US Economy

[tomahawk6]

The original purpose of TARP was to buy the toxic assets from the banks,instead TARP was used as a vehicle by the government to control the financial sector. As a result we have not resolved the underlying problem. As the economy worsens more banks will fail.

 

[a_majoor]

Japan's recession dragged on for a decade+ since the government allowed (and even covered for) Japanese banks to continue to carry dead assets on the books after their bubble popped rather than simply write off the losses.

China also has billions of dollars worth of "zombie" assets in the form of forced loans to non performing state enterprises; this has been partially covered up by stating GDP differently than most Western economists (see the Chinese superthread for details), and some of the truth is leaking out (Chinese growth is now propped up by massive government intervention in the economy to the tune of "investing" $10 for every $1 of growth...)

Rather than continuing the charade, it is best from a political and economic view to tell the banks to write off their trillion dollars in non performing assets. Given the Obama administration's goal isn't saving the financial sector, this may have to wait until 2012 (while a massive sea change might happen in the Congress in 2010, that would be a "best case" scenario).

Until then, look for declining growth and reduced prospects for the Canadian economy, since much of our economic prosperity is tied to what happens in the United States.

 

[a_majoor]

Two possibilities (since the government seems determined to prevent market clearing deflation, which is the third possibility):

Power Line Blog: John Hinderaker, Scott Johnson, Paul Mirengoff
http://www.powerlineblog.com

What's In Store, Inflation or Default?
 
September 3, 2009 Posted by John at 7:34 PM

I've assumed that the profligate spending and borrowing planned by the Democrats in Congress and the White House will run up a debt that we and our children just can't pay, so, in the time-honored tradition of banana republics, the Obama administration or its successors will inflate our currency and repay its creditors (China, mostly) in devalued dollars. Thus, I've been buying gold. I've assumed that an actual default by the United States government is unthinkable.

Jeffrey Rogers Hummel, however, disagrees. He writes: Why Default on U.S. Treasuries Is Likely. HIs thesis is that times have changed, and it isn't so easy to inflate our way out of debt:

    Many predict that...the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal.

Hummel explains that most money is now created privately by banks and other institutions, not the government, so that "[o]nly in poor countries, such as Zimbabwe, with their primitive financial sectors, does inflation remain lucrative for governments."

A steep tax increase won't really work for the Obama administration either. This chart shows federal spending and receipts as a percentage of GDP since 1936; click to enlarge:

graphic

Hummel observes:

    Two things stand out. First is the striking behavior of federal tax revenue since the Korean War. Displaying less volatility than expenditures, it has bumped up against 20 percent of GDP for well over half a century. That is quite an astonishing statistic when you think about all the changes in the tax code over the intervening years. Tax rates go up, tax rates go down, and the total bite out of the economy remains relatively constant. This suggests that 20 percent is some kind of structural-political limit for federal taxes in the United States. It also means that variations in the deficit resulted mainly from changes in spending rather than from changes in taxes. The second fact that stands out in the graph is that federal tax revenue at the height of World War II never quite reached 24 percent of GDP.

    Compare these percentages with that of President Barack Obama's first budget, which is slated to come in at above 28 percent of GDP. Although this spending surge is supposed to be significantly reversed when the recession is over, the administration's own estimates have federal outlays never falling below 22 percent of GDP. And that is before the Social Security and Medicare increases really kick in. In its latest long-term budget scenarios, the Congressional Budget Office (CBO), not known for undue pessimism, projects that total federal spending will rise over the next 75 years to as much as 35 percent of GDP, not counting any interest on the accumulating debt, which critically varies with how fast tax revenues rise. However, the CBO's highest projection for tax revenue over the same span reaches a mere 26 percent of GDP. Notice how even that "optimistic" projection assumes that Americans will put up with, on a regular peacetime basis, a higher level of federal taxation than they briefly endured during the widely perceived national emergency of the Second World War.

A grim scenario? To say the least. Hummel continues:

    We all know that there is a limit to how much debt an individual or institution can pile on if future income is rigidly fixed. We have seen why federal tax revenues are probably capped between 20 and 25 percent of GDP; reliance on seigniorage is no longer a viable option; and public-choice dynamics tell us that politicians have almost no incentive to rein in Social Security, Medicare, and Medicaid. The prospects are, therefore, sobering. Although many governments around the world have experienced sovereign defaults, U.S. Treasury securities have long been considered risk-free. That may be changing already. Prominent economists have starting considering a possible Treasury default, while the business-news media and investment rating agencies have begun openly discussing a potential risk premium on the interest rate that the U.S. government pays. The CBO estimates that the total U.S. national debt will approach 100 percent of GDP within ten years, and when Japan's national debt exceeded that level, the ratings of its government securities were downgraded.

