Saturday, June 6, 2009

June 6 2009: All my tomorrows were yesterday

Howard Hollem or Edward Meyer D-Day June 6, 1944
Allied Armies Land On Coast Of France. Great Invasion Of Continent Begins.
Crowd watching the news line on the Times building at Times Square, New York City

Ilargi: "I’m old and gray
and I lost my way
and all my tomorrows were yesterday"


Meltdown 101: Unemployment by the numbers
The unemployment rate rose steeply in May, jumping by half a percentage point to 9.4 percent. Yet employers cut far fewer jobs than in recent months. How can the unemployment rate increase so sharply even as monthly job losses drop by half? And what do these numbers, taken together, tell us about the economy? The apparent discrepancy between the two employment trends mostly has to do with more people starting to look for work - and not necessarily because they were laid off. That includes high school and college students entering the work force for the first time.

People who don't have jobs and aren't looking for work, such as students, stay-at-home parents, or those who have simply given up, aren't counted as unemployed in the rate put out by the Labor Department. But once they start job hunting, they start to count - and that can boost the unemployment rate. This trend is particularly apparent as recessions bottom out: People hear the economy is improving, so they plunge back into the job market. Yet companies are reluctant to hire until they are sure the economy is truly getting better, so those people have trouble landing jobs, and the jobless rate goes up.

That's why the unemployment rate usually peaks long after a recession has ended. Many economists expect that to happen after the current slowdown, too, potentially sending the jobless rate to 10 percent or higher by early next year. There's also an important technical factor: The Labor Department's monthly employment report is based on two surveys. The "household survey" covers 60,000 households and measures how many people are unemployed, while the "establishment survey" covers 160,000 businesses and government agencies. That survey gauges how many jobs are gained or lost.

On Friday, the establishment survey found that employers cut a net total of 345,000 jobs - a huge number, but still about half the average decline in the previous 6 months. The household survey, meanwhile, counted 787,000 more unemployed people, including 350,000 who entered the labor force in May. That pushed the unemployment rate to 9.4 percent, from 8.9 percent. Overall, the two results aren't that different: Both show the economy is still hurting and jobs are scarce. They also signal that while employers aren't cutting as many jobs as earlier this year, they are still reluctant to hire.

Here are some other interesting details from Friday's employment report, by the numbers.
14.5 million: People unemployed in May 2009, the most ever in records dating to 1948
12.1 million: People unemployed in December 1982, the record before the current downturn
9.4 percent: Unemployment rate in May 2009
August 1983: Last time the unemployment rate was higher than the current level
44,000: Number of jobs added in May in education and health services, one of only two broad job categories - out of seven - where the number of jobs went up
3,000: Number of jobs added in leisure and hospitality, the other category to add jobs
59,000: Construction jobs lost in May
117,000: Average monthly loss of construction jobs in the previous six months
7,000: Temporary jobs lost in May
73,000: Average monthly loss of temp jobs in the previous six months
3.95 million: The number of people unemployed for 27 weeks or longer
1.32 million: The number unemployed for that long in December 2007, when the recession began
2.2 million: People without jobs who wanted to work, were available and had looked in the last 12 months, but had not looked in the last month.
16.4 percent: Unemployment rate if you include involuntary part-time workers and those without jobs who hadn't looked for work in 12 months - the highest in records dating to 1994
9.8 percent: Adult men
7.5 percent: Adult women
11 percent: Female heads of households
6.7 percent: Asians
8.6 percent: Whites
12.7 percent: Hispanics
14.9 percent: Blacks
22.7 percent: Teenagers

U.S. Jobs Propaganda Gets More Desperate
With another fraudulent U.S. monthly jobs-report due out today, the U.S. propaganda-machine is uttering one absurdity after another. Thursday, it was trumpeting the news that “continuing claims” fell last month for the first time in five months. The first point to make here is that if last month's number had not been revised higher (as is happening every month) then continuing claims would have increased, not decreased. The second point to make about this nonsense is that the tiny decline of 15,000 (from a total of nearly 7 million) is statistically insignificant. In other words, there is a statistical “margin of error” with all such reports and that margin of error is much greater than 15,000.

Finally, even if this report had shown some marginal decrease in “continuing claims” (greater than the margin of error), it does not imply an improvement in the job market. This is a neutral statistic regarding month-to-month changes in employment. The reason? If the number of people continuing to receive unemployment decreases, there are two equally probable explanations as to what has occurred to change this number. It might mean that some of these people found jobs, or, it could simply mean that their unemployment insurance expired.

When the propagandists present a statistically insignificant number which does not imply a positive change in this market as unambiguously “good news”, then this is nothing less than a deliberate attempt to deceive. Similarly, the propagandists have frequently reported that the weekly lay-offs statistic is “improving”. Yet every one of these “improvements" occurs only because the previous week's “final estimate” is always revised higher – since the original number is always a “low-ball” estimate of the real weekly lay-offs. Thus, despite all these “improvements" in the weekly lay-off figures, there has been no statistically significant improvement – at all.

Today, the Bureau of Labor Statistics is expected to pretend that the net job-losses for May will be slightly over 500,000. This doesn't even qualify as an estimate, since it is a complete fabrication. I have dealt with this issue previously. However, with the propagandists continuing to produce these outrageous lies every month, it is sadly necessary for me to repeat my denunciation of these ridiculous lies. In early 2008, at the beginning of the collapse of the U.S. economy, there were roughly 1.3 million lay-offs each month. The net job losses for those months was virtually flat.

Thus, as a matter of simple arithmetic, last year (when the U.S. economy was much stronger), there were roughly 1.3 million new positions being created each month to offset those weekly lay-offs. This year, the weekly lay-offs have totaled 2.5 million to 3 million every month. Obviously, the U.S. economy is producing far fewer positions than it was in early 2008. In other words, the U.S. economy is producing far fewer than 1.3 million new position each month. A reasonable estimate (if not generous) is that the U.S. economy is producing half as many new positions each month (i.e. roughly 600,000 new positions).

If we add that reasonable number of new positions (600,000) to the total monthly lay-offs of between 2.5 million and 3 million, we see that the U.S. is losing a minimum of 2 million jobs per month. This is more than three times the fictional numbers produced by the BLS. There is no possibility that a huge error of this magnitude could be an honest mistake. Thus, the supposed monthly job-loss numbers from the BLS are deliberate, manufactured fraud – which should be painfully obvious to anyone capable of performing simple arithmetic. Anyone who defends these numbers is (implicitly) either a liar or an idiot.

U.K. Agency Seeks Statistical Truth
Here come the stats police. Mobilized by distressingly low levels of public trust in official statistics, the U.K. government is embarking on a daring, and possibly unique, experiment. With broad support, Parliament in 2007 approved the formation of the U.K. Statistics Authority, a group with the budget, authority and independence to question other government agencies on the numbers they release to the public. After its formation last year, the authority got off to a slow start, but it has already taken to task other government agencies for presenting data in a misleading way. Now, it is gearing up for audits on hot-button topics, such as crime statistics and education test scores, whose reliability has come into question.

The agency's task is a delicate one. If it uncovers reams of faulty data that might have been used in crafting public policy, Britons' fraying faith in public institutions could be further eroded. Officials know that airing the statistical truth could stir the public's ire at first, especially at a time when the government's credibility has suffered amid revelations that U.K. politicians billed taxpayers for dubious personal expenses. "From our first actions over challenging public statistics, the immediate impact could be that people say, 'I was right not to believe this!'" says Sir Michael Scholar, chairman of the authority, whose very name implies a devotion to hard facts. "I have to have an eye on the longer term."

Governments around the world have had their credibility tested over how statistics are gathered and used. While sometimes the accuracy of numbers themselves is questioned, more often political leaders seek to spin opaque sets of figures to serve their own ends. Public confidence in the numbers the U.K. government produces has been soft for some time. Among 1,708 adults who answered a 2004 survey by the Office for National Statistics, an agency now answerable to the oversight authority, just one in six agreed with the statement, "Official figures are produced without political interference." A poll conducted three years later found that just 33% of U.K. respondents said they tend to trust official statistics, the lowest rate among the 27 member states of the European Union.

"You end up with a situation where the government can't set out to achieve what it wants to achieve, because no one trusts the figures," says Richard Alldritt, head of assessment for the authority. That problem persuaded Prime Minister Gordon Brown, then chancellor of the Exchequer, to propose the creation of the oversight agency. Mr. Alldritt had worked on an earlier body, the U.K. Statistics Commission, which had independence but not much power. "As a nonstatutory body, you can pretty much say what you like, but no one really has to pay attention to you," Mr. Alldritt says. The new agency has a budget three times the size of the earlier commission for assessing data, and the ear of a parliament whose hearings grilling officials on statistical maneuvering are "televised and covered by journalists and can be fairly combative," Mr. Alldritt says.

The power of the new authority was on display in December, when the Home Office trumpeted its efforts to reduce knife attacks, after a series of heavily publicized incidents. The government cited a 27% decline in teenagers admitted to the hospital for knife crimes. The report drew a sharp rebuke from the new oversight agency, which said the government had acted prematurely in claiming that knife attacks had declined, and also accused the Home Office of using data selectively to try to make its case. That prompted an apology from the Home secretary to the House of Commons, and led to the creation of a one-page code of conduct for civil servants governing their use of statistics. Among the new rules: "Decisions taken by statistical professionals are final."

The episode earned kudos from observers hoping for an end to manipulating statistics for political gain. The guidelines for civil servants were "a very important victory," says Jill Leyland, an economics consultant and vice president of the Royal Statistical Society, a private organization committed to the cause of numeracy. Among good-data devotees, Canada is held up as a model for how to organize statistics under one agency. Wayne Smith, assistant chief statistician at Statistics Canada for business and trade statistics, says the centralized approach helps to keep public trust high. The worst situation for a government would be that "you publish the unemployment rate, and people don't believe you," Mr. Smith says.

While some good-government advocates criticize the more-decentralized approach followed in the U.S., they praise certain practices, such as sharply limiting pre-release access to data. By contrast, the U.K. used to allow officials access up to five days in advance, plenty of time to craft a politically palatable interpretation of the data. Last December, the government tightened restrictions, though not enough for the statistics authority's taste. "A lot of people get 24 hours' advance sight prior to publication, which we're not very enthusiastic about," Mr. Alldritt says. Still, he says, the agency is determined to raise accountability. But, he adds, "we'll be the first to say it's not working, if it doesn't."

Latvia's Problems Prompt Worry About Contagion
Latvian officials worked to assemble an international aid package, aiming to avert a currency devaluation as neighboring countries voiced concerns about financial contagion. The International Monetary Fund and the European Union are demanding severe budget cuts as a condition for the money Latvia needs to contain its crisis and maintain the value of its struggling currency. While European and Latvian leaders said that Latvia's peg to the euro would remain in place, traders, bankers and economists said a devaluation was inevitable and probably necessary to avoid a deep and prolonged recession in the Baltic nation.

The pressure on the Latvian currency, the lat, has showed that the stitches on the edge of the European economy are frayed and that Eastern Europe in general remains fragile. Latvia had kept its currency pegged to the euro in hopes of joining the monetary union and a devaluation would prove embarrassing as attention swings to the region ahead of European Parliament elections this weekend. Fear that Latvia's problems could spread to its neighbors, in particular fellow Baltic nations Lithuania and Estonia, intensified Friday.

Dariusz Filar, a member of Poland's Monetary Policy Council said, "The situation in Latvia is a threat, everyone is afraid of regional spillover, though we see that different markets are reacting differently." "The situation requires an international response," Mr. Filar added. Other currencies potentially at risk are the Polish zloty, the Bulgarian lev and the Hungarian forint. "More steps are needed and maybe additional funds," said Marek Belka, the head of the IMF's mission to Latvia said. Some called for a coordinated response to the entire Baltic region. Lithuania and Estonia have similar currency pegs and similar macroeconomic problems. "If I were a super-economic commissioner, I would organize a coordinated devaluation of all three currencies," says Alf Vanags, director of the Baltic International Centre for Economic Policy Studies, a think tank based in Latvia's capital, Riga.

Latvia's biggest creditors are Swedish banks, who hold $23.2 billion of assets there, according to the Bank for International Settlements. The Swedish banks say they are ready for a devaluation and high loan-default rates. Swedbank AB's chief executive Michael Wolf said in a statement Friday that "we feel comfortable about our action preparedness regardless of which way the Latvian government chooses to go." To be sure, Latvia's problems might be contained to the Baltics and not spread more widely. Latvia has half as much borrowing from foreign banks as Iceland did when its currency collapsed, yet has seven times the population, at around 2.2 million people.

In addition, European countries with floating exchange rates, such as Russia, Ukraine, Hungary and the U.K., have already seen substantial devaluations during the crisis, while Latvia has stuck to its peg. Interest rates in Latvia have soared since the country's currency came under sustained attacks this week, with overnight rates for lending among banks rising to 19.6%, from 16.8% Thursday. The IMF is leading the negotiations with Latvia over how big a budget deficit the IMF and European Union should allow before they approve the next disbursement of aid.

In similar circumstances, the IMF has insisted countries devalue their currencies. That has the effect of spreading the pain of adjustment throughout the economy rather than the current situation, where Latvia's government workers are taking the brunt of adjustment through pay cuts. A devalued currency also makes exports cheaper, giving a troubled country a path toward recovery. Latvian homeowners and businesses are saddled with $40 billion of loans originated by foreign banks, most of it denominated in euros.

Gross domestic product is expected to fall at least 18% this year as asset prices, especially in the housing market, have cratered as much as 60%. Some said the EU's attempt to avoid devaluation would only delay inevitable pain for Latvia and its creditors. "It looks like a train wreck to me. It's a crazy idea," not to devalue, says Simon Johnson, a professor at the Massachusetts Institute of Technology and a former IMF chief economist. Propping up the lat will force intense pain for Latvians in the form of wage and benefit cuts. It will also stifle any chance at economic recovery, which will keep loan-default rates high.

"The Europeans keep supporting [the peg] because they are operating a fixed exchange rate system in Europe and don't want to undermine the undertaking," says John Williamson, a senior fellow at the Peterson Institute for International Economics in Washington. "I don't see the sense of trying to defend marginal currencies like that," he added. The official public support for the lat could also be the familiar public performance that always occurs before a currency falls. "In every devaluation in history, the prime minister and the central bank governor go on television the night before and say a devaluation will happen over their dead bodies," says Anatole Kaletsky, chief economist at GaveKal, a research and fund management firm.

Bond-market rout lifts mortgage cost


"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices." Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time. So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?

One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation. The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year -- more than four times last year's all-time high. "The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."




Banks can tap Social Security to cover bounced-check fees
In a verdict that could have far-reaching implications for elderly and disabled bank customers, the California Supreme Court ruled this week that banks can tap Social Security benefits in bank accounts to cover bounced-check fees. The decision, in the Miller v. Bank of America case, effectively reverses a 2004 San Francisco trial court ruling ordering the bank to pay at least $284.4 million in damages to more than 1.1 million customers. Spokeswoman Shirley Norton says the verdict confirms that BofA "has always acted lawfully in maintaining and balancing its customer accounts." James Sturdevant, the lawyer who brought the case against BofA says the opinion "condemns the most vulnerable bank consumers to predatory practices."

The Center for Responsible Lending, an advocacy group, has found that consumers heavily dependent on Social Security income pay $1 billion in overdrafts a year. Most overdrafts are triggered by small-dollar debit card transactions, says Eric Halperin, director of the center's Washington office. The California ruling — along with a 2002 federal verdict in Lopez v. Washington Mutual Bank favoring the thrift — could make it more daunting to challenge banks' ability to deduct overdraft fees from government benefits. "It will make plaintiffs pause at least in bringing other cases," says Greg Taylor, associate general counsel at the American Bankers Association, a trade group.

But Margot Saunders, counsel for the National Consumer Law Center, says the Supreme Court ruling merely "interprets a California statute" and doesn't prevent similar cases from moving forward elsewhere. It also won't stymie general lawsuits dealing with overdrafts, she says. BofA, in an unrelated overdraft case, recently agreed to a $35 million settlement. The lawsuit alleged the bank processed transactions and provided account information in a way that increased overdraft fees. In settling, the bank denied the claims and said it fully complied with the law.

Federal law generally prohibits creditors from seizing Social Security or other government benefits to pay a debt. But California law says overdraft charges are not debt. The highest state court viewed the bank account as "a running tally of debits and credits," entitling banks to deduct overdraft charges, says Daniel Bussel, law professor at UCLA. The U.S. government sided with BofA. The government said if banks are not able to tap Social Security benefits for overdraft charges, they may restrict electronic deposits, which could force the government to issue costly paper checks.

U.S. Pushed Fiat Deal on Chrysler

The documents, filed in the Southern District of New York as part of Chrysler's bankruptcy proceedings, provide a glimpse at the tense debates that shaped Chrysler's final days as it raced to find a suitor. On Friday, a federal appeals court upheld Chrysler's Fiat deal, dismissing a challenge by dissident Chrysler debt holders. But the court also issued a stay until 4 p.m. Monday -- leaving a small window for Thomas Lauria, the lawyer pursuing the case, to appeal to the Supreme Court. One judge on the three-judge panel suggested the Supreme Court should have "a swing at this ball." Mr. Lauria's persistence led one government lawyer in the Chrysler case to dub him a "terrorist" in an email to a Chrysler adviser.

In a written statement, Chrysler said "comments extracted from emails exchanged in the heat of negotiations reflect the normal hyperbole that occurs in the final stages of negotiating any complex transaction." Chrysler said its concerns about the deal were answered. Fiat said it "provided full access to all information relevant to the due-diligence exercise performed by Chrysler and the prospective lenders." The revelations come as the Obama administration is rushing to get a bankruptcy court to sign off on the Chrysler-Fiat merger as early as next week. Fiat has the right to walk away from the deal if it isn't consummated by June 15.

Chrysler filed for bankruptcy protection April 30 armed with $12 billion from the government. Earlier this week, the government ushered General Motors Corp. into what it hopes also will be a speedy bankruptcy.
In an interview, an administration official said any concerns about Fiat were resolved in the final week. The Italian company gave Chrysler and the U.S. "total access to technology" and revealed enough about its financial status to persuade the U.S. the company was not just stable, but strong, the official said. The official called the negotiations "a high-wire act" in which a small team of government advisers had to quickly pull together a complicated deal. In such situations, "people speak in elevated tones," the official said. "People get threatening."

The emails, which run from mid-March until early May, were put into the court record following a request by Mr. Lauria, the lawyer fighting the bankruptcy on behalf of various Indiana pension and investment funds that hold Chrysler bank debt. They argue that the case has trampled on established bankruptcy law. In early March, both Chrysler and the government seemed unsure about Fiat. In a March 10 letter to the Treasury auto team, Chrysler Chief Executive Robert Nardelli said he shared some of the government's worries about a Fiat alliance, including that the introduction of Fiat in the U.S. "may have a negative impact" on General Motors and Ford. Mr. Nardelli also noted how Treasury officials had complained Fiat was "not bringing enough to the table" and had to be forced to put up cash for an equity stake.

A Chrysler spokeswoman said Mr. Nardelli wouldn't comment beyond his affidavit. In the affidavit, he said that by April's end, "Chrysler's management became comfortable with entrusting our precious assets to Fiat." Chrysler's advisers told the company their Italian counterparts were refusing to provide sufficient financial information to evaluate the deal. A team sent to Fiat headquarters in Turin, Italy, reported back on March 14 that "no financial due diligence ... has or can be performed." An internal memo 13 days later from Chrysler's advisory team also said Fiat's "off-balance-sheet investments" in joint ventures around the world posed an economic risk and a political risk," including the appearance that "Treasury/Chrysler" was "in bed with a shady partner."

Eight days before President Barack Obama announced his support for the alliance in an April 30 speech, Chrysler officials were still bristling over what they considered Fiat's unwillingness to provide even basic information about its finances. "They requested us to re-submit a written request" for the information, one Chrysler official wrote on April 22 to Mr. Nardelli, the CEO. Treasury officials, meanwhile, worried about Fiat's willingness to share technology with Chrysler, one of the deal's underpinnings. Fiat stands to get an initial 35% stake in Chrysler, and potentially 50%, based on its ability to help upgrade Chrysler's technology. Fiat is putting in no cash.

On April 22, Mr. Manzo of Capstone, the Chrysler adviser, sent a note -- like some of the emails, containing misspellings -- to the Treasury's Mr. Feldman to complain that Fiat "is trying to be squirely" about sharing technology. Mr. Feldman emailed back: "We know." At the outset, the Chrysler team appeared leery of the role being played by the Treasury, which was leading the effort to save the auto maker. "I think we are clearly getting more cooks in the kitchen," Mr. Nardelli said in an email. However, Chrysler quickly learned to defer to the Treasury team. In one email chain, Ron Bloom of the Treasury chastised a Chrysler official for trying to hammer out some lingering issues with Daimler, Chrysler's former partner, without looping in the Treasury.

"I am more than a little surprised," Mr. Bloom wrote, that Chrysler was proceeding "without our approval." Mr. Nardelli jumped in: "Ron, thought we were helping, how would you like to handle!" Later, the Chrysler executives deleted Mr. Bloom from the address line, and continued talking. "I guess the UST is running it!" said Mr. Nardelli, referring to the Treasury. "26 days and counting," said Tom LaSorda, Chrysler's then-president, referring to the April 30 deadline to either do a deal or file for bankruptcy. "Amen!" responded Mr. Nardelli.

Despite the push to do a deal with Fiat, Chrysler advisers continued into April urging the Treasury to think again about a potential merger with GM. Earlier talks between the two auto giants had broken down in November, and the Obama administration put little stock in the idea. On April 10, Mr. Manzo emailed Mr. Nardelli to say he told the Treasury to reconsider a GM pair-up. Four days later, Mr. Manzo sent an email to several Treasury officials, as well as Messrs. Nardelli and LaSorda, urging them to reconsider. "We continue to believe that revisiting the combination/alliance discussion with gm from the fall is the best alternative for all parties," he said.

In an interview, Mr. Manzo said conflicts will happen when a company like Chrysler is asking for money from a lender, particularly the government. He also said the emails reflected his "fiduciary duty to get the best value" for Chrysler. Just before the filing, tensions boiled over. Mr. Manzo offered a suggestion to Mr. Feldman about making a last-minute offer to Chrysler's debt holders. "I'm now not talking to you," Mr. Feldman wrote back. The next morning, hours before President Obama announced the bankruptcy, Chrysler President Mr. LaSorda emailed Mr. Manzo asking if Chapter 11 filing was inevitable. "Not good," Mr. Manzo replied. "These washington guys want to show the market (gm, delphi....) that they can be tuff. We are the gueni pigs unfortunately."

Related Documents
March 10: Chrysler Chairman and Chief Executive Officer Robert Nardelli writes a letter to the U.S. Treasury laying out his thoughts and concerns about a potential Fiat merger.
March 17: Chrysler advisor Robert Manzo passes along an email noting how the Treasury team seems to know little about Chapter 11.
March 25: Chrysler top brass discuss how the company will definitely go into Chapter 11.
March 27: Chrysler's advisers report that they have too little financial information to determine Fiat's viability.
April 4: Treasury's Ron Bloom chastises Chrysler's Nardelli for negotiating with Daimler.
April 14: Manzo urges all sides to reconsider a Chrysler alliance with General Motors.
April 22: Chrysler top officials are told that Fiat is still refusing to turn over key financial information, demanding they make a "written request."
April 23: Treasury's bankruptcy lawyer, Matthew Feldman, acknowledges that Fiat is holding out on a promised technology deal.
April 30: Manzo tells Chrysler President Tom LaSorda that for Treasury, "We are the gueni pigs unfortunately."
The same day, as Chrysler files for bankruptcy, Treasury's Feldman calls a lawyer opposing the bankruptcy a "terrorist"

Jefferson County Set to Halt Services, Shut Buildings
Alabama’s most populous county is preparing to stop road maintenance, close courthouses and shutter services for the elderly after a court struck down taxes that pay for about 35 percent of its budget. Jefferson County, which includes Birmingham, released a plan to cut $52 million from its budget as it appeals the ruling against its business and occupational taxes to the Alabama Supreme Court. Without that revenue, the county has said it is at risk of running out of money as soon as this month.

The loss of the tax money was another blow to a county that has been struggling to avoid bankruptcy since last year, when Wall Street’s financial crisis caused its interest bills to soar on more than $3 billion of bonds. The challenged taxes provided about $75 million in the fiscal year ended Sept. 30 to the county, which is forced to balance its budget under state law. “I’m not expecting that this is going to go easy into the night, but I’m abiding by the law,” county Commission President Bettye Fine Collins, a Republican, told reporters in Birmingham. “People who thought this was some kind of game are finding out this reality.”

The proposed cuts, outlined in a series of proposed resolutions released today by Collins, would slash deeply into the government’s services and include closing a nursing home for the indigent, declaring a moratorium on enforcing zoning and littering laws, and scrapping local development contracts. They would also bring a halt to the enforcement of building codes, close the county’s laundry, and shut down the agency that assists senior citizens.

The proposals come a day after Alabama circuit court judge David Rains ruled that the county can’t spend the disputed job tax money while it waits for an appeal. They will need to be voted upon by the Jefferson County Commission, a five-person body that has been divided over how to resolve unrelated financial problems brought on by the more than $3 billion debt of its sewer system, which is in default. The county for more than a year has been unable to make the full payments on those bonds. The interest bill jumped by some $107 million from early 2008 through March of this year, after the bond insurers backing the floating-rate debt lost their AAA credit ratings, according to the county’s estimate. When investors sold the securities, the interest rates jumped as high as 10 percent.

County officials have said they can’t raise sewer rates high enough to pay for the bonds without placing an undue strain on the poor. In Birmingham, a city of 230,000, 27 percent of the population lives below the poverty line, more than double the national rate, according to the U.S. Census Bureau.

Even Less Is 'Made in America'
Job announcements this week by two big U.S. companies provide a snapshot of the current state of U.S. employment. First General Motors, now in bankruptcy, said it would close or idle 14 plants across the country, putting as many as 20,000 out of work. Several days later, mega-retailer Wal-Mart announced plans to create 22,000 jobs in 2009—including cashiers, sales associates, and pharmacists—to staff new and expanded stores.

The juxtaposition of these messages—from the country's formerly largest employer, GM, and its successor, Wal-Mart—sparked questions about how rapidly the economy is shedding well-paid jobs and to what extent they can be replaced. The U.S. Labor Dept.'s May jobs report, released June 5, provides more fodder for the debate. It showed that while job losses slowed in most private-sector industries, including retail, manufacturing employment fell at an accelerating pace—by 156,000 jobs in May, compared with April's loss of 149,000 jobs.

So while the stock market was buoyed by May's less-than-expected overall job losses, many saw the report as grim. "The concern is that we're replacing $25-an-hour jobs with $12-an-hour jobs," says Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland. Morici says this trend has been going on for decades in the U.S., but that "the recession is exacerbating this weakness in the economy."

There are many reasons the U.S. manufacturing sector has been in decline. In GM's case, the cuts reflect the long slide in the company's sales and market share. Job automation and competition from countries with lower wage rates contribute to the general problem. And economists such as Morici also cite the low valuation of China's currency, which makes it much cheaper to produce goods in China than in the U.S. "Manufacturing, including the auto sector, has been clobbered by China's [monetary] policy," says Morici, who is critical of President Barack Obama's policy toward that country. "The U.S. is appeasing, not challenging China."

Tig Gilliam, CEO of the North American group of temporary-help giant Adecco, disputes the notion that just because the service sector is doing better than manufacturing, growth will come only in low-wage jobs. "Some of the strongest industries for job growth are bookkeeping, finance, health care, and education," he says. "They're not all graduate-degree jobs, but they're well-paying jobs."
But even if the pay for newly created jobs could compare with the $28 an hour that laid-off GM workers make, it's not clear that those thrown out of work have the skills or training needed to fill them. The number of "discouraged workers"—those who have given up looking for work because they don't believe a job is available for them—has nearly doubled in the past year.

The number of long-term unemployed (jobless at least 27 weeks) increased by 268,000 in May, to 3.9 million. That number has tripled since the beginning of the recession, indicating that there may be a mismatch between open positions and workers' skill sets, geographical location, or desired rate of pay. So for now, manufacturing continues to decline and net job creation remains a distant dream. "We're losing our middle class now," says Andrew Stettner, deputy director of the National Employment Law Project, or NELP, a low-wage worker advocacy organization. "Will those who lose middle-class jobs go back to middle-class jobs? That's the big question."

The manufacturing sector stood out from what was otherwise an improving jobs picture in May. Other battered industries halved their April job losses, including construction (with 59,000 jobs lost in May) and retail (18,000 cut). Three durable-goods industries accounted for about half of the overall loss in U.S. factory employment in May: motor vehicles and parts (a drop of 30,000 jobs), machinery (down 26,000), and fabricated metal products (19,000 lost). Since its most recent peak in February 2000, employment in motor vehicles and parts has fallen by about 50%. "Manufacturing job losses are likely to continue at an alarming rate as the ripple effects of GM's and Chrysler's restructurings are felt throughout the supply chain," says Scott Paul, executive director of the Alliance for American Manufacturing, a lobbying group.

The manufacturing work week was also down by 0.2 hours—twice the drop for all production and nonsupervisory workers during the month. In April and May, average hourly wages grew by just 0.1%, to a seasonally adjusted $18.54, but wages for manufacturing workers actually fell 0.1%. The manufacturing sector's decline has a disproportionate impact on less educated workers, who already face an unemployment rate significantly higher than that of college graduates. "The concern is for workers that have only a high school degree or less," says NELP's Stettner. "We're losing lots of good jobs for people with that level of education. Unless the manufacturing sector recovers—or we somehow upgrade the level of jobs in the service sector—the job market will become even more unequal."

ECB sharply downgrades growth forecasts for Europe
The European Central Bank has sharply downgraded its staff forecasts, expecting the eurozone to remain stuck in recession until mid-2010 and may not start to recover for a full year after the United States. Jean-Claude Trichet, the ECB's president, said the economy is likely to contract by 4.6pc this year and a further 0.3pc next year. The gloomy outlook is in sharp contrast to the healthier tone of Federal Reserve chair Ben Bernanke, who told Congress this week that the US would rebound as soon as this summer.

The ECB has agreed to launch a €60bn purchase of covered bonds in a token gesture of quantitative easing, but the sums amount to just 0.6pc of GDP (compared to 9pc in Britain) and may be too small to make a difference. The move is an uneasy compromise between a German-led bloc of hawks and a group of national governors facing incipient debt deflation at home. The bond purchase will cover 3-10 year maturities and start in July. Mr Trichet refused to clarify whether this stimulus would be "sterilized" to reduce the inflationary risks despite being asked three times at his press conference. German Chancellor Angela Merkel is deeply opposed to radical monetary stimulus, lashing out this week at the world's central banks.

"I view with a great deal of skepticism the extent of the Fed's powers and that the Bank of England developed its own small sphere. The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds," she said. Mr Trichet offered a prickly defence of ECB independence against this unprecedented attack by a German leader. "We did not decrease rates when the German chancellor asked us to decrease rates in 2004. All what we do is done without bowing to any influence or pressure. We decide on the basis of our own judgement," he said. Mr Trichet said eurozone inflation would "temporarily remain negative over the coming months" but continued to insist that there was no danger of deflation. The bank left its key interest rates at 1pc.

End Britain’s phoney fiscal war
by Martin Wolf

This financial year, the UK government is forecast to spend £4 for every £3 it raises. Never before, in peacetime, has the UK run such a deficit. This, one might imagine, would be a dominant concern in the British political debate. One would be quite wrong. The public is venting its rage over the expenses of members of parliament, instead. This is not all bad: outrage over creative fiddling demonstrates the public’s resistance to serious corruption. Yet it diverts attention from the looming debate over the scale and financing of the state. Choices must be made. There is, one might say, no alternative. As I noted in this column last month the increase in the UK’s fiscal deficit between 2007 and 2010 is forecast by the European Commission to be the fourth largest in the European Union, even though the decline in UK gross domestic product is about average.

Moreover, three-quarters of the rise in the deficit is due to the jump in spending as a share of GDP, rather than the fall in revenue. How did this happen? A paper from the right-of-centre think-tank, Policy Exchange, argues that this is the second of two huge spending surges under Gordon Brown. The first took spending as a share of GDP from 36.3 per cent in 1999-2000 to 41.3 per cent in 2005-06. The second will take it from 41 per cent in 2007-08 to a Budget forecast of 48.1 per cent in 2010-11, a level seen only once before in the UK’s peacetime history, in the mid-1970s. A financial implosion can do fiscal damage comparable to that of a sizeable war. Indeed, this is quite likely to prove the fourth most adverse fiscal event since 1800, after the second world war, the first world war and the Napoleonic wars.

So why did spending soar relative to GDP? The short answer is that nominal spending is forecast to leap by 20.5 per cent between 2007-08 and 2010-11, while nominal GDP is forecast to rise by just 2.8 per cent. In real terms, spending is forecast to rise by 14.7 per cent over this period, while GDP shrinks by 2 per cent. Real spending is forecast to rise by 7.2 per cent alone this year, while real GDP shrinks by a (probably over-optimistic) 2? per cent. A rise of 15 per cent in real spending in three years seems extraordinary. Part of it is due to the recession: according to the Institute for Fiscal Studies, nominal spending in 2010-11 has been revised upwards by £21.9bn since the 2008 Budget, with £10.2bn extra due to additional debt interest and £12.5bn extra due to additional spending on social security and tax credits.

But two other things were going on: first, even in the Budget of 2008, real spending was expected to grow by 6.5 per cent between 2007-08 and 2010-11; second, and more important, with the current lower inflation forecasts applied to the 2008 Budget’s nominal spending commitments, real spending would have risen by 10.2 per cent, instead of 6.5 per cent. Since no attempt was made to rein in nominal spending, real spending will rise much faster than planned. This is a reminder of a very big point: mistakes in forecasting inflation and the economy can generate huge increases in real spending and deficits if policy does not adjust quickly. The result is that this year – not coincidentally, an election year – the UK will enjoy a huge increase in real spending.

But, unless both the economy and tax receipts show an extraordinarily vigorous recovery, on which no prudent government would rely, this is a “phoney war”. After the election, the real war will begin. Just as most of the increase in the deficit resulted from an enormous surge in spending relative to GDP, so must most of the reduction come from curbs on spending. So how big a cut might be needed? On the Treasury’s forecasts, real GDP next year will be close to where it was in 2006-07, when spending’s share in GDP was 41.5 per cent. To reduce forecast real spending next year to where it was four years earlier, it would need to be cut by 15 per cent. The UK government is spending much more in real terms than it planned, its economy is far smaller than it expected and the fiscal deficit is, as a result, far larger than anybody forecast.

Unless one is confident that the economy will regain most of its losses, in a burst of high growth, or one is prepared to argue for a much higher peacetime tax burden than ever before, spending must be cut quickly or its growth reduced to around zero for years. An optimist would argue there is plenty of time to find out. A pessimist would argue, as the International Monetary Fund does in its most recent report on the UK, that markets may lose patience. Sensible chancellors of the exchequer are always pessimists. Hoping for the best is rarely a sensible strategy, since the downside can be ghastly. The debate on how to curb public spending is, quite simply, the central issue in UK politics. This government is evidently unwilling to confront the challenge of spelling out choices. So the UK needs a new government. The time for a general election is sooner rather than later. As for the issue to be debated, it is not MPs’ expenses. It is how to share out the seemingly inescapable pain.

Iceland Strikes Loan Accord With U.K., Netherlands
Iceland agreed to take a $5.44 billion loan from the U.K. and the Netherlands to repay Icesave claims, bringing to a close a seven-month dispute and helping the island draw the next tranche of an international bailout. The Atlantic island must pay back the loan over 15 years, according to a joint government statement sent by e-mail today. The U.K. will lend 2.35 billion pounds ($3.76 billion), the Treasury said, and the Dutch 1.2 billion euros (1.68 billion). It will be interest-only for the first seven years.

Thousands of U.K. and Dutch depositors risked losing their life savings after Landsbanki Islands hf, which offered the high-interest Icesave online accounts, collapsed with the rest of Iceland’s debt-reliant banking system in October, dragging the island’s currency down with it. The island is now relying on its IMF-led bailout to avert bankruptcy. “There was no other way out of this, but to negotiate,” Iceland’s Prime Minister Johanna Sigurdardottir said at a press conference in Reykjavil today. “Not paying was simply not an option.”

The Icelandic government has estimated the deposits owed are worth 650 billion kronur ($5.26 billion), local media including Morgunbladid have reported. Prime Minister Johanna Sigurdardottir told local media yesterday the island would pay 5.5 percent interest on the loan, adding that during the term of the loan, the government will try to sell the assets of Landsbanki Islands hf, the failed lender that offered the Icesave accounts. “This outcome gives us the opportunity to get a rest from this matter for the next seven years,” said Finance Minister Steingrimur Sigfusson at the press conference. “This will help the central bank in bringing down interest rates.”

Iceland, the fifth-richest country in the world per capita as recently as 2007, got approval to for a $2.1 billion IMF loan in November, with a further $3 billion pledged by the Nordic nations, Poland and Russia.
The U.K. Treasury “has also given notice that it proposes to lift the asset freezing order imposed on the U.K. assets of Landsbanki on Oct. 8, with effect from June 15,” the government said in the statement. “Today’s announcement is a positive step forward for relations between our countries,” the Treasury said. “It will ensure that taxpayers’ interests are protected and that the Icelandic economy can continue in its recovery after very difficult times.”

Kremlin urges grain exporters to tackle world hunger
Russia, seeking a greater say in global food issues, pledged on Saturday to double grain exports and urged suppliers to unite in eliminating food price surges in a world where every sixth person is starving. President Dmitry Medvedev proposed closer coordination between grain exporters, including a possible Black Sea grouping, and said excessive protectionism had encouraged speculation in global grain markets. "Every five seconds a child dies from hunger on this planet. The world, to a large degree, is more concerned with its income and profit. This is immoral," Medvedev said as he launched the Kremlin's showcase World Grain Forum.

Russia, propelled into the top three global wheat exporters by a record crop last year, has almost one-tenth of the world's arable land and plans to increase grain production by about 50 percent in the next 15 years. Already the world's largest energy producer and a major supplier of commodities to global markets, Russia wants to play a central role in governing agricultural trade flows. "We are preparing to strengthen our position on the world grain market and to put financial and organisational support behind it," said Medvedev, who first proposed the forum during a meeting last July with leaders of the Group of Eight. "We should work out a mechanism that can regulate supply and demand imbalances on the world grain market," he said.

"Excessive protectionism is damaging for sustainable development, including in the agricultural sector, though it is flourishing and often leads to speculation on the grain market." Grain prices hit record highs in 2008 when investment funds flocked to a bull run in commodities. Although prices have since retreated, the rising global population and frequent droughts have raised the spectre of supply shortages and higher prices. "Today, the number of people starving in the world has reached 1 billion," Medvedev said. "Every sixth person on our planet is starving." Medvedev told an international audience of more than a thousand officials and executives that Russia, the world's No. 2 oil exporter, would only support the development of environmentally friendly biofuels that used non-food resources.

"The technology now exists and we think the world community has to find a compromise between the issues of energy and food security," he said. "The growth of biofuels should not become a reason for a growing deficit of food grain." Agriculture Minister Yelena Skrynnik said Russia would be able to produce up to 135 million tonnes of grain within 10 to 15 years, compared with 90 million planned for this year, by cultivating land now lying fallow and increasing crop yields. "This will be enough to cover domestic needs and to export 45 million to 50 million tonnes," she said. Russia expects to ship about 20 million tonnes of grain in the current crop year.

International executives urged Russia to maximise its potential by encouraging more private investment and opening up more land to foreign investors. The European Bank for Reconstruction and Development said at least 13 million hectares of former farmland could be returned to production across ex-Soviet countries, half of it in Russia. "The investments remain enormous. Under the current circumstances such financing is difficult to obtain," EBRD President Thomas Mirow told Medvedev at the meeting.

Runaway Brides in China
With no eligible women in his village, Zhou Pin, 27 years old, thought he was lucky to find a pretty bride whom he met and married within a week, following the custom in rural China. Ten days later, Cai Niucuo vanished, leaving behind her clothes and identity papers. She did not, however, leave behind her bride price: 38,000 yuan, or about $5,500, which Mr. Zhou and his family had scrimped and borrowed to put together. When Mr. Zhou reported his missing spouse to authorities, he found his situation wasn't unique. In the first two months of this year, Hanzhong town saw a record number of scams designed to extract high bride prices in a region with an oversupply of bachelors.

The fleeing Mrs. Zhou was one of 11 runaway brides -- hardly the isolated case or two that the town had seen in years past. The local phenomenon has fueled broader speculation among officials that the fast-footed wives may be part of a larger criminal ring. "She called me soon after she left," says Mr. Zhou, a slight man with a tentative smile. He says she asked how he was doing, and apologized for the hardship she had caused. "I told her, 'I will see you again one day.' "

Thanks to its 30-year-old population-planning policy and customary preference for boys, China has one of the largest male-to-female ratios in the world. Using data from the 2005 China census -- the most recent -- a study published in last month's British Journal of Medicine estimates there was a surplus of 32 million males under the age of 20 at the time the census was taken. That's roughly the size of Canada's population. Now some of these men have reached marriageable age, resulting in intense competition for spouses, especially in rural areas. It also appears to have caused a sharp spike in bride prices and betrothal gifts. The higher prices are even found in big cities such as Tianjin.

A study by Columbia University economist Shang-Jin Wei found that some areas in China with a high proportion of males have an above-average savings rate, even after accounting for factors such as education levels, income and life-expectancy rates. Areas with more men than women, the study notes, also have low spending rates -- suggesting that many rural Chinese may be saving up for bride prices. Curbing consumption in hopes of connubial pleasure is increasingly the norm in Xin'an Village, or New Peace Village, a lushly verdant spot with 14,000 people, located in central China's Shaanxi province. The village has over 30 men of marriageable age, but no single women.

As in other parts of the country, village customs dictate the groom's family pay the bride's family a set amount -- known as cai li -- while the bride furnishes a dowry of mostly simple household items. In the 1980s, before the start of China's economic reforms, cai li sums were small. "When I married, my husband just bought me several sets of clothes," recalls Zhang Shufen, Mr. Zhou's mother. In the 1990s, cai li prices rose to several thousand yuan (about $200 to $400 at today's conversion rates), mirroring the country's growing prosperity. But it was only starting in 2002-03 that villagers noticed a sharp spike in cai li prices, which shot up to between 6,000 to 10,000 yuan -- several years' worth of farming income. Not coincidentally, this was also the period when the first generation of children since the family-planning policy was launched in 1979 started reaching marriageable age.

So the normally frugal Xin'an villagers began saving even more in anticipation of rising wedding costs. While the Zhous are fairly well-off by village standards, they had been scrimping for years, growing their own vegetables and eating mainly rice and noodles, with little meat. The family had curbed spending in anticipation of wedding costs for their son who was working in southern Chinese factories. The hope was that he would return with a prospective mate in tow. But when the younger Mr. Zhou returned home a year ago, he was still single. "In our village, when a boy is older than 24, 25, it is a shame on him for not marrying," says his mother.

Last December a family friend told his mother that her nephew recently married a girl from neighboring Sichuan province. The bride had three female friends visiting her, who might be interested in marrying local men, said this friend. Encouraged, Mr. Zhou and his mother met the three girls the next day. After an hour's chat with the trio, who claimed to be ages 23, 25 and 27, Mr. Zhou found himself drawn to the prettiest and youngest, Ms. Cai, who had angular features and an ivory complexion. He proposed marriage. She agreed, with one proviso: cai li of 38,000 yuan, or roughly five years' worth of farm income. The Zhous agreed, but took the precaution of running a quick background check. Tang Yunshou, Xin'an's Communist Party secretary, said Ms. Cai's identity and residential papers checked.

Three days later the couple registered their union at the local registrar's office. They posed for studio shots, with the bride in a creamy satin gown, the groom in a tuxedo. In one shot, they wear traditional garb, the bride pretending to light a string of firecrackers. Mr. Zhou mugs a grimace, hands to his ears. They held the wedding banquet a week later, on Jan. 4, where Mr Zhou's mother formally handed over the dowry -- half of it loans from family members -- to a woman she believed to be Ms. Cai's cousin. The new bride took up residence with her in-laws, and quickly found favor with her diligent and respectful ways, said Mrs. Zhou. "I treated her better than my own daughter," she said. A red electric scooter, with ribbons on the handles, sits in the living room, a wedding present for Ms. Cai.

Matrimony was catching. Two neighbors sought Ms. Cai out, and asked her to act as matchmaker for their sons. Ms. Cai recommended two girls within a few days. The neighbors each paid 40,000 yuan in cai li. On Jan. 28, all these brides vanished, leaving the villagers reeling. While there are no nationwide statistics, wedding scams have occurred before, but usually isolated cases. Mr. Tang, Xin'an's Communist Party secretary, says he has never before seen such clusters of cases. Most of the 11 families involved lost an average of 40,000 yuan. Officials consider these to be fraud cases. So if caught, the women could serve jail time, according to police. Meanwhile, Mr. Zhou is still lovelorn. "I feel I can't hate her," says the deserted husband, who is now so depressed his parents have forbidden him to leave the village, as he longs to. "She must have her own troubles."

USA Fire Sale, 2nd Meeting, June 2009: Political capital call
The following fictional conversation never occurred in June 2009 between Treasury Secretary Tim Geithner and a Chinese negotiator named Cheng for the sale of U.S. assets, at least not that we know of.

The first fictional meeting July 3, 2007 between Cheng and America’s representative broke off without a deal. Maybe Geithner did better on his latest trip to China.

Cheng: You’re back.

Geithner: I’m here to represent the government of the people of the United States of America...

Cheng: Of course you are.

Geithner: ...and I’d like to begin by saying that I cannot speak to commitments made by the previous administration by my predecessor...

Cheng: This is the difficulty with your “multi-party” system. Leadership change there between your two political parties controverts the principle of accountability that is supposedly the chief benefit of your so-called “democratic” system. The system is supposed to replace ineffective leadership with more effective leadership. Represent the will of the people? In truth both political parties in the United States are captive of influence from your finance, insurance, real estate, weapons manufacturing, and pharmaceutical industries that finance elections there. The leaders they choose constantly rotate in and out of power, avoiding blame for the problems they leave behind. Voters chase one meaningless promise for “change” after another. The latest administration is not held responsible for the previous administration’s mistakes. There is no continuity or sustained effort toward a goal for the nation and its people. Errors accumulate.

Geithner: I do not hope to get into a political argument...

Cheng: I'm getting to my point. The greatest accumulated error of all? Foreign government debt.

Geithner: If we can get back to...

Cheng: Your so-called economy, and those of your western allies who have followed you on your misguided path to finance-based wealth, have become a burden to the savers of the world. How do you feel to come here once again, hat in hand, to us, a nation that the west only recently granted admission to the WTO but still holds out of the OECD and other international governing bodies? We read in your press that China is a third world country. Why then is the United States, the leader of western democracies, borrowing from us, and under ever more desperate circumstances?

Geithner: I’d like to get back to the matter at hand...

Cheng: Please be patient. I not you will frame this discussion, thank you.

We are tired of the accusations of your Congress that we manipulate our currency. Tired of your western paid so-called “economists” criticizing our use of our “excess” savings, as you call them, as we see fit. Tired of so-called human rights organizations, financed by your British allies, accusing us of human rights abuses because we will not abide dangerous cults inside our own borders. Tired of your “Pentagon” accusing us of increasing our military capabilities to threaten the United States, even though our spending is a fraction of your own. There is not a single Chinese military base outside Chinese territory yet America has 747 bases around the world, including many near to China. Everyone can see that your weapons industry has ties to your government. It creates this excuse of a military threat from China to justify appropriations of public funds from your legislature. And who do you ask to cover the gap in funding for these programs when you can’t raise the funds through taxes or from domestic or foreign borrowing? Us! Your “enemy.” It’s outrageous. Ridiculous.

Geithner: To keep this conversation constructive...

Cheng: These are the matters that we will discuss today.

Geithner: I’m am not sure how in the context of these negotiations I can address your...

Cheng: I will help you. All in good time. When we met in July 2007 we held $480 billion in U.S. Treasury bonds. Now we hold $768 billion, an increase in nearly 40% in less than two years. Obviously, our foreign exchange needs did not grow by 40% in two years. We want to exchange a portion of these securities for assets of value to us. What have you come to offer?

Geithner: I have come prepared with a few ideas, but before I get to those there is a matter of concern to us. Officials of the Chinese government have over the past months made a number of public statements questioning U.S. sovereign debt quality, particularly since we began to execute emergency government investment programs to support our economy similar to the Chinese government spending programs. Your central bank representative Yu Yongding repeated these points to me yesterday, and the matter also came up at a speech I gave at Peking University. U.S. government bonds represent the gold standard of sovereign debt in the world...

Cheng: Yes, we read the reports in your press.
Geithner tells China its dollar assets are safe
June 1, 2009 (Reuters)


But again, the purpose of this meeting, nor the last one, is not about future purchases. We own a great deal of U.S. debt. We do not need to be “sold” on U.S. debt. The question is, what do we do with the U.S. government securities we already hold? This question has been a matter of intense internal debate here, and—quite frankly—deep and growing concern. We used to argue within the government about the urgency of it, about the soundness of the policy of buying U.S. debt with savings of our people, but there is no disagreement anymore. The actions of your department, and your central bank, and your legislature over the past year have decided the argument. Something must be done. Something has to change.

Geithner: Are you referring to our fiscal stimulus programs? These amount to 5.5% of 2009 GDP. These are reasonable compared to China’s outlays of 6.8% of GDP...

Cheng: Your projections assume that your GDP will not shrink. That is unrealistic. Our stimulus programs are not, as you claim, like those pursued by your government. They are not even remotely similar. When your legislature approved spending in February this year no national improvement plan existed to build on. The as yet unelected Obama administration hastily threw together a plan that focused on infrastructure and alternative energy, near as we can tell based on articles published in magazines. But here in China we accelerated a well-defined and efficient plan for investment. Our spending will result in an even more competitive economy, yours in even more public debt and little improvement in infrastructure to help make your economy more productive. And if not in rising productivity, then in what are we investing by buying your bonds?

No, we are certain that we will not make additional purchases of US treasury bonds, or at least no significant new purchases, and only in short term instruments. Further purchases shall be modest and sufficient to avoid a dollar crash.

Geithner: The US dollar is not in danger of crashing.

Cheng: You have us "over a barrel," right? If we do not buy a certain quantity of US debt, and Japan does not, and the UK does not, and other nations do not—and who but China is in a position to buy now?—that U.S. interest rates will rise, by our estimates 100 basis points per year. Such a rise in interest rates in the U.S., caused simply by your creditors collectively “doing nothing” will halt and reverse your economy’s weak recovery. Your already falling housing market will crash from rising mortgage rates. If the U.S. economy shrinks more than others’ then the dollar falls against the others, and the value of our U.S. debt holdings with it. Then your interest rates rise more. And so on. We want to use these holdings to finance purchases of assets abroad. We want to avoid that cycle. We have an interest in seeing the purchasing power of these remain high, but do not take that for a perpetual commitment to buying US debt. We shall purchase U.S. debt only at levels necessary to avoid such an outcome if we can, but no more.

Geithner: I appreciate that, your position. As you know, our central bank has taken steps to mitigate the problem of rising interest rates caused by reductions in foreign purchases of U.S. debt, to support the U.S. housing market, by making purchases of treasury and agency debt directly.

Cheng: I hope you are not suggesting that your central banks’ monetization of expenditures appropriated by your legislature for the benefit of politically important industries was done for the benefit of your foreign creditors? Quite obviously these are desperate measures, covering for the damage done by your corrupt financial industry. If continued these spending policies lead to certain calamity for your currency no matter what we want, unless your economy recovers within, say, six months and tax receipts with it.

We see your state media selling the idea of recovery hard, for the benefit of the currency and bond markets. Consumers are asked to go spend money. Your stock markets are inflated to increase consumer confidence. The hope is that recovery of the American Economy can be willed into being. But if economic growth were so easy to accomplish why can’t the Mexican economy become as strong as Canada’s by the act of convincing the Mexican people to spend more? The idea is absurd.

Look at the data. Your people don’t have money to spend. They have debts. They have no savings. Their incomes are falling. Tax receipts are off by more than 30%.

Closing a multi-trillion dollar gap in tax receipts and foreign borrowing by monetizing debt is a dangerous game. Your government is playing with the reserve status of the currency. Every other nation that has tried this has failed. The dollar has saved you so far, but the reprieve is temporary. That gives this meeting urgency.

Geithner: The reserve currency status of the dollar is not in question.

Cheng: Your creditors will be the judge of that.

Geithner: China purchased U.S. assets for the risk-adjusted returns and let us not forget that China pursues a policy foreign bond purchases, especially U.S. debt, in order to effectively make the yuan more competitive, to improve China’s trade position.

Cheng: We are tired of this claim. If we do not purchase sufficient dollar denominated financial assets to offset foreign exchange, the yuan will appreciate against the U.S. dollar.

The euro as a viable alternative to the dollar, and we are increasing our euro position.

But getting back to the purpose of this meeting, as I told your predecessor two years ago, we value assets such as raw materials that allow us build our economy. We want to buy resources companies in the US as we do in Australia, but we understand the political difficulties. We have rules on foreign ownership here, as well. But there are philosophical differences that we can work on. Your government’s decision to acquire a 70% stake in your nation’s largest automobile manufacturer is a step in the right direction. Here 32 of our largest 33 companies are majority owned by government. Over time, we see America becoming more like China and welcome this development. When more US companies are majority government owned, our governments can arrange for transfers without the current difficulties. Our concern is that the dollar does not sustain value through that process.

Geithner: The dollar...

Cheng: We also welcome American companies to China to build plants here. Not only do these plants supply products for export earnings but our managers learn important skills, such as how to design and build high technology products. For example, telecommunications. As you know it is not toys and clothes sold at Walmart that make up the bulk of China’s exports to the U.S. but industrial goods, by dollar volume.

I’ve brought charts to show you to make my points.

We learn from Americans, Germans, Japanese, Taiwanese and others how to make these high value goods. Over time we become more independent and able to compete in the global market for high value goods and labor. This is a well-worn path to development that other nations have taken, such as Japan. But in the case of China your dysfunctional political bubble economy has sped up the transfer process. Your bubble economy booms and busts have been a boon to us.

I will provide you an example. After your reckless early 2000s technology market bubble, U.S. companies such as Cisco Systems cast off their U.S. based technology manufacturing to improve profits and today China manufactures and exports far more telecomms equipment than the U.S.

After the U.S. crash, many of your major manufacturing companies, particularly in computer hardware technology, outsourced production to China. Many, such as Dell and Cisco, are now R&D and marketing companies. We manufacture high tech products for export but we make our own high tech equipment for domestic use. We use different standards and protocols, as Japan did, for networking and wireless, so our market is not “interesting” to your technology equipment companies. Remember 3Com?

Geithner: I’m sorry, you’ve lost me.

Cheng: Well, your latest difficulties with your political bubble economy present a new opportunity for us. We’d like to import the most important of all U.S. assets: human capital. After 2001, America trained our engineers in the U.S.—at MIT and Stanford—then sent them home to us for “security” reasons! Today, with U.S. economy in shambles but China still growing robustly, they no longer wait to be shipped off by your immigration services. They come here for better job opportunities and a high standard of living. They earn less than in America but live like kings by American standards.

We like to say that America does not have the most engineers but has the best. Ten years after this latest blow up of your economy, China will have both the most and the best human capital.

Geithner: I’d like to get back to...

Cheng: What does this have to do with our discussion today, of America’s debt to China? I’m getting to that. You see, as long as the Chinese economy performs better than the U.S. economy, without the baggage of empire it is a matter of time before China acquires most of the advantages that the U.S. has enjoyed for over a century. We do not have an overextended military with hundreds of bases and millions of troops stationed around the world. We do not labor under the political liabilities of special interests as you have in your finance, insurance, real estate, weapons, tobacco, agriculture, oil, and pharmaceuticals industries. Our social programs are modest. And not only do we have no foreign debt, we are creditors to so-called “rich” western states.

Geithner: I’d like to assure you that the U.S. government has no intention of allowing the U.S. to lose its sterling credit rating...

Cheng: A curious choice of words, considering that the pound sterling was once a reserve currency, before the United Kingdom committed itself to projects that it could not afford, much as the United States has. Perhaps if I recount recent history I may orient you to our perspective.

You will recall that your nation’s stock market bubble popped in 2000 and deflated well into 2003. A recession in 2001 hit incomes hard. Corporate and individual tax receipts declined with incomes and profits. Taxes on capital gains fell with stock prices. Private foreign investors in U.S. agency and Treasury debt exited the market as they have during each recession since the early 1980s, but this time the United States government could not take the loss. Your government was in need, both money to fill the tax gap to fund government operations and also money to finance economic stimulus programs—focused on housing—to restart growth. Central banks stepped in to fill the gap left open by private investors.

Private investors nearly stopped buying US treasury debt in 2003

Private investors stopped buying US Agency debt in 2006

America’s political and economic ally Japan took the lead role in the bailout of the United States economy and government that time. By the end of 2006, Japan held $650 billion of a total of $2.2 trillion in U.S. treasury debt held outside the U.S. while China held $320 billion, half as much as Japan.

We made most of our purchases of U.S. debt after 2006. As I mentioned before, between October 2007 and October 2008 we increased our holdings from $450 billion to $650 billion.

China took decades to purchase $320 billion. We doubled our holdings in only two years! We had our reasons for buying so many bonds at that time. We were more dependent on the U.S. for export income. In 2006, we earned 31% of our export income from the U.S. and Canada.

Today our dependence is less than 20%. If U.S. demand for our exports falls by 50% our exports will fall by 10%, a tolerable loss.

Then in 2008 the U.S. suffered an even greater financial and economic crisis than in 2001 as your country’s financial system collapsed, then your economy, then much of the global economy, but not all of it.

At the end of 2008 only China stood by the United States as a significant net buyer of U.S. Treasury bonds. Other U.S. allies made token contributions to the effort.

Curiously, the largest net sellers were America’s former traditional tax havens, Caribbean banking centers and Luxemburg. Cracking down on savers with more stringent tax laws did not quite have the net benefit expected, did it? The United Kingdom from which, it is widely known, Middle East Oil money flows also reduced holdings.
But I digress.

China is now far and away the largest holder of U.S. Treasury debt, with more than twice the holdings of Japan, and one third of the total.

The chart shows only Treasury debt. We as well hold a considerable amount of agency debt, the bonds that back your housing market that is collapsing despite your government’s best efforts to support it through your nationalized government sponsored enterprises Fannie Mae and Freddie Mac. We agree with those who predict that the price of the collateral on those mortgage loans—housing—will continue to decline for more than a decade as occurred in Japan after a similar property bubble collapsed in 1992, where prices fell for 18 years. We are more optimistic about the U.S., however, and agree with forecasts that prices will not bottom until 2015 or so.

No, no. We are certainly not interested in buying more agency bonds.

Again, our interest is only in purchasing as many short term Treasury bonds as necessary to maintain the purchasing power of our current dollar holdings and to manage our exchange rate as we see fit. We will use our long duration US securities holdings as collateral to buy assets such as oil and metals in Latin America, Africa, Australia, and Canada that we need here in China, to improve the living standards of our people. These are, after all, their savings. In return, the United States will reduce its foreign lending requirements by cutting wasteful spending, starting with your bloated military. The U.S. will cease to meddle in our internal affairs. Your Congress will stop berating us for "manipulating" our currency. We will diversify into other currencies and implement foreign exchange programs with our trade partners, providing convertibility of the yuan directly into currencies other than the dollar. The U.S. dollar will over time cease to be the major global reserve currency but will become equal to the euro, yen, and yuan.

That is, as you say in your country, “how we roll.”

Thank you for coming.


Ventriloquist said...

@Anon @ 10:52 AM


No, you're not alone. In fact, you're spot on.

I LOVE the fact the Mugabe is here.

Someone with an intellect equal to I & S (far as much as many here would deny it) and who has the incredible capability to put Illargi on the defensive.


Ventriloquist said...


This goes without saying, but it needs to be said.

I found Stoneleigh's contributions to the entire June 5 comments thread quite incredible.

She is one of the most lucid intellectuals to be posting on the internet today.

I'm amazed at her many excellent responses yesterday to thoughtful and cogent questions posed.

Thanks Stoneleigh for your fantastic work.


Anonymous said...

@ Ilargi Re: Timely Commenting on your Posts

You need to remember how unique your commentary truly is. Nobody sounds like you. It takes a bit of time for your writing to sink-in. I need to wrestle with it for a few days before I come to terms with the implications. There are many doomers, but only one Ilargi.

PKP said...

Anyone who wishes to take a short break (4 minutes and 30 seconds) while reading today's financial news on TAE should check out the following song (on You Tube).

Shirley Bassey "NEVER NEVER NEVER"

D. Benton Smith said...

Well, Dr. J sent me off to do my homework and by the time I finished enough of it to be forced to concede that he was right, and I was wrong, it was too late to post this into the original thread.

Dr. J, you were right on three points. First is that glucose oxidation is not the only energy producing process (there is, at least, also the fatty acid oxidation sequence of events... triggered by low glucose levels.)

The second is that I should not have challenged a fact without checking more thoroughly my own grasp of the facts.

And the third is that our hosts would almost certainly appreciate me staying a little more on topic.

VK said...

It is rather interesting to see how fraught a position Gordon Brown seems to be in. The Blairite part of his cabinet have caused a near coup! The losses in the elections have been terrible at the council levels.

I wonder how socionomics fits into this? We have a situation where the incumbent was never so openly challenged to resign BUT the markets have been on a bull market tear for 3 months and house prices have infact risen in the UK.

Wearing my tinfoil hat, I wouldn't be surprised that this is part of some larger conspiracy to make politicians do the bidding of the British elite. The MP's expenses scandal came at a time when socionomics would suggest the Govt be thanked for bringing about recovery (however false), I suspect that the MP's expenses were known to the major newspapers for years but they decided to act in order for the powers that be to control parliament.

I know it's a long shot but think about it, elite owner tells editor to 'uncover' expenses scandal as the politicians might be openly questioning the influence of the elite. Once story is planted, the unwanted MP's get taken out. Who knows, Brown might be replaced with another puppet, more subservient to the interests of the elite.

The cynic in me can not fathom how and why MP's expenses were kept hidden for so long. It's on the public record - what they claim etc. Why now? Why so much sustained media pressure? Every British newspaper is talking about the resignation of Brown and new elections. Something strange is stirring in Britain.

Anonymous said...

I keep hearing people apologizing for not staying 'on topic'.

What exactly does that mean?

Are we obliged to keep comments limited to topics handled in the post of the day? Are comments simply a way to lavish praises on Illargi for doing such a fine job?

Why in the world would anyone give a rats ass if a conversation strays 'off topic'? I find these wanderings highly entertaining and informative.

The more discussion, the better!

ca said...

I second david's comments re Stoneleigh's contribution.

jal said...

Loved the title ...
"All my tomorrows were yesterday"

I like it better than mine ...
"Yesterday is gone!"


ca said...

Stoneleigh --

Are the comments in the following post consistent with how you envision events playing out?

Dr J said...

@ D. Benton Smith - very gracious of you.

@ anon 11:31 - our hosts had indicated earlier their displeasure with the flamewars which occasionally erupted on topics extraneous to the discussion of economic and political issues which are the raison d'etre of this blog. I think there was a tacit understanding that we should behave ourselves in that respect. Hence the references to staying on topic from time to time when we do tend to stray.

PKP said...

Securitization: The Biggest Rip-off Ever

Anonymous said...

The comment recently about the need to concentrate on our respective gardens instead of little blue computer screens hit the mark squarely...I find myself completely engaged this year due to my exclusive use of seed,instead of greenhouse starts...lots harder to get the lettuce up w/every slug in the forest coming to "brunch at snuffys".As I am using 2 year old seed,I have had some "dissapointments"...,but then I recall many times my grand-father re-planted his garden from mostly bad weather.

I hope our gentle hosts remember that there is a huge group of us who use this as a way of being able to discuss rationally,with others of like mind,what many would consider tinfoil hat material.I am fortunate to have several friends who have the same mindset,whom I have sent this direction[Hi Dr. Pram!]We live in the Matrix,and to step too far out of bounds will result in the 'bots being sent out...
Here we can talk..for awhile anyway...
I am having a nice increase in my colonies...I have been able to secure a supply of queens commensurate with limited finance,so I am just barely keeping ahead of the natural advance of my girls...I have decided to try and do my queen rearing thing in the next month during the top nectar runs...god I hope this works...

I keep seeing so many people running on about how after this catastrophe China's star will be in ascendancy and we all better learn how to speak mandarin...

I do not thinks so folks,and here is my logic..

The entire world manufacturing base is pretty much in china now.We have shipped them just about all the heavy[energy intensive] industry we have now,and they have cheerfully put it all to good use,creating what some call the worlds manufacturing floor.
Our industry is now small,fast ,and lean,and we have a large portion of the worlds "system specific type"trained engineers/workforce,as well as a fair to middling transport system.

We have a whole lot of small suppliers
We have the .mil research labs,and others cranking out god know what.

And we have a whole lot of people who KNOW we are in deep shit due to the lack of stable petroleum supplies..

China bought the 19th and 20th century infrastructure for heavy,energy intensive production....which is not where the world will be will be micro companies,small manufacturing...and energy efficiency....[Peak was last year]

They will be making plastic pumpkins when the shops here will be making low end solar gear,and local goods &services...

I hope...


APC said...

I found this article kinda interesting and thought perhaps others here would also.

Anonymous said...

Advice and ideas being gratefully accepted:

1) I have a mortgage at 2.75% (I'm in Europe).

2) I have bonds and a few investments, the yearly interest which I receive covers the interest due on my mortgage each year.

If I sell the bonds etc. I will be able to pay off half of the entire mortgage today.
Would it be best to sell the investments and at least be out of mortgage debt by 1/2 or keep the investments and just continue to pay the interest on the mortgage?

I remember somewhere on this blog hearing the words 'get out of debt', and I wonder if it would apply to somebody in my situation.
What I am afraid of is that if/when things get really strange everything may go POOF.

Any thoughts would be appreciated.
El Gal - please put in your 2 cents if you like since you did such a good job on the last question.

carpe diem

VK said...

@ carpe diem

Reading your post I can see you are attached to your home as you didn't consider the possibility of selling it.

What I would suggest for entertainment value of course is to sell your home at current market price and rent. Your home price is going to take a steep fall once the secondary leg of the market crash begins, hence sooner or later you're going to be 'underwater'.

It is a consistent recommendation on this blog that you be entirely debt free, to rent not buy and to have as much liquidity on hand as possible - that means, short term treasuries in your Government's currency and maybe some physical metals (t- bills should be less then one year and less then 6 months preferably due to the possibility of a bond market bust up)

While it might seem surreal to suggest it but peering into the future, you also want to be mobile. Renting gives you that option, it's a very real possibility that civil unrest might break out in Europe and elsewhere, so best to be in a position to be fleet footed.

Stoneleighs words were that we would have patches of green in oceans of red (via Naomi Klein's Shock Doctrine, think green zone Baghdad)

Anonymous said...

Snuffy, it's a nice hope, but misplaced. We've also sent our high tech jobs overseas. The semiconductors, the firmware and software, etc. We all knew about the manufacturing jobs, but while you had your back turned the design jobs went too. There are precious few Americans going through science and engineering programs in Universities - that's been true for some time, and the thought was that it didn't matter because many of those foreign students stayed here anyway. But I'm not so sure if staying here makes as much sense for them now or in the future. Meanwhile, the Chinese are pumping out technically educated people in huge quantities at home.

The company I used to work for (high tech electronic equipment) was run by young business school grads from the US and Europe who were ambitious and knew how to do everything (they certainly thought so). They believed in having an organization with zero fixed costs - if your sales drop by 20% so should your costs, etc. They could not see that having no fixed costs meant having no assets. Since they did not know what the organization actually made, nor how it made it, they could not recognize any assets - and therefore anything that cost money was a negative, and something to be gotten rid of. They had outsourced most manufacturing, and design was becoming contract management. The idea was that they would concentrate on their "core competencies" - the big ideas, the tricky high tech stuff. At the same time they were contracting with Chinese universities to develop the state of the art algorithms they would need to get an edge on competition....

There is a certain arrogance at work among some in Western industry - you can farm out the manufacturing and product design, those are just grunt work anyway. You'll still retain control because you've got the big brains with all the big ideas. But after you set people in far-off lands up with world class design and manufacture, you'll soon find they pretty damn smart too, and in fact you've got nothing but a shell while they can do this thing called "value add". Then they can buy you and you can be their local marketing arm. And of course the people at the top of our companies only care about their insane bonuses.

Yes, there are still some great scientists and engineers in the West, but once the organizations are scattered it takes time to build them up again, which will be very difficult in our present and foreseeable financial situation. I'm afraid most of our companies are but empty shells dependent on very long supply chains for product manufacture, design, parts, and supporting science and technology.


Anonymous said...

Carpe Diem to VK 7.05.....

Thanks for the input but it doesen't actually answer the question I asked. Does it?? :)
Also, just purchased my small dream place in the alps last year. Got a great deal and am self-sufficent here as well. Would never consider selling. This is it for the rest of my life unless some strange force enters the picture and things turn upside down for all of us.
On that note:

Still a bit confused. Should I sell all bonds/investments and at least have the mortgage 1/2 paid off while at the same time losing the yearly interest coming in.

Stoneleigh? El G.? and VK....can you please revisit my question now knowing that I ain't goin' nowhere unless they drag me away kicking and screaming.


Anonymous said...

In many ways, the Ministry of Propaganda, run by the Kriminalklass, is flogging the notion of Inflation because it drives people/sheeple to prepare in exactly the wrong way for a deflation.

Stoneleigh has said that in an inflationary scenario, taking on debt is a good idea because inflation will effectively wipe it out.

If you are under the misguided impression, fueled by the Ministry of Propaganda, that inflation is imminent, you might get conned into taking on more debt, like buying a house that still has to lose 30-40% of it's value.

This of course is the coup de grâce for your finances.

It's bad enough to have deflation, but now you're double hosed because you took on great debt when you should have been shedding it.

The Wall St Mafia are working every angle down to the bloody end game.

Suckering people into recourse refinance loans on houses that will tank in value over the next year or two.


"If you steal the pennies off a dead man's eyes, you send him to hell, for he has no way to pay for his passage."

bluebird said...
This comment has been removed by the author.
Anonymous said...

Well said Twilight

American's brag 'we're number One' and yet in their own elite technical and and engineering universities, the majority of graduates are foreign nationals. America can't even field a majority of it's own citizens to fill it's own engineering colleges.


They're not even close to being number anything at this point in history. Zero is not a number but they seem close to it.

The 'financial services industry' lured far to many students to the rocky shores of it's Ponzi-land mentality. The Siren call of Big Easy Money (BEM) with no heavy intellectual lifting (like in science and engineering) has destroyed the present and future base of US manufacturing for the foreseeable future.

The tables have been turned on the US, in large part by it's own incompetent hand and the traitors in government and business who sold it out for their own gain.

The U.S. deserves the whirlwind of poverty it shall be reaping. Poverty in fact and in spirit. And an intellectual poverty of vast proportions.

There will be no alternate energy projects or efficient transportation or sensible food product systems for many generations.

The industrial base is Gone.

The financial base for the efficient allocation of capital and resources is Gone

The topsoil is Gone

The oil is Gone

The assets are Gone

The word depression will apply to more than a financial state.

It will be the mood of the populous for a long, long time.

They'll be dropping Prozac from the helicopters, not debased QE dollars.

bluebird said...

Trying this again.

For people who don't want to keep paper dollars in the house for fear of fire, here is a $1 coin program by the U.S. Mint. The $1 coins, wrapped in rolls of 25, are available in quantities of $250 per box. Maximum order quantity is 20 boxes or 5,000 coins.

Five different Presidential designs are available, as well as a Native American design
$1 Coin Product List

More info
$1 Coin Additional Info

This is the description for the Native American Design
$1 Coin Native American Design

bluebird said...

P.S. to my previous post. I like the $1 coins because I can put them in my grandkids holiday cards, and barter with them in the future. I'm not rich enough to buy gold so these are much more affordable to me. Would there be any disadvantages?

VK said...

@ Carpe Diem

I can not answer the question you have asked but just for the sake of imagination. Isn't it possible to rent in the Alps? If you rent for a a year or so your home price could be 50-70% cheaper? You could buy it back for a song :)

@ Board

Aah! This is why I still keep reading Ambrose Evans, he keeps coming with little golden nuggets of juicy information from time to time.




Anonymous said...

$1 coins

Presidential designs are available

Since Bush the Lesser was such a two-bit president, he coin is only worth 25¢


Anonymous said...

This link sems to verify Snuffy's assertion--the U.S dominates the bottom tier of the top one-thousand manufacturing firms:

Jim R said...

@David last evening,

I wouldn't take a troll's ability to rile Ilargi as a mark of intelligence. And if such 'intelligence' is absent this group, you could always listen to talk radio.

Anonymous said...

Carpe diem to VK 10.29.....

I live in a sort of exclusive area. Rents are thru the roof - NYC prices. Impossible to buy a place for what I paid and virtually nothing available unless you have many millions to spend - which I don't.
I was told I would never find what I found, that it was a needle in a haystack. Miracles do happen - I found the needle.
If I sold my place (NEVER!!) which I only bought 1 year ago, it would be gone in a moment. Places like this do not exist. As rents are unaffordable and this is my dream come true. I'm staying put.
My instinct is to pay off half of the mortgage so perhaps the question is moot. When things enter the strange and bizarre (not that they haven't already started), at least I'll have the investment in property and not some airy fairy bond out there.
Where I live home prices keep going up and up (at least for now). Strange but true.

J.P. said...


Judging from the US Mint website, these $1 coins seem to be mostly copper. I have yet to see one on my infrequent visits to the USA (unlike those awful dollar bills that seem to breed and multiply in my wallet), so I would guess that regular folk are unused to dealing with them and might be unwilling to barter for them going forward.

Therefore, I might suggest your silver American Eagle coins as an alternative. You retain all the advantages of the $1 coin (numanistic value, resistance to fire), but you also get an object that is a historical store of value (the physical commodity) and useful in an industrial sense. I believe you should be able to buy 1 oz silver American Eagles from the Mint or from a dealer for about $20-$25 each.

jal said...

It is awesome to be able to hear the personal stories and observations from the readers from around the world.

Prosperity still happening there ... normal here... recession in this corner ... depression over here/there ... etc.

Without the web, there would be no way of knowing what is happening and what could be happening. We would be limited to our own personal experience and observation and therefore would probably be missing the "big picture".

Everyone's story and observation is a "dot" and a verification of the "official" news media presentation/claims.

The challenge of linking those "dots", weighing their effects and trying to establish a timeline of the final outcomes is a planner's dream or nightmare.

Anonymous said...

@ carpe diem

I have some interest in following in your footsteps and securing an alpine retreat, been looking at this for some time.

Wondered if you could kindly pm me and we could discuss?

globetrotter @

thanks from a regular TAE reader and occasional poster

D. Benton Smith said...

@ Anonymous 10:58 AM

If the rents in your rather exclusive area are astronomic, and prices continue to climb (in apparent defiance of what's happening in the rest of the world), then the financial question you should be asking is "Are the fundamentals underpinning this phenomenon stable, or are they a bubble?"

Is the location home to old money and long established class distinction, or is it a passing fad "venue de jour" of socially ambitious new money?

If deep recession becomes long term depression, can they easily weather the storm and keep their property, or would they default and skedaddle (thereby precipitating a price collapse?)

A cold eyed evaluation of the financial stability of the OTHER residents might suggest the wisdom of selling while the location is "hot", and buying back in after the bubble bursts.

Hopefully your own income is safe enough that should worse come to worst you can comfortably ride things out from the comfort of what soulds to be a very nice place to live.

VK said...

@ Carpe Diem


Must be Switzerland or France then I gather? I can see the desire to live in such a beautiful part of the world ;-)

The psychology of optimism is strong right across the world. Things are only going to get better and recover. I wonder what the mood will be next year, when the dark hand of reality exposes the full extent of it's cards of deflation, deleveraging and depression?

Might as well live it up till then and in your part of the world i'm sure you can!

Stoneleigh said...

Carpe Diem,

If you are determined to hang on to your place (and it sounds wonderful), then I would get rid of the debt to the extent that you can, or the likelihood is that you would lose it at some point. Be careful to hang on to at least several months worth of liquidity though (under your own control).

Having a mortgage is a big risk, even if it currently seems manageable. Is your income source depression proof? Are there any other people with whom you might be able to share your dream place in order to pay off the mortgage with a larger pool of money?

RC said...

Jal, the personal stories from the world are just that. While the local situation may be stable or not, the individuals' finances and income sources and investments very much position them in a certain strata.
On top of that, due to the unique characteristics of certain locations
{midtown Manhattan vs. small Caribbean island}, even though they may be of precisely the same size and even elevation, due to accidents of history, climate and extreme differences of population
and work options, the economics of these places are always very different in good or bad times, and individual persons living on these islands {in some cases the same persons in different seasons}
have particular economic experiences that cannot be readily extrapolated to any larger set.
It is important to understand the details of the anecdotal and not to confuse them with legitimate statistics. Just sayin'.

el gallinazo said...

Carpe Diem

Of course I agree with VK and others who have responded, but you want your question answered given only two options; stay as you are or sell the bonds and pay off half your mortgage.

Of course we do not not your whole picture including your income vis-a-vis the mortgage payment and your job security.

However, two things come to mind.

If you sell off your bonds and pay off half your mortgage, if you have a reversal of fortune, say lose all your income and are forced into foreclosure, you could wind up losing everything. If you hold the bonds, at least you could sell them into the secondary market to keep the mortgage bank from your door.

However, we may be facing a global bond dislocation, and if we do, the value of your bonds if you are forced to sell would be well below face. I would probably sell the bonds and put the money into short term German treasuries directly with the Bundesbank, take the hit on the interest, and pay more of the mortgage directly from your income. OTOH, if your bonds go back quite a few years and are paying well over 5% and reasonably secure over the short term, I would just hold pat but stay very alert to a failure of the issuer of your bonds.


No, I never got dengue - knock on wood. I wear blue jeans, short sleeve tee shirts, and socks at all times, slather with DEET when appropriate, and frequently light a candle to the Virgin.

el gallinazo said...

Not only is Stoneleigh the smartest person I know of, she is kind and can explain complicated issues with amazing clarity. Whether she suffers fools gladly is hidden from the public, but she responds to the most inane and loaded questions with reasoned equanimity. I hope she had performed a few miracles as well, so when the time comes, she will be eligible for beatification.

el gallinazo said...

A few days ago, I suggested that Vanity Fair would probably publish an in-depth article on the plight of the Wall Street trophy wife in the near future, Well, it's not an in-depth article and not in the future, but well worth a look and a laugh.

Anonymous said...

VK, nice link, that( ), thanks

Snuffy, I live in slug country, where a man quails as the slugs smoke Marlboro with no filter, so have been busy duck herding my ducks on the garden borderline (I use a 2.5 ft wire fence as these Indian runners and khaki Campbells are very low flyers), that seems so far to have made slugs a mere wisp of a memory. I would like to get a smaller duck variety that I can run in the garden itself as I can only let these guys in in winter otherwise much crushing of the cabbages occurs. I also have high hopes they will deal with my coddling moth problems but time will tell on that. Duck eggs, I find have a limited market here but they do make handy little gifts, to make to neighbours and new acquaintances - real ice breakers

On the China thing I have been suggesting Mandarin to my just graduated physics major son but he just looks incomprehesively at me and asks if English is my second language


Anonymous said...

Above that is uncomprehendingly not incomprehensibly and maybe my son is right, but I just can't figure out what my first language is.

el gallinazo said...

One of my closest friends down here is a Russian émigré professor emeritus of applied mathematics and material sciences at a major state university. He also runs a small lab and makes quite a large side income solving very practical problems in polymer aging for large corporations. All his proteges are post docs. He reports that it is now hard to hold onto them - they are all starting to return to their countries of origin. His favorite one, an Iranian, is going back shortly. So are a lot of the Chinese and Koreans. He says that the Americans aren't worth a damn, but he is very demanding of his students (if not his plumber).

Stoneleigh said...

Thank you for the kind words friends :)

bluebird said...

J.P. - These $1 coins are meant to be used just like the paper dollar, not for investment purposes. Every few years, the United states tries to get the public to use dollar coins which last longer than paper dollars.

First they tried with the Susan B. Anthony coin, than the Sacagawea coin, now the Native American coin series, along with the Presidential coin series.
More info

Occasionally, I do receive the $1 coins as change from purchases at the store, but most Americans still prefer using paper dollars.

I thought I would order a box just to have something to insert in the holiday cards for the grandkids. (though I may have to use them as barter someday, and people would accept them because they are legal tender)

Currently, I am stockpiling necessities. After that, if there is extra money, then I would buy silver American Eagle coins.

Anonymous said...


Concerning the Alpine discussion, perhaps we should set up a little side group because I assume it does not interest most people here.

For what it is worth, I live in the Alps and have property to sell. The Alps have long struck me as the place to be for a number of reasons, including ample water, the right balance in access to cities, train lines, virtually ideal living conditions, fairly cheap land, a social system based for centuries on solidarity (to the point that it has long served as a "social laboratory" for research institutes) and, last but not least, a physical setting that instils a tangible sense of contentment every day.
I am also very interested in the European bond situation.

Carpe diem and Globetrotter, if you are interested in this discussion, you may contact me via El Gallinazo who serves as a repository for contact addresses. Any other persons interested?

El Galli, could you please remind us all of how we may contact you?


Anonymous said...

The big question as I see it is what is the Fed's next move?

They've painted themselves into a corner. So what are they thinking in order to get themselves out of it?

Will they drive down the stock market via Goldman-Sachs? Help Latvia implode to bolster a flight to safety? Certainly more propaganda, but that's wearing thin.

Anyone care to speculate?

Anonymous said...

Carpe Diem to....Stoneleigh, D. Benton Smith, VK,
El G, FB - hope to address all of you below.

Wow. Never expected to hear back from so many. Thank you! I've been in a real quandary about what to do (failed math and science and excelled in the arts!). Have no idea about how economics work and rely on my bank manager who chastises me (in a nice way) for wanting to sell all my bonds and the few energy stocks I hold. I gave him this websight which he tells me he is 'studying'. Will see if it helps what I see as his overly optimistic world view and misleading advice.

To get back - thank you for all of your insights which have been very illuminating. I finally feel like I'm getting a grip instead of floundering around in the dark.

Thanks Stoneleigh - I'll hop to it this week. It was my gut feeling all along but the beastly bank manager (actually he's a very nice man) keeps trying to get me to hang on to my investments (he is so convincing and persistent!).

Exclusive area in the sense that it is not far from a glitzy ski resort that has been around forever. I am not rich (or glitzy!) but I did manage to save a bit and buy a very small apartment in an idyllic location high in the alps. Breathtakingly beautiful place. It's been a dream of mine since I first came here in the late 60's. I am middle aged, ex-hippie now and don't see moving again, travelling yes - but no more moves.
Living it up to a point (the red wine flows) but live a quiet contemplative life with my animals and living as close to nature as possible in a cold climate.

That's all folks and thanks again.

Anonymous said...

Hello again,

Just catching up on the discussion on European bonds.

Personally, I would do as El Galli suggests.

For a long time, I thought that German bonds would hold up against sinking Treasuries (remember Hugh Hendry with the wild accent last winter?), but I have come to the conclusion that even the best European markets largely mirror the U.S. market and, more importantly, will continue to do so. Consequently, a dislocation in the U.S. will produce similar results here and the value of any current bonds will plunge. In short, the general rule (stay liquid) propounded by Stoneleigh holds in Europe as well. So, as El Galli suggests, I would sell and put the money into Tagesgeld at the DFA (see address below) or something similar.


el gallinazo said...

TAE Registry (as of now)

Brian M
El Gallinazo
FB (Francois)
Nightly Summary
Reluctant Poseidon Hamster
Rototillerman / WV Farmer

My email is hpaulfuchs which can be found at gmail, a commercial corporation. I relay addresses and messages to anyone who registered.

The way it works is that someone here can email me with a request to another poster here. I will simply forward the request by email, and the recipient has the choice of whether to respond directly or not.

For those of you who tuned in late, I am not an agent for the NSA, and though a plumber (some protested here that I was too dumb to be a plumber and others too smart), I never worked for Nixon or H.R. Haldeman, and RC and I, though equally cantankerous Caribbean plumbers living on God forsaken islands, are different people.

Anonymous said...

Well, Latvia had it's Parade of Blondes to cheer up the nation, I suppose Manhattan could have a parade of Trophy Wives.

What a spectacle it would be.

You'd have to pass out sunglasses or the bystanders would be blinded by the Bling.

A new interpretation of Dylan's Blonde on Blonde

Anonymous said...

I am perplexed by the concern about being underwater in a mortgage. I guess I am from the school of thought that my home is where I live and not a vessel to make money. What if Stoneleigh still owed money on her farm and went underwater. Would she just walk away? Or try to sell it? I doubt it.

If you do not plan to leave your home, I dont see what it matters if the value of it goes below what you owe. I can see how this becomes a problem if you lose your job and cannot pay. But if you lost your job and your home was not underwater the problem would be the same.

What if you have a pretty safe job? Maybe you are a mortician or a nurse. Say you buy a house valued at $100,000. You put the 20% down on a 30 year fixed rate of 5%. So you are locked in at a $500 per month payment for the next 30 years or until you pay it off. If the home value drops, by whatever percentage, and you never planned to sell, what is the concern? You signed up for a 'lease to own' arrangement. You still make the same payment. Even if the value never gets back to where you bought, what is the problem? If you happen to be one of the suckers who lied to get a loan, or paid way too much with confidence of selling for profit, or took out a second mortgage for quick cash, you are screwed and probably deserve to be. They are like the people who buy into market bubbles at their near peak and then lose their shirts. At least the person with the mortgage has a home still standing there when the value drops. But what about the guy who has the steady job with little risk of loss, who paid a reasonable price for his home, who planned to grow there and live there forever? What does it matter to this person if the house value drops?

Say I invested $500 per month in GM stock for the last 30 years. Where would I be today? If I invested $500 in a home for the last 30 years, I own a home.

Aren't people who buy a new car upside down right when they drive off the lot? What happens if that new car gets dented? Do you just throw up your hands and walk away?

Maybe I am a bit naive, but even with 20% U6 unemployment, that means there are still 80% still working. Granted, things could get worse, but those 80% are still getting paid and are still paying their mortgages regardless if they may be at risk of being underwater. Plus, from what I understand, lenders are willing and able to readjust mortgages based on scenarios.

Nassim said...

re: el gallinazo's TAE Registry

I have recently been toying about with a way to allow people from different cultures to exchange short messages and to "chat" online in a fairly anonymous way. For the sake of demonstration, I shall call myself Nassim123 and anyone who wishes to may write to me in any language he cares to (it can get translated to English). I will happily reply as soon I notice their message. We could even fix a time for a "chat"

The website is called and there is no registration process or need to provide email address of suchlike.

I look forward to getting some constructive comments.

By the way, messages remain indefinitely until the person they are destined for reads them. Once they have been read, the messages disappear. They are not saved anywhere and the IP address is not recorded anywhere either.

Be my guests.

Anonymous said...

Carpe Diem (I think there was another carpe diem once?)... I'm the other one.
I always thought European, New Zealand, Australian bonds had no relationship to the US bond market (just shows how little I know of these things).

Anyway thank you FB for your further elaboration.

And thanks to all of the other contributors.

Anonymous said...

Like a massive boulder tossed into water, each unemployment percentage point becomes part of the undulating tidal wave which threatens to capsize the remainder of the ships. The unlucky two out of eight( to cite your numbers) are still part of the whole, just as the ship still needs the water it sails on.

The "us' and " them" mentality likes to crawl into a safe and convenient corner, as if organic entirety can be sliced into rationalized units of safe sanctuary.

" Gideon come in with his eyes on the floor
Says: Y'ain't got a hinge, you can't close the door
Moses stood up a full six foot ten
Says: You can't close the door when the wall's caved in"

Ilargi said...

Anon 4:26,

The problem with being underwater (or one of them, at least), is that the home serves as collateral for the loan. A $500.000 mortgage on home that drops in value to $250.000 or lower can cause the lender to do a margin call, i.e. demand the borrower put up additional collateral. This is true for a car as well, but since the absolute amounts are not nearly as high, they can often be dealt with differently. Repoing a car is much less of a problem, as in less expensive, than a home foreclosure.

"...those 80% are still getting paid and are still paying their mortgages"

I think not. For one thing, medical bills are responsible for more bankruptcies than any other cause. It's not that simple.

The main issue is that you can't just cut out 20% from a system and expect it to keep functioning as if nothing changed.

Anonymous said...

If U6 unemployment is 20%, we must have a long way to fall considering that I just drove by the local Costco and it was completely packed. Went by the movie theatre and there were no parking spots. Anywhere I go I see people buying shit. If large portions of the country go underwater on mortgages, maybe it will spur a natural readjustment to the way banks expect to be paid back. What is more in their interest, calling for more collateral that they are not going to get? Or keeping the person in the home to get at least a little money? Holding onto these homes and having to market them seems like something a bank will not be willing to do. If they kick people out, they will have to sell them or destroy them and all the while they remain unmaintained.

Ilargi said...

The only thing that both keeps home prices artificially high at the moment and at the same time keeps banks from being far more aggressive in making margin calls, is the government's dual plan of A) multi-trillion dollar bank-bail-outs and B) multi-trillion dollar subsidization of home purchases through FHA, FHLB and most of all Fannie and Freddie.

That approach has one huge caveat: it does nothing to pay down the debt accumulated in all parts of the financial system.

On the contrary, it just adds more debt, and a lot of it. And that is the truly scary part: bad as it is, it'll get a whole lot worse.

As for the still happy crowd you see spending out there: much of what they spend is not money, but credit. That's what got us here, and it's what'll bring the whole thing down.

Anonymous said...

How is a home determined to be underwater? Aren't appraisals taken at the time of purchases and refi's? If you do nothing to trigger a re-appraisal what determines your home as losing its value? The homes around you? But legally speaking, how can the bank come in and re-appraise at their will? It would be in their interest to play the role of Schultzy from Hogans Heroes- "I see notting."

Ilargi said...

Homes are appraised for various reasons. Property taxes is a big one. Want to pay double what the home next door sold for, just to keep the illusion alive?

Anonymous said...

I suppose a possibly interesting video (which I couldn't watch - I don't have wndows) on the bloomberg websight.

Roubini dismisses green shoots, sees complacency.

No really?

Anonymous said...


Right. I know that homes are appraised for various reasons. Refi, purchase etc.

Property tax assessment and a property appraisal are two different things.

A tax assessor is not a trigger in determining if your home value is going down. That is the job of an appraiser.

How can a bank reappraise your home without a refi or a purchase. What are these other instances?

If we are going to say that loans going underwater is a big deal, I would like to know how a person who does not trigger a re-appraisal would be deemed underwater. Are we simply basing this off of the values of homes around you? That does not seem correct to me.

Do banks have a legal right to re-appraise your home at their will?

I have never heard of such a thing.

Does anyone know for sure?

Anonymous said...

Have You Ever Seen The Rain?

Persephone said...

@ Anon 7:01

This is one I definitely know - and the answer is yes. Surrounding homes are evaluated on $/sq ft. regardless of cosmetics.

If you have a bank that is issuing a mortgage to another home in your area (or selling one through REPO), then that will trigger a generalized appraisal.

Anonymous said...

SO you are telling me that every time a house sells nearby a general appraisal takes place?

This seems impossible to me.

Anonymous said...

bellissimo the last article...a must read for everyone!

Persephone said...

@Anon 7:37
I am saying when a house sells, the bank and realtors know the general assessment value of all the homes in a certain area - yes.

Does the bank recalculate their assets? yes
They have to provide asset amounts on their balance sheets.

Anonymous said...


you mentioned a "repo call" for a mortgage that is underwater. This does not exist for most residential mortgages in the US. This may be a danger in some countries in Europe, though.

Anonymous said...

Fanfare of trumpets, roll of drums, now presenting, The complacent Roubini

Thanks to another anon: ANON June 7, 2009 6:48 PM (AKA No really?)

Ilargi said...

"you mentioned a "repo call" for a mortgage that is underwater."

No I didn't. The term is margin call.

Ilargi said...

New post up.

Please excuse the delay.

Anonymous said...


Inflation is coming for sure, although at a much longer period than the majority of investors think it will happen.

The US is broke and either has to Monertize the debt or default. Default is simply out of the question.

If Deflation did happen the US gov't would quickly collapse. Already Tax revenue have fallen by 30%. Further tax revenue declines would make the US unable to fund itself, resulting in a default.

If the US defaulted in on its debt, the value of the dollar would plunge as no crediter would consider loaning money to the US or any business or consumer expecting to be repaid in a defaulted currency. The Dollar would become worthless which would be the same as hyper-inflation (except it would happen much quicker)

Consider what happened to the Former Soviet Union when it defaulted. Nobody in Russia wanted Rubbles for payment. Anyone holding a large cash position in Rubbles was wiped out. Three weeks before the Rubble crash, a 1000 Rubbles bought a luxury 2 week vaction. After the crash, a 1000 Rubbles didn't buy a loaf of bread.

There is only one outcome whatever future action the US gov't takes: The dollar becomes worthless. The only power the gov't has remaining is to choose how long before the dollar crashes.

Anonymous said...

To 'Anon' (aka ?) 9.21pm,

Life is short and precious - preoccupy yourself with more important things not with the trivial.

;) Anon and Amen and.........