spur growth.

Sterling declined versus all its 16 major counterparts and gilts advanced after the British Retail Consortium said shop- price inflation slowed in December to the lowest in 16 months. The Bank of England will keep its bond-purchase target unchanged at 275 billion pounds ($422 billion) at a policy meeting tomorrow, according to a Bloomberg News survey.

“The trade data is worse than expected, and it has negative connotation on sterling,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There is also some outside talk about possibility that the Bank of England may expand the target for bond purchases. The consensus view is that it remains unchanged.”

With the Eurozone in deepening contraction, don't expect the UK to export its way out of its economic mess either.

European Banks Wisely Hoard Cash

Please consider Europe Banks Hoarding Cash Resist Draghi

Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, ECB data show. Banks will use most of the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis.

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

Expect Severe European Recession

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd. If banks did increase loans, it would add to bank losses. The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.

For additional details please see ...

"Social VAT" Trade Wars Heat Up Between Spain and France

Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?

Don't expect the US to be immune from a Eurozone recession and a Chinese slowdown. Unlike 2011, it will not happen again.

CNBC Reports Geithner Seeks Support for Iran Oil Sanctions From China

As Iranian President Mahmoud Ahmadinejad continued his Latin American tour, U.S. Treasury Secretary Timothy Geithner arrived in Beijing to persuade the Chinese government to support sanctions on the Iranian oil industry.

China is the largest importer of Iranian crude but decreased volumes recently due to a dispute over contract terms. Although the country’s demand for crude oil has decelerated, the latest data still showed a growth of 6 percent in 2011 compared to a year earlier.

What Should China's Response Be?

I propose this:

Dear Secretary Geithner In light of the fact that the US Defense Secretary announced on Face the Nation that "Iran Not Trying to Develop Nuclear Weapon" China will not support a US-Led oil embargo. Moreover, we will consider any efforts by the US or Europe to block Iranian exports to be economic warfare against China. We call on the United States to dump their unfounded economic attack on Iran immediately.

That would set the proper tone for discussion and make the Obama administration as well as Republican warmongers look foolish in the process.

Unfortunately, China is unlikely to do that. Instead, If the US and Europe are stupid enough to ban Iranian oil, China would have additional leverage on those disputed Iran oil contracts mentioned above.

Shoddy Reporting by Bloomberg on Oil Story

I call your attention to shoddy Bloomberg reporting in Obama Prepared to Use Force to Stop Nuclear Iran, Former Adviser Ross Says.

Nowhere in the slanted article does the author mention the fact that Leon Panetta emphatically stated "Are they trying to develop a nuclear weapon? No. But we know that they’re trying to develop a nuclear capability, and that’s what concerns us."

Instead all we see mentioned in the above Bloomberg article is "They need to know that if they take that step, they’re going to get stopped,” Defense Secretary Leon Panetta said Jan. 8 on CBS News’ Face the Nation."

Not only is Panetta's position absurd, so is the war-mongering position started by Bush and continued with Obama.

Speaking of which, notice how these war-mongering nutcases think:

"[Former Obama advisor] Ross underscored that U.S. willingness to stop Iran from getting nuclear weapons affects decision-making in other countries that fear Iran, including Israel and Gulf states. If the White House abandoned a pledge to stop Iran made by Obama and President George W. Bush before him, the U.S. would lose all credibility, he said."

Credibility is lost when the secretary of Defense freely admits Iran has no nuclear weapons program, when Iran volunteered to step up inspections, yet the US insists that Iran stop its nuclear program entirely, not just its weapons program (that it does not even have, much like the nonexistent WOMD program that Bush used in a war that wasted $trillions in Iraq).

Credibility in news reporting is lost when Bloomberg quotes the defense secretary, leaving out the most important part.

I emailed, Mark Silva, the Bloomberg editor responsible for this story this morning. I will send a second email with a link to this article Mark Silva and also to Indira Lakshmanan, the reporter for this slanted story as well.

All the tin hats that disputed Ron Paul's position that Iran was not developing nuclear weapons can now hear the same thing from US Secretary of Defense. Please consider Panetta admits Iran not developing nukes.

U.S. Defense Secretary Leon Panetta let slip on Sunday the big open secret that Washington war hawks don’t want widely known: Iran is not developing nuclear weapons.

Appearing on CBS’s Face the Nation on Sunday, Panetta admitted that despite all the rhetoric, Iran is not pursuing the ability to split atoms with weapons, saying it is instead pursuing “a nuclear capability.”

That “capability” falls in line with what Iran has said for years: that it is developing nuclear energy facilities, not nuclear weapons.

“I think the pressure of the sanctions, the diplomatic pressures from everywhere, Europe, the United States, elsewhere, it’s working to put pressure on them,” Panetta explained on Sunday. “To make them understand that they cannot continue to do what they’re doing. Are they trying to develop a nuclear weapon? No. But we know that they’re trying to develop a nuclear capability, and that’s what concerns us. And our red line to Iran is, do not develop a nuclear weapon. That’s a red line for us.”

Face the Nation Video

Link if video does not play: Iran Not Developing Nuclear Weapons

That admission by Defense Secretary Panetta proves just how preposterous the US position is. Hopefully Europe has second thoughts over the absurd embargo it is considering later this month.