There's more, just follow the link. Hummel's bottom line is rather cosmic:

    [A] century of experience has taught us that the client-oriented, power-broker State is the gravity well toward which public choice drives both command and market economies. What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.(Interpolation; History suggests that what replaces social democracies is far, far worse....)

The end of the welfare state would be a good thing, and I don't doubt that it's coming. It's hard to think that the federal government's repudiation of its debt would be a good thing, too.

A very sophisticated reader who sent me the link to Hummel's column writes:

    This is excellent...Quite thorough discussion of the strategic end-state of the middle class entitlement welfare regime.

I asked King Banaian, a PhD economist and chairman of the Economics Department at St. Cloud State University (not to mention a member of the Northern Alliance Radio Network) to comment. He replied:

    Yes, I had read some of that column earlier today and hadn't finished it until now. It's plausible.

    Suppose you had a credit card. Each month you charged enough more that your minimum payment never covered the entire amount of interest on it. At some point your debt escalates to a point where the bank stops you. You declare bankruptcy, which effectively is repudiating your personal debt. This is what the government is doing. Its deficits are so large that even if you net out the interest charge, there is still a deficit (we call this a primary deficit.) No government can long endure with a fiscal policy that does not bring the primary deficit into long-run balance. Given that the federal government has never long sustained taxes greater than 20% of GDP, you have to bring the share of government spending down to that level, or else you get investors to believe the debt is a Ponzi scheme. When that happens, you either pay more and more interest, or you go bust.

    Governments can't declare bankruptcy in the same way people do, but they can decide not to honor their debt. They can also decide to inflate away the nominal value of it. Unlike Hummel, I think the inflationary route is more likely. (I note that I own TIPS -- Treasury Inflation-Protected Securities -- in my tax-protected retirement account.) An outright repudiation would bring the wrath of foreign governments, particularly China, down on the US like nothing you've ever seen before. It would also ruin my inflation hedge, but that's the least of my issues if that happens.

We'll let it rest there: hyperinflation or default. One or the other is the inevitable result of the unprecedented irresponsibility of Barack Obama's administration. Either one is a disaster, not so much for us, but for our children. Obama and his advisers are gambling, evidently, that we don't care much what happens to our children and grandchildren, or to our country after we're gone.

 

[Kirkhill]

What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.(Interpolation; History suggests that what replaces social democracies is far, far worse....)

Unless everybody comports themselves like the Swedes and makes a cold, hard decision to accept the demise of Nanny, or at least the reduction in her capabilities and decide that they need to put a little more effort in to maintaining themselves.  The Swedes have accepted downsizing and privatizing of government services. 

It seems that they operate their economy much like the way they drive their Volvos.  A little bit of gas, a little bit of brake and an occasional pressure on the wheel to keep their society between the lines.  No sudden irrational urges to chuck out the Volvo and buy a Peugeot or Fiat.    Occasionally they do change chauffeurs.

 

[a_majoor]

The Swedes are not the only people thinking about fiscal discipline these days, this piece is from the Governor of Indiana:

The Coming Reset in State Government
My fellow governors and I are likely facing a permanent reduction in tax revenues.
   
By MITCH DANIELS

State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.

Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.

The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

For now, my state's situation is far better than most, but it won't stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.

And, unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration's policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

I doubt even that would suffice to rescue most states. Instead, historical forecasting models need to be revised. One-third of state revenues (over half in seven states) come from sales taxes, but it's hard to imagine them snapping all the way back up to where they were just a few years ago. Americans are now saving much more then they used to relative to how much they are spending. This sudden shift will mean that even in good economic times to come consumers will likely spend less and therefore pay less in sales taxes than they did during bubble years.

Even if Americans wanted to go back to their high-spending, high-borrowing ways, will anyone lend them the funds to spend like it's 2007 all over again? Consumer credit will remain tighter as a matter of both sound business practice and new government regulation. Home equity appreciation is gone as a huge source of collateral, even if lenders were either willing or permitted to loan freely against it.

The "progressive" states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. Those who remain in high-tax states will be making few if any capital gains tax payments in the years to come. Even if the stock market comes roaring back to life, the best it could do is speed the deduction of recent losses.

Sadly, the political impulse to protect government largess leads many states to aggravate their dilemma. Already more than half have raised taxes, often on businesses, serving only to chase them and their tax payments away and into the open arms of states like Indiana. Our traffic flow of interested investors is as heavy as it was in 2007. Since January we have welcomed the consolidation of more than 30 firms that closed up shop elsewhere and chose us as the low-cost, enterprise-friendly environment among their current locations.

Indiana was near bankruptcy five years ago but is relatively solvent today because we have spent the intervening years making hard choices. We have reformed state procurement, contracted out some jobs, cut costs, and relentlessly scrutinized expenditures in pushing for annual improvement in departments large and small. We've also reduced the number of state employees by some 5,000 from the 2004 level.

In contrast to the national pattern, our per capita state spending has cut, on average, 1.4% each of the past five years. Indiana is now the sixth thriftiest state by this measure. And if we Hoosiers are realizing that we need to re-examine what we can afford to have our government do, what must they be thinking in Albany, Lansing or Trenton?

Truth be told, officials in those cities are probably not thinking about this at all. But they will because state governments will soon have to choose between a major downsizing or consigning themselves to permanent decline. Wishing for an improbably huge boom while chasing your own tail through self-destructive taxes won't prove much of a strategy.

Unlike the federal government, states cannot deny reality by borrowing without limit. The Obama administration's "stimulus" package in effect shared the use of Uncle Sam's printing press for two years. But after that money runs out, the states will be back where they were. Even if Congress goes for a second round of stimulus funding, driven by the political panic of bankrupt Democratic governors, it would only postpone the reckoning.

The time to plan and debate is now. This is a test of our adulthood as a democracy. Washington, as long as our Chinese lenders enable it, can practice denial for a while longer. But for states the real world is about to arrive.

Mr. Daniels, a Republican, is the governor of Indiana.

 

[Edward Campbell]

BRIC is a term coined, in 2003, by Goldman Sachs in a report that speculated that, by 2050, Brazil, Russia, India and China would be wealthier that today’s economic superpowers.

Certainly China and India can be economic superpowers, in their own right, before 2050 – if they can manage their internal affairs well enough for the next generation.

Brazil is a big, rich country with a very, very spotty record of accomplishment. There are some long standing, structural socio-economic and cultural (there’s that word again!) problems which have, in the past, crippled Brazil. Brazil has a larger population (190+ Million) than Japan (125+ Million); the question is: can all those people be sufficiently productive to “grow” their economy from $1.5 Trillion (about the same as Canada’s) to $5+ Trillion (where Japan’s will be, easily) by 2015 and then to $10 Trillion, which is where Japan’s will be by 2030, and so on to $25 Trillion by 2050?

Russia has long standing and structural problems like Brazil’s and it is also sitting on a demographic time bomb.

The principle cultural problems facing Brazil and Russia is that they are deeply illiberal societies and those sorts of societies have, pretty consistently, failed while liberal and conservative societies have prospered.

By the way, how “good” is Goldman Sachs? How much faith should we put in the BRIC?

China is proposing that Special Drawing Rights (SDRs) - an IMF generated reserve asset - should be used as an alternate reserve currency. Possibly not a bad idea, given that President Obama plans to debase the US currency so that others will pay for his recovery schemes.

More on the BRIC below, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from yesterday’s Globe and Mail:

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/emerging-economies-pace-recovery/article1285020/

Emerging economies pace recovery
Brazil blasts out of recession with 7.8 per cent growth, while China and India keep up strong momentum

Shawn McCarthy

Ottawa
Saturday, Sep. 12, 2009

Fuelled by rising exports to China and strong consumer demand, Brazil roared out of recession in the second quarter of the year, as emerging economies of the so-called BRIC countries shook off the doldrums that still grip the developed world.

With Russia trailing significantly behind, Brazil, India and China have shown signs of increasing economic momentum, and expect to post solid growth rates for 2009. All three countries released positive economic indicators yesterday, showing rising industrial activity and climbing growth rates.

Unlike India and China, Brazil did enter recession with two quarters of economic contraction in late 2008 and early 2009. But it bounced back with growth at an annualized rate  of 7.8 per cent in the second quarter. Brazilian Finance Minister Guido Mantega said the South American giant will post the strongest growth in the Americas this year, and is one of the world's healthiest economies.

“We were one of the last countries to experience negative growth, and one of the first to bounce back with positive growth,” Mr. Mantega told international reporters yesterday.

But with the exception of Brazil, most emerging economies remain heavily dependent on massive stimulus programs for their resurgence and will eventually require re-energized consumers in developed countries to sustain their recoveries. And the current rebound in the BRIC nations will do little to spur global growth – other than provide some price support for key commodities produced in Canada like crude oil and base metals.

“I don't get wildly excited” about the BRIC recovery, said Peter Hall, chief economist with Export Development Canada. “We're not going to get a global recovery until we see Western consumers spending again.” Still, the emerging markets do appear to be leading the global economy out of its year-long slump.

China – which has stimulus programs worth 13 per cent of its GDP – saw its growth accelerate to 7.9 per cent annualized in the second quarter, compared with 6.1 per cent in the first quarter. Economists worry that China's exports remained mired in recession, down 20 per cent in August from the same period last year.

India's industrial output climbed 6.8 per cent in July following an 8.2-per-cent increase in June, and economists expect Asia's third-largest economy to grow by 6 per cent this year. Mr. Hall said India's trade sector also remains in a slump, adding that the growth in industrial output may reflect temporary inventory rebuilding.

Russia remains the outlier in the group – its economy contracted by 10.9 per cent annualized in the second quarter, and is forecast to shrink by 7 per cent on the year before recovering in 2010.

In contrast to many emerging economies, Canada is expected to post growth of only 2 per cent next year, which is still expected to lead the industrialized world, CIBC World Markets Inc. said in a forecast released yesterday. This year, CIBC said, Canada's economy would shrink 2.3 per cent.

Emerging-economy stock markets have also rebounded smartly, with the trendsetting MSCI emerging-market index posting its biggest weekly gain since July. The New York-based MSCI gained 4.6 per cent this week, approaching levels not seen since before the market meltdown that began last September.

Brazil's Bovespa index edged lower yesterday after a five-day advance that capped a 55-per-cent increase from the beginning of this year.

The Finance Minister insisted his country's recovery is sustainable, because it is more dependent on domestic consumers and less on stimulus, which represented only 1.5 per cent of the country's GDP, versus China's 13 per cent and 6.7 per cent in the United States. Instead, Brazil relied more on lower interest rates, targeted incentives to encourage consumer spending, and continuing investment in its energy and commodity sector.

“The Brazilian middle class has grown despite the crisis, and they represent an important part of Brazil's consumption.” Mr. Mantega said.

EDC's Mr. Hall said Brazil, with its population of 200 million and sound economy, promises to be a global powerhouse in the years to come.

“Structural improvements have increased Brazil's economic resilience, and together with promising new opportunities, they make Brazil a hot prospect for future trade and investment,” he said.

A few points:

• Peter Hall, chief economist with Export Development Canada, is right when he says, “We're not going to get a global recovery until we see Western consumers spending again;”

• Russia’s outlier status is not surprising. Its economic fundamentals and productivity do not put it anywhere near the same league as China and India; and

• I remain convinced that Brazil can and will find a way to reverse its progress. It may be a Latin American thing.

 

[Edward Campbell]

This, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, probably says all we need to know about how the “smart money” views the state of the US financial sector:

http://www.theglobeandmail.com/report-on-business/caution-rules-in-bankers-us-forays/article1271437/

    Caution rules in bankers' U.S. forays
    TD's relatively low offer for BankUnited shows how carefully Canada's banks tread with U.S. expansion plays

    TARA PERKINS

    Tuesday, Sep. 01, 2009 03:03AM EDT
    FINANCIAL SERVICES REPORTER

    Toronto-Dominion Bank's best offer for assets of BankUnited Financial Corp. was nearly $1-billion (U.S.) less than the next lowest offer, a move that speaks volumes about the growth strategy of Canadian banks in the United States.

    TD submitted two bids to U.S. regulators on May 19, the final deadline for offers for Florida's largest regional bank, which had been pushed to the brink by a shortage of capital and troubled mortgage loans.

    TD's highest bid for assets came in $980.9-million lower than one from a private equity consortium led by billionaire investor and turnaround expert Wilbur Ross, according to documents available from the Federal Deposit Insurance Corp.

    But the relatively low offer speaks to the reasons why, more than a year after the FDIC began brokering a wave of U.S. government assisted deals, no Canadian bank has participated in one. It seems this country's banks are choosing the route of extreme caution when it comes to U.S. expansion.

    TD is not the only Canadian bank considering scooping up troubled lenders that are being auctioned off by U.S. regulators. Top executives at Royal Bank of Canada and Bank of Montreal each say that they too would take a look at those opportunities.

    The deals can be a coup for banks that win them. A report in The Wall Street Journal yesterday pointed out that the FDIC has agreed to assume most of the risk on $80-billion in loans and other assets because of "loss-sharing" deals it has struck to secure the fate of dozens of collapsed banks.

    For example, when regulators arranged the sale of Alabama's Colonial Bank to BB&T last month, the FDIC agreed to assume more than 80 per cent of the future losses on a portfolio of more than $14-billion of mortgages, construction loans and other assets. (BB&T is one of RBC's main competitors in the U.S. Southeast, and TD was a rumoured contender for Colonial's assets.)

    "In some of the most recent deals with loss-sharing, I think that the people who bought stand to make a good profit over time," said Howard Adler, a Washington-based lawyer with Gibson, Dunn & Crutcher.

    For those who had doubts, it became clear in late August that the FDIC is willing to do these deals with foreign banks, with Texas's Guaranty Financial going to a Spanish bank.

    "I think it would be a reasonable thing for us to be involved in looking at FDIC-assisted transactions," BMO chief executive officer Bill Downe said last week.

    One stumbling block has been the relative lack of opportunities in the U.S. region where BMO operates, around Illinois, Indiana, and Wisconsin. "The second thing is, if we are going to acquire a bank through an FDIC process, we have to be satisfied that they have high-quality branches, that the customer base can be retained," Mr. Downe added.

    "It's hard work," he said of the process of scouring through the possibilities. Some of the banks that are being liquidated have very "hot deposits," meaning customers are pulling their money out, he noted. "You could acquire the buildings and not really have a core deposit base. You'd be paying for deposits that you couldn't retain."

    RBC chief executive Gordon Nixon has long expressed a similar degree of caution. Looking at the banks that have changed hands in the region where RBC operates, one still sees a tremendous amount of real estate exposure on their balance sheets, he said last week.

    The documents about TD's bid for BankUnited assets were originally released by the FDIC in response to a freedom of information request, a practice that the regulator quietly stopped this summer over fears about the effect it might be having on bids. A notice on the FDIC's website says it is reviewing its policy on releasing information about failed bids. "There's a real furor over that, and I think that ultimately they're not going to be able to get away with [not releasing the information]," Mr. Adler said.

    While banks that bid for assets might not like having the information become public, others say the record of information helps them to formulate bids for assets that become available in future.

A proper “recovery” will not, indeed cannot happen, in the USA, until the US financial/banking sector is “sound.” A full Canadian recovery will not/cannot happen without a US recovery.

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Financial Post is an interesting commentary:

http://www.financialpost.com/news-sectors/story.html?id=1991684

Stiglitz says banking system is in worse shape

Mark Deen and David Tweed, Bloomberg News

Monday, September 14, 2009

Joseph Stiglitz, the Nobel Prize-winning economist, said the Unitd States has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview on Sunday in Paris. "The problems are worse than they were in 2007 before the crisis."

Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.'s assets have grown and Citigroup Inc. remains intact. In the United Kingdom, Lloyds Banking Group Plc, 43% owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

Obama's Plan

While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn't force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

"We aren't doing anything significant so far, and the banks are pushing back," said Stiglitz, a Columbia University professor. "The leaders of the G-20 will make some small steps forward, given the power of the banks" and "any step forward is a move in the right direction."

G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance.

Reluctant to Act

"It's an outrage," especially "in the U.S. where we poured so much money into the banks," Stiglitz said. "The administration seems very reluctant to do what is necessary. Yes they'll do something, the question is: Will they do as much as required?"

Stiglitz is too pessimistic and the banking system will probably continue to strengthen, said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. "I'm not sure why he's saying it," O'Neill told Bloomberg Television on Monday. "The banks were close to near death. We've been to hell and back, so to speak, and we're on the road to recovery."

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is "far from being out of the woods" even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

‘Economic Malaise'

"We're going into an extended period of weak economy, of economic malaise," Stiglitz said. The United States will "grow but not enough to offset the increase in the population," he said, adding that "if workers do not have income, it's very hard to see how the U.S. will generate the demand that the world economy needs."

The Federal Reserve faces a "quandary" in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

"The question then is who is going to finance the U.S. government," Stiglitz said.

Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favor of broader measures of prosperity.

"GDP has increasingly become used as a measure of societal well being, and changes in the structure of the economy and our society have made it an increasingly poor one," Stiglitz said.

Sarkozy Agrees

Sarkozy said on Monday in a speech in Paris that focusing on GDP as the main measure of prosperity had helped to trigger the financial crisis. He ordered France's statistics agency to integrate the findings of Stiglitz's study into its economic analysis.

Assessing government's contribution to economic output, which ranges from 39% in the United States to 48% in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in the quality of products such as cars instead of just quantity, Stiglitz said.

Similarly, increased household debt may drive up output numbers, even though that doesn't amount to a real increase in wealth, he added.

While Stiglitz doesn't recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making.

"Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism," he said. "The message is to encourage political leaders away from that."

It is important to note that Stiglitz is a harsh critic of the “free market fundamentalists” (Hayek, Schumpeter, Friedman and the Chicago School) but his views on the state of the US banking/financial system bear consideration by all because he’s been so right so often.

His question - ”who is going to finance the U.S. government?” - is very pertinent because the Chinese are showing signs of reluctance.

Canadian bankers' caution about investing in the US appears justified.

 

[a_majoor]

You can almost hear the shark music from "Jaws" in the background. Click on link to get the charts:

http://hotair.com/archives/2009/09/22/exclusive-cbo-predicts-social-security-cash-deficits-in-2010-11/

Exclusive: CBO predicts Social Security cash deficits in 2010-11; Update: Too much sunny optimism at CBO?posted at 8:48 am on September 22, 2009 by Ed Morrissey
Share on Facebook | printer-friendly Four years ago, George W. Bush attempted to reform the entitlement program Social Security, warning that the system was accelerating into collapse and would soon run deficits.  Democrats scoffed and claimed the Social Security system was solid and wouldn’t have problems for at least 50 years, as Harry Reid told PBS’ Jim Lehrer in June 2005.  Just last year, the CBO — under the direction of Peter Orszag, now budget director in the Obama administration — claimed that the first cash deficits in Social Security would not come until 2019.
Now, however, the CBO has determined that Social Security will run cash deficits next year and in 2011, and by 2016 will be more or less in permanent deficit mode.  Hot Air has exclusively obtained the summer 2009 CBO report sent to legislators on Capitol Hill but not yet made public, which shows that outgo will exceed income for the first time since the 1983 fix on an annual basis in 2010:
OASDI Summer 2009 projections: click to enlarge in new window
The numbers need explaining.  The number to watch is the “Primary Surplus” number, which watches actual income and expenditures without the interest payments from the general fund.  The interest payments mask the fact that costs have begun to outstrip income on an annual basis (individual months have gone into deficit in the past).  One way to look at this, according to my sources, is to think of this as a mortgage, and in 2010-11, the income can’t make the payments, so the general fund has to cover them.  Since the interest obligation compounds, the debt grows.
As we can see, this trend reverses itself temporarily from 2012-15, but the surpluses are minimal.  By 2016, the deficits return, and begin to accelerate again.  By 2019, the primary surplus runs $63 billion in the red, almost triple the deficit in 2017, showing the rapid decline of the Social Security system.
This demonstrates nothing better than the poor and politically calculated analyses that came out of the CBO during Peter Orszag’s tenure at the Congressional agency.  Democrats wanted analyses that allowed them to ignore the problems in Social Security, and Orszag was happy to supply them.  Douglas Elmendorf has had to right the ship at CBO while Orszag continues to blow his predictions at OMB, most notably in overall deficit projections, which Orszag had to admit were off by more than 40% and $2.2 trillion over the next ten years.
Of course, they were helped along by a complacent media unwilling to do math, and a host of apologists for the Left.  Chuck Blahous at the Hudson Institute has a good rundown of those he calls the “mythmakers”.  It’s worth reading in its entirety, as is Robert Reich’s “All is well!” blogpost from four months ago, apparently working off of the Orszag numbers from last year.
The situation at Social Security is much worse than this administration and Democrats in Congress want to admit.  They want to continue busting the deficit and creating new entitlements while the existing ones careen towards collapse.  The new data shows that time has almost run out for reform.  Seniors will still get their checks, but those will increasingly rely on injections from the general fund and not revenues from Social Security payments.  At this point, one has to wonder when SSA becomes a flat-out Ponzi scheme, and who the suckers will be when it blows up.
Update: Fixed a couple of typos, and also recalled (thanks to a Hot Air reader) that SocSec briefly ran an annual cash deficit before the 1983 fix.
Update II: Steve at No Runny Eggs, who has been keeping a very close eye on SSA, says that the CBO numbers project some eye-popping payroll-revenue growth numbers to get back to surpluses (briefly) by 2012.  According to the numbers, CBO projects a 6.19% growth rate in 2012, and 5.69% in 2013, then dropping to 4.59% in 2014 and declining afterwards.  Assuming that they only peak at the 4.59% number for all three years — still a rather optimistic projection — Social Security never actually comes out of its deficits at all:

Be sure to read Steve’s post to get the full explanation of his projections.

 

[a_majoor]

The long term prognosis is very bad, and it will take a radical change by a future administration to reverse the effects predicted here (huge tax and spending cuts, elimination of many "entitlement" programs and a release of many areas of life from science to labour to education by the Federal government):

http://www.nypost.com/f/print/news/business/the_dead_end_kids_AnwaWNOGqsXMuIlGONNX1K

The dead end kids
By RICHARD WILNER

Last Updated: 4:45 AM, September 27, 2009

Posted: 1:34 AM, September 27, 2009

The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.

And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.

"It's an extremely dire situation in the short run," said Heidi Shierholz, an economist with the Washington-based Economic Policy Institute. "This group won't do as well as their parents unless the jobs situation changes."

Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill.

"There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses."

There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said.

"If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.

During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50 percent. Except after 9/11, jobs growth followed within two years.

A much slower recovery is forecast today. Shierholz believes it could take four or five years to ramp up jobs again.

A study from the National Longitudinal Survey of Youth, a government database, said the damage to a new career by a recession can last 15 years. And if young Americans are not working and becoming productive members of society, they are less likely to make major purchases -- from cars to homes -- thus putting the US economy further behind the eight ball.

Angrisani said he believes that Obama's economic team, led by Larry Summers, has a blind spot for small business because no senior member of the team -- dominated by academics and veterans of big business -- has ever started and grown a business.

"The Reagan administration had people who knew of small business," he said.

"They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."

Angrisani said the stimulus money going to extending unemployment benefits is like a narcotic that is keeping the unemployed content -- but doing little to get them jobs. (Interpolation: Take that Jack Layton!)

Labor Dept. statistics also show that the number of chronically unemployed -- those without a job for 27 weeks or more -- has also hit a post-WWII high.

 

[tomahawk6]

The real unemployment numbers are in the high teens. The numbers dont reflect people who no longer get unemployment benefits.Large numbers of out of work older people are opting to take social security at age 61,which will put a strain on the budget as social security wont have the money to cover these people,so the treasury will have to pickup the tab. Obama's policies are not intended to put people to work. Next year there will be more stimulus spending primarily because its an election year. The voters are mad as hell now just wait until next summer when increased taxes and food prices register on the electorate.The Republicans need 40 seats to retake the House,they may get all of that and more. If the Senate can also be swung to the Republicans then the damage can be undone as long as there is a veto proof majority. A tall order to be sure but given the growing unease of the voters it could happen just as it did to the Republicans in 06 and 08.

 

[Kirkhill]

Tomahawk:

What is the end result if the country comes to the conclusion that there are no good choices - there are only two bad choices? The punditry talk about the electorate having a short memory but swinging from unitary left to unitary right and back again every two years might test that theory really hard.

 

[tomahawk6]

Bush was actually a moderate Republican but when the opposition party is so far left he looked to them like the devil incarnate. After this flirtation with socialism it will be very difficult for anyone but a conservative to get elected. People are scared and we arent even at the one year mark of Obama's presidency. Just wait until next year if cap and trade passes along with national healthcare plus stiff tax increases and higher food/energy costs people will be voting their pocket books.

 

[a_majoor]

Is there any realistic possibility that another politcal movement can rise in the United States in the near future?

The Whig party rapidly collapsed and was replaced by the Republican party, so historical precident exists, and the T.E.A. party movement is currently non partisan in the sense they seem to blame both parties equally for the current mess, but is this being translated into any real action?

 

[Edward Campbell]

The last political movement to "spring up" was Ross Perot's circa 1990, it culminated in a 1992 presidential campaign.

I think you need three things to create such a movement:

1. A charismatic and credible LEADER - this is the (digital-electronic) "information age," charisma matters;

2. An "enduring" ISSUE - economic issues, even the current one, tend to be too short term; and

3. MONEY.

 

[tomahawk6]

The US is a two party country and that is unlikely to change. Third party's rarely win but do tend to throw the election to one of the two party's. Perot siphoned off enough votes from the Republicans that allowed Clinton to win. A Palin third party for example would assure Obama of a second term. The other issue is a real third party must have a presence in the House and Senate. A lucky third party candidate that got elected would have no legislative help unless he or she was able to craft a coalition and you see how that works in Canada. The socialists were able to takeover the Democrat party and the Republicans need a conservative takeover of theirs. The Democrats have been able to conceal their true agenda from the public which culminated in Obama's victory. Obama repeated the sloagn "Hope and Change" but never outlined what he meant. Now we do and alot of people dont like it - including people that voted for him. It truely is buyers remorse.

 

[Kirkhill]

Obama repeated the sloagn "Hope and Change" but never outlined what he meant.

I take your point on Bush..... I guess, in sum, I was thinking more of the Gingrich House vs the Pelosi House.  I know a decade separates them but I do believe that the counter to Pelosi will be somebody like Gingrich who may well be countered by another Pelosi.  If that pendulum starts swinging really fast (on a 2 year period for example) then I wonder if:

a) the system overbalances
b) the system splits along party lines
c) the system tears itself away from its popular underpinnings.

In a - the system just becomes unworkable and the government can't govern effectively
In b - the two parties fail to maintain a sufficient reserve of goodwill to permit the peaceful transition of power (a recurring thought of mine is that if Obama's Democrats may well react adversely if the lose in 2010 and/or 2012).
In c - the populace just completely ignores the government and reinstitutes a whisky economy.  (Thucydides' Gulch of Galt....)

As to the Hope and Change thing .... the complete mantra is  "Fear, Hope and Change".  You can't sell Hope unless you can convince people that Change is necessary.  You can't sell Change unless you can convince people there is something to Fear.

Obama's buddies excelled at Fear mongering while GW was in power.  They sharpened their claws on George Herbert - when the slogan was "Its the Economy Stupid".

Iggy's problem up here is that our government had no interest in creating an image of panic.  Obama's did - so long as he could blame it on his predecessor.

 

[tomahawk6]

Some pundits think that no one would intentionally cause the US economy to tank unless one wanted to sow the seeds of chaos where the central government could impose martial law and suspend the constitution. I want to think that its sheer incompetence rather than intentional,but time will tell.

 

[a_majoor]

Some pundits think that no one would intentionally cause the US economy to tank unless one wanted to sow the seeds of chaos where the central government could impose martial law and suspend the constitution. I want to think that its sheer incompetence rather than intentional,but time will tell.

Among many Internet pundits, the name "George Soros" comes up again and again, and I am not talking about the tinfoil hat brigade either....As for history, Soros made his fortune by "intentionally causing the [UK] economy to tank", so with decades of experience, Soros funded organizations and a whole host of "useful idiots" to help out, the idea is certainly in the realm of plausibility.

 

[a_majoor]

Some say tomato, some say tomahto...

Conventional wisdom is massive inflation is around the corner to the vast influx of dollars into the US and global economy. This article suggests deflation is the true threat, and makes some very compelling points. If true, then a Japanese like "lost decade" looms ahead:

http://reason.com/blog/2009/10/06/dare-to-deflate

Dare to Deflate
Tim Cavanaugh | October 6, 2009

However you choose to define it -- falling commodity prices, contraction of money supply and credit marked to market, decline in the velocity of money, a $2 gallon of milk -- Mish Shedlock of Mish's Global Economic Trend Analysis and Botanica says the debate is over: Deflation is here, and it's awesome:

Deflation is not a threat because deflation is here by any practical measurement. Deflation is also here by impractical measurements such as falling prices...

Moreover, deflation is not a threat in a second sense. Deflation is needed to purge the excesses of the last credit cycle. Attempts to defeat deflation by force will only prolong the agony while accumulating government debt, just as happened in Japan's two lost decades.

Finally, deflation is not a threat in a third sense. Falling prices are a natural state of affairs because of rising productivity over time. Inflation is a direct (and unnatural) state of affairs caused by the Fed and fractional reserve lending.

There follow many paragraphs and visual aids in support of this thesis. Most of this material will be familiar to regular Hit & Run readers, but some is new. (Disposable Personal Income, welcome to Subzero World.) Then a closing peroration worth quoting in full:

In light of all of the above, the deflation "denial phase" should now be over for all but the most stubborn inflationistas. The "recognition phase" has finally arrived. The Bernanke "panic phase" is waiting on deck.

Please note that Bernanke's Deflation Preventing Scorecard is a perfect zero. Lord knows what Bernanke will try next.

The Real Threat

We are already in uncharted territory, and the risk is what the Fed, Congress, the Treasury department, the Administration, and central bankers globally do to prevent something that needs to happen: the liquidation of malinvestments and debt.

Thus the "real threat" (and risk) is not deflation, but rather the foolish attempts by Keynesian clowns to circumvent what needs happen.

Japan is proof that such efforts are futile. Note that Japan is once again back in deflation, and all the government has to show for its efforts is debt equaling 150% of GDP. Falling prices, lower wages, lower asset prices, and especially debt liquidation are not to be feared, they are a necessary part of the healing process, lest the country stagnate for years.

On the what-will-Bernanke-think-of-next question, forcing banks to lend would be the next logical step, but the Fed chairman probably wouldn't take it because 1) it could actually be controversial and 2) his pattern so far has been to put bank solvency above all other concerns. Bernanke's wisdom from the Great Depression -- which in practice is not as nuanced or interesting as it seemed in theory -- doesn't seem to draw a clear distinction between a zombie bank and a lending bank. Both need to be kept alive until the Great American Economic Machine comes to our rescue, at which time the fatter and more robust banks can start lending into a boom. If the Fed were seriously interested in getting banks to start lending now, it could stop paying them interest to keep money in their vaults. It isn't doing that. So we have a policy that combines big cash infusions for banks with an austerity program for everybody else. Theoretically, you could keep that policy in place for a long time. It even makes sense, if your only goal is to make banks healthy.

Read Reason on Japan's lost decade and on the return (or not) of inflation.

 

[a_majoor]

A long article with some very scary implications:

http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-ghost-fleet-recession-anchored-just-east-Singapore.html

Summary: Over 500 merchant ships of all sorts are anchored off the coast near Singapore, representing @ 12 % of the global shipping fleet standing idle. It is suspected that the deepening recession might increase the numbers up to 25% of the global fleet.

This is made worse because a huge surplus of ships is coming on line now, having been ordered 3-5 years ago. This can only make the problem worse, increasing overcapacity.

Deleveraging will have lots of bad consequences.