News December 2009

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THE REAL INVISIBLE HAND / LA MANO INVISIBLE VERDADERA ............(traducción en español más abajo)
THE FALTERING EAGLE: Speech made in 1970
CLEPTOCRACIA 1990 articulo para el 25 aniversario de ILACIF
ENFRENTANDO LA CORRUPCION EN TIEMPOS DE COVID, Conferencia - Profesionales del Bicentenario del Perú
ETICA E INTEGRIDAD, Congreso Organos Internos de Control, del Estado de Guanajuato, Mexico via Zoom
EL IMPACTO DE LA INTEGRIDAD, presentación en el Foro ISAF de Sonora, Mexico via Zoom
Donde fueron nuestros valores? Como podemos recuperarlos?
75 ANIVERSARIO DE LA Federación Nacional de Contadores del Ecuador
VIDEO: El Auditor Frente sus Tres Mayores Desafíos
MIAMI KEYNOTE: Public Financial Management, 2016
CONFERENCIA 6a Conferencia de Auditores Ecuador: El Auditor Interno Frente sus Tres Mayores Desafios
CONFERENCIA CReCER 2015: Empresas Estales en Busca de Etica---State Enterprises in Search of Ethics
CