American Melt Down?

World's 8th largest economy will be without funds to pay government employees (teachers & police included), promised social benefits, interest on its debt, etc. in about two months:

For details; See http://www.bbc.co.uk/news/business-10802119

 

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Here is part of Email, just received, from Obama's internet group. "Organizing for America"

"... Without federal help, a lot of teachers like me -- as well as other public servants like police officers and firefighters -- will lose their jobs. Maybe you know some of these people. Maybe it's you.

Democrats in Congress are trying to do the right thing, proposing emergency assistance for states to preserve more than 100,000 jobs like mine. They're racing back to the Capitol for an emergency session this week to pass this bill and save these jobs.

But Republicans are standing in the way. Minority Leader John Boehner is calling the bill a "payoff" to "special interests" and attacking every Democrat who is fighting for us.

But I'm not a special interest. I'm a teacher. ..." {Bold in the original.}

Billy T comment:
It should get to be an interesting* pre-mid-term election this year.

The Republicans are correct that all this deficit spending will destroy the dollar, (but they never admit GWB's needless wars and trickle down tax relief than built modern Factories in China & closed factories in US made it necessary).

The Democrats are correct that without government deficit spending to replace the contracted consumption, the economy will sink into depression. Americans are worried and saving 6.4% of their income now instead of spending 104.6% of it under GWB as the purchasing power of their salaries dropped. - That is a huge change in spending patterns, made worse by the negative 'wealth effect" of their home losing more than 1/3 of its value.

It makes little difference to the economy which POV prevails - GWB's depression is coming either way. It does make a difference to Obama & Bernanke - They will spend and borrow (Americans are now helping and now hold slightly more than half the treasury debt.) to delay the depression until Obama's first and only term is over.
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*We have the Chinese curse: "May you live in interesting times." in full effect now.

 

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Updating last post (283):

“…Congress gave final approval to legislation providing $26 billion in aid to cash-strapped state governments … {The bill} cleared the Senate last week after a pair of Republicans joined Democrats in breaking a filibuster. … Barney Frank, a Massachusetts Democrat, said Republicans opposed the measure for political gain:
“The Republicans have a two-step strategy: first of all obstruct anything from getting better and then point out that things aren’t getting any better,” he said … The bill is designed to help fill state budget gaps totaling $84 billion, according to the National Conference of State Legislatures, triggered primarily by weak sales and declining income tax revenue. …”

From: http://noir.bloomberg.com/apps/news?pid=20601087&sid=ak2GmHNd7vb8&pos=9

Billy T comment:
Last time I calculated, 26 is not even 1/3 of the 84 billion needed, but perhaps they had to settle for a too low a figure to get Republicans to stop their filibuster. In Brazil this “Party First, Country Second” POV is expressed as: “The worse it gets, the better it is!” I.e. All but two of the Republicans filibustered hoping to make teachers, firemen and police lose their jobs so in the fall elections, Republicans would gain more seats in Congress. No wounder the US is doomed.

 

An update to post 271:

"... On Sept. 15, Harrisburg, Pa., was scheduled to make a $3.29 million payment on the bonds it issued to build a trash plant. But, the cash-strapped city doesn't have the dough. "The city's budget is in deficit," said Chuck Ardo, spokesman for Harrisburg Mayor Linda Thompson. "We're looking for ways to trim the budget just to keep services going." ..."
From: http://money.cnn.com/2010/09/02/news/economy/harrisburg_bond/index.htm

Billy T comment:
I guess in these hard times, that western art, offered for sale {see post271} did not bring many bids.

 

Yes, I think you're right about that. Typical unintended (but predictable) consequence of a government regulation meant to improve worker's lives that actually ends up screwing them. Hopefully Obamacare will soon be repealed and workers will be able to keep their one full time job rather than having their hours cut to avoid government regulations that apply to full time employees.

Or, could it be that the Republicans are concerned that kicking state and local debt up to the federal government (which can't afford it either, except by running the virtual printing presses) will make our long term problems worse and encourage further proflagate spending by the states?

 

So you hope for one full time job without health care coverage, and one unemployed person - rather than two part time employees without health care coverage.

Option A - what you hope for - will raise your taxes: the unemployed person will be receiving government paid health care, while paying little in taxes. And unemployment is hard on a person's health.

At least in option B the two part time employees would both be paying taxes, to partly offset their health care costs to the public.

Unlikely. They never were before, and they are blocking all attempts to govern well now.

 

That is why I would prefer a commission to study several European health care systems with objective of evaluating them for direct and complete adoption of one in the US, perhaps phased in a few states at a time.

These system perform better* than the US's by any reasonable measure and would save lots of money for the tax payers. Most have past the test of time (and evolved to improve for more than 100 years in several cases). Why is the US so egotistical that it can not adopt a proven system, but must try to create one which as we agree will have unforeseen consequences?

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* About half the cost and deliver 2 to 3 years greater life expectancy.

 

I don't know that the US is more egotistical than any other country. I would wager it difficult to be more egotistical than a Frenchman. I think the issue in a nutshell is the power of special interests in the US. Special interests created the current US healthcare system and have every interest in keeping it exactly the way it is until it collapses under its own weight...perhaps another 10 years.

Special interests are more powerful here in the US than they are in places like Europe and I think most other advanced economies have a better educated citizenry.

 

update on post 285 (Harrisburg PA's debt problem):

"... {PA} Governor Ed Rendell accelerated $3.6 million in state aid payments to Harrisburg to avert a Sept. 15 default on $3.3 million in general-obligation bond payments.

A Harrisburg default would boost borrowing costs or make credit unobtainable for other Pennsylvania municipal borrowers, Rendell said yesterday.

So far this year, Harrisburg has skipped $8 million in payments it guaranteed on behalf of the {trash plant} authority and has a $4 million gap in its budget for the year ending Dec. 31, according to Mayor Linda Thompson. ..."

Quote from: http://www.bloomberg.com/news/2010-...nty-seek-harrisburg-incinerator-receiver.html

Billy T comment:
The governor's action also gives 0.3 million after the 15 Sept bond payment is made, but last paragraph of quote shows 8+4 =12 million hole to fill. I doubt if the bold part of quote is much more than a cover for the governor's aid as some California cities did default and yet others could borrow but admittedly at perhaps higher interest rates, when State did not step in to save the defaulting ones. Probably fact that Harrisburg is the capital of PA played a role.

The real question, now state has stepped in, IMHO is how does this effect the state's cost of borrowing? Some what the same question if the US bails out California, etc.. All these "step ins" by higher level of government hasten the day the run on the dollar starts, but I still think Obama will be able to delay the run on the dollar until his first (and only) term ends.* I.e. Obama will not be POTUS in Feb 2013 and my log standing prediction is that the run starts by Halloween 2014. That is now a "window for the run" of only 10 + 10 = 20 months.

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* There will be about 4 or 5 trillion dollar cost (debt increase) to buy this delay so when the depression comes, it will be harder to end. (It may never end in the US except for US farmers and coal miners and some rail and port activity shipping food and coal to Asia. US factories cannot compete against the more modern ones GWB's "trickle down" tax relief for the very wealthy, like Warren Buffett, built in China. For example, Warren's BYD company's electric hybrid cost half as much as a Chev Volt and goes farther before the gas engine kicks in.)

Republicans are killing more jobs in the US if they again give tax relief to the very wealthy. The wealthy are not dumb. They will do again what they did before - build factories outside of the US where GDP growth rates are at least 5 times higher and the markets are larger; However, this time the new, more modern, factories and new jobs will be in Vietnam and Indonesia as wages in China are rising rapidly. (About 15% in purchasing power annually on average and in the coastal cities, where new worker are hard to hire, ~25% / year.)

 

The factory jobs and increasingly brain work will continue to be relocated out of the USA regardless what sectors do or do not get tax cuts.


Giving the wealthy extra money will push up prices for the sorts of things the wealthy like to buy which is mostly financial assets.

You can't push a rope. If the wealthy don't see demand they will not create Jobs. This whole bit about the wealthy needing to be still yet wealthier so that they will create jobs was just goblygook nonsense. I am surprised ho many financially literate people choose to believe such obvious nonsense.

I suppose driving up stock prices and making the wealthy wealthier at least would help people to feel more confident about the economy because people get their economic perceptions from the media which in turn gets their economic ideas from Wall Street.


And the wealthy would buy bigger McMansions and hire more domestic servants if they felt wealthier.

 

Me too! For example otherwise intellignet posters* here supporting extention of the Bush tax cuts to the less than 2% who are the most wealthy** (who get 1/3 of all the tax reductions)
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*Especially MadAnthonyWane
** They will charter planes and take their support staff to Vietnam or other parts of Indochina / Indonesia this time to negotiate the rights to build new factories there instead of China, as wages in China are rapidly rising, but the effect will be the same again - more outsourcing to stay competitive, more US's older factories closed, and more jobs lost in the US as before.

Probably true, but the very wealthy (that <2%) are actively buying or building many of those Mansions OUTSIDE of the US - as a place to escape to when the dollar collapses. Hong Kong and Oil Rich lands are the most popular sites. China has more million dollar plus homes under construction than any other country but only a few are being built for wealthy Americans.

 

The explanation is that your assumption is wrong.

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Let's call them educated, instead of intelligent. They are not the same. Lots of simple concepts are hard to understand even for educated people if it doesn't advances their belief systems. For example peak oil. A simple, easy to understand fact, nevertheless most Republicans just don't accept it due to brainwashing and political standings...

 

"... {Bill} Clinton's proposal: Skip the schools and just give the {tuition} money to employers. Let them do the training. Cut out the middle man and let those actually hiring permanent workers -- the current ranks include companies such as UnitedHealth (NYSE: UNH) General Dynamics (NYSE: GD), and Amazon (Nasdaq: AMZN) -- do the dirty work. But the problem with this argument is that corporations are holding record amounts of cash, and corporate profits are at an all-time high. Companies have plenty of money to train workers on their own. They're just choosing not to. ..."

From: http://www.fool.com/investing/general/2010/09/21/bill-clintons-plan-to-save-the-economy.aspx

Bill points out that many college degrees (especially in the liberal arts) do not qualify you for jobs that are available (especially now the jobs in the financial industry are decreasing) Many may object that this would be "training" and not "eduction" but in these difficult times Training for the ~5000 jobs open for immediate hire, may not be a bad idea.

 

FED is most likely out of effective bullets now:

"... Those arguing against more QE cite the ineffectiveness of the first program, in which the Fed spent $1.7 trillion purchasing assets. However, banks continue to hold nearly $1 trillion in excess reserves. *

The problem is two-sided:
Banks face higher capital requirements, less creditworthy borrowers, and have raised lending standards.
Consumers are reducing their spending and shunning debt.

Richard W. Fisher, President of the Federal Reserve Bank of Dallas, has said that large-scale purchases may be "pushing on a string."

Kansas City Fed President Thomas M. Hoenig is concerned the Fed may be unable to effectively control rates when it comes time to tighten, because the already-elevated level of reserves could quickly multiply in the economy when confidence, economic growth and lending return, generating inflation. ...

Meanwhile, Minneapolis Fed President Narayana Kocherlakota believes that a mismatch between jobseekers' skills and business needs is responsible for 2.5% of the current unemployment rate, and that this mismatch is not "readily amenable" to monetary policy tools, citing instead programs to address job retraining and foreclosure mitigation. ..."

From: http://www.schwab.com/public/schwab...&lvl1=research_strategies&lvl2=market_insight

*Actually that "banks hold" does not mean cash in their vault. What banks are doing with most of the 1 trillion they have received is to buy Treasury paper.

Some time back I made post calling this the "great circle jerk" - FED buys newly printed treasury paper with thin air created money - i.e. new deposits to the Treasury's accounts in the books of its participating major banks - and those funds are returned to the Treasury by the banks (rarely used to make more risky loans to the economy). So with both FED and Banks buying Treasury Paper, with "thin air money" the demand is at all time high and interest rates at all time low.

Inserted later by edit some hard numbers showing what I just said is true: "Banks pared commercial and industrial lending to $1.24 trillion in the week ended Sept. 8, 11.3 percent lower than a year earlier, Fed data show. At the same time, their holdings of government debt rose 14.5 percent to $1.59 trillion. ..." I.e. more QE is definitely "Pushing on a string." Only thing that might stimulate economy now is for Ben to fly his helicopter over poor neighborhoods and drop out $10 bills. Blue text from: http://www.bloomberg.com/news/2010-...lds-in-pimco-s-new-normal-credit-markets.html

Wealthy people tend not to be dumb and are scared that this flood of thin air money will destroy the dollar's value, so Gold is at all time high and the only Treasury paper with inflation protection (TIPs) is so much in demand that the interest rates have been driven down to / and thru / zero. I.e. interest rates on TIPs are now negative. - I.e. you pay the government for the privilege of lending it money (because the government promises to pay back in inflation corrected dollars)!

Where will it all end? - I told you that four or five years ago: with a run on the dollar by or before Halloween 2014, which is quickly followed by the worst depression** ever in US and EU. I also told you back then to invest in Brazil and India's ADRs (typically up more than 300% now) or if you did not have the guts for their volatility, to buy TIPS. They were much cheaper then and paying positive interest.

Billy T comment (in addition to above footnote):
Note last paragraph's 2.5% unemployment due to mismatch between skills needed and skills available and what Bill Clinton suggests to do about this in prior Post 294

** That includes riots for food by mobs with guns. Looting in the suburbs as many of the hungry think basements there hold caned goods etc.

 

China duties to hit US chicken imports

China's government says it will impose import duties on US chicken products it says are being unfairly dumped on the Chinese market. From Monday, duties of up to 105.4% will be imposed on US chicken imports for the next five years, the China's ministry of commerce said in statement.

I was thinking how comical this situation is, here we are in the USA, supposedly the most technologically advanced nation to ever exist on Earth, maybe the Universe, yet we buy all our high-end computer products (e.g. iPhone) from China and export to them Chicken. Not even transgenic ones at that!

 

The US started this trade war:

“…China's Ministry of Commerce said Friday it had launched anti-dumping, anti-subsidy investigations into US-made off-road vehicles and sedans with engine displacements of 2.0 liters and above. The M0C announcement came one day after the US Commerce Department set preliminary anti-dumping duties on imports of Chinese-made oil pipes, which was the biggest US trade action against China. {Earlier the US had set high tariffs on imported Chinese tires. BTW it is not just "oil pipes," but almost all types of steel pipe, such as water mains, NG pipelines etc.}

As a result {of US Dept of Commerce rulings}, a 36.53-percent tariff will be imposed {by the US} on oil country tubular goods from 37 Chinese companies, while some other companies will be levied a preliminary dumping rate of 99.14 percent. They are in addition to the preliminary extra duties of 10.69 percent to 30.69 percent which the US Commerce Department announced in September for Chinese oil pipes.

The US move drew strong objection from China. "China is resolutely opposed to US abuse of protectionism. And (China) will take measures to safeguard the interests of domestic industry," MOC spokesman Yao Jian has said ...” {First of those "measures" appears to be stiff tariff on chicken parts. See next section of this post.}
From: http://www.chinadaily.com.cn/bizchina/09gzautoexpo/2009-11/06/content_8988383.htm

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“…duties of up to 105.4% will be imposed on US chicken imports for the next five years, the China's ministry of commerce said in statement. …The move is the latest in a growing trade dispute between China and the US.

On Friday a US Congress committee approved a bill allowing tariffs to be imposed on imports from currency manipulating countries. The bill is aimed at China, which is accused of keeping the yuan artificially low to help its exporters.

In its statement the {Chinese} ministry of commerce defended its decision to impose the latest tariffs, saying there was a "causal relationship" between the "US dumping of broiler products and the losses suffered by domestic business". The tariffs are likely to have a significant impact on US chicken exporters, who rely on sales of chicken feet and wings to China. …” {You may have wondered what happens to chicken feet. They are the best part of the chicken according to many Chinese – Tons of them are shipped to China each month.}
From: http://www.bbc.co.uk/news/business-11415036

Billy T inserts above in blue and commentsMany think the efforts of most countries to restrict imports either caused or greatly deepened the 1929 depression. We seem to be repeating that mistake. The “Buy American” law was the stupid start of this slide down hill.

 

We are cursed as we live in "interesting times" (Old Chinese curse: “May you live in interesting times.”)

Example 1a, (A related problem, 1b, is in the next post), The "pull back" problem: Efforts by buyers of the Mortgage Backed Securities, MBS, that banks et al packaged into what is now called "toxic trash" are seeking to recover at least some of their losses, based on the fact that both the banks who wrote the mortgages did not do "due diligence" nor did the rating companies who equally blindly slapped AA or higher ratings on them. The New York Fed is one of these investors, now seeking to recover losses.

As recovery would substantially damages the banks, some claim that is a "conflict of interest" by the NY Fed, whose charter includes the stabilization of the banking system, but others, including the head of the Richmond Fed, said just yesterday there was no conflict –the NY Fed needed to protect the taxpayers, etc. Read more on this here: http://noir.bloomberg.com/apps/news?pid=20601087&sid=aEM.fYcC3y_U&pos=7

"...Pacific Investment Management Co. {World's largest bond fund and also seeking refunds} contend that sellers are obligated to repurchase some mortgages because of misrepresentations such as overstatements of borrowers’ income or inflated appraisals. Their case may be bolstered by probes in 50 states into whether banks used documents that were also flawed to conduct foreclosures. Neither dispute is likely to be resolved quickly. “It’s going to be trench warfare with years of lawyering,” ..." {As usual, only the lawyers win.}

Quote from: http://noir.bloomberg.com/apps/news?pid=20601087&sid=aWMD4PrtsB_M&pos=7

Example (2),The debt problem: US is leaning towards more Keynesians stimulation (50 billion to fix bridges etc.) and liberal monetary policy, now via QEII
BUT England is cutting spending to reduce debt and hopefully lower the financing cost of it. – Who knows which (if either) will work?
For British reaction , see here: http://edition.cnn.com/2010/WORLD/europe/10/20/uk.budget.cuts/index.html?hpt=T2
I find it interesting that the French are rioting in the street as the retirement age may go to 62 and the Brits are still mainly drinking their tea as it goes to 66!

Example (3), The "currency wars" problem: All major nations (except China)* are debasing their currencies to aid exports in the so called “currency war” yet for A to increase exports the must be a B who increases imports. The net result of this nationalist effort will decrease trade and damage all – as it did in later 1920s. Some think that was a major cause of the 29 depression (Trade did drop 60%! within a year of Smoot-Hawley passage)

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* Some may argue China debased Yuan long ago, but it rose in value until re “pegged” a few years ago and now that the new peg is to an ill defined “basket” it has appreciated in value 10% wrt the declining dollar. Thus, currently China is the one major nation that is making it currency STRONGER to help out imports and producers who sell to the domestic market. - Part of the planned transition to a more domestic based economy.

I.e. NOW and for at least 6 months China has be hurting its exporters and even closed or limited the production of many major ones like steel and coal producers. Like me, China seems to fear that the US and EU will soon be too depressed to buy much from China. Thus they are getting prepared for more contraction of exports to US & EU. Already China is trading much more with countries they import from, like Brazil and the lower cost Asian producers they import components from, like Vietnam. If you take away the imports of components that later are exported in higher cost good only about 12% of China’s GDP is Chinese exports! (about the same as Brazil’s)

 

The "robo-signer" Problem:
“… When a homebuyer signs a mortgage, the key document is the note, which is the actual IOU. In order for the mortgage note to be sold or transferred to someone else (turning it into a mortgage-backed security), the document has to be endorsed (signed) to the next person. All of these signatures on the note are called the "chain of title."
If any of these signatures are missing, {or made by a "robo-signer" too busy to get the owner's signature} then the chain of title is said to be broken. As such, the mortgage note is no longer legally valid. In other words, the person who took out the mortgage loan to pay for the house no longer owes the money if he doesn't officially know the payee. …”

One serious risk, of course, is that the major title companies back away from insuring sales of foreclosed properties that {don’t have clear paper chain of ownership. Many banks don’t loan if title insurance is unavailable. }

Another risk is that "strategic defaults" heat up. These are when individuals stop making mortgage payments even though they can afford to. More individuals may be encouraged to strategically default if they perceive a reduced likelihood of being forced out of their homes. In fact, some companies and websites actually promote strategic defaults. …”
From Schwab’s article called: “Dirty paper.”

“…Attorneys general in all 50 states plus the District of Columbia are jointly investigating whether paperwork and legal procedures were handled properly. At the federal level, the Treasury Department's Office of the Comptroller of the Currency last month asked seven big banks to examine their foreclosure practices. The OCC and the Federal Deposit Insurance Corp. are also working with the Fed on its examination.
In addition to probing the banks handling of foreclosure documents, Fed staffers and other federal agencies are evaluating the potential effects of the foreclosure debacle on the real-estate market and on financial institutions, Bernanke said. …”
From: http://news.yahoo.com/s/ap/20101025/ap_on_bi_ge/us_bernanke_housing

Billy T comment: Note this is different problem from (1a) of prior post 299. It more directly effecting the housing market, than the “mortgage pull back” problem, caused by lack of “due diligence” in issuing the mortgage back “toxic trash” which may stick up to 170 billion dollar loss on the banking system. The rating companies which put AA ratings on the toxic trash will probably get off the hook with:
“Hey were not perfect, we do make mistakes.”

SUMMARY The housing market collapse is just getting started. When homes fall 10% more in price, MORE THAN HALF OF ALL MORTGAGED HOMES IN THE US WILL BE "UNDERWATER." (20% already are.)
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A few days later by edit:
"as many as 7 million homes face foreclosure or have already been seized by lenders, according to Zillow Inc., a clog in the pipeline {Robo-signers} may delay a housing recovery, which won’t occur until home prices stop falling. That could in turn postpone a U.S. economic recovery. Distressed properties accounted for 31 percent of all U.S. home sales last month, RealtyTrac Inc. said Oct. 14.

“If what’s a hiatus turns into a moratorium, that’s quite problematic,” Stan Humphries, chief economist for Zillow, a Seattle-based real estate data provider, said in an interview. “It will delay the ultimate bottoming process in the market.”

From: http://noir.bloomberg.com/apps/news?pid=20601087&sid=aiI6HOF9ZkSs&pos=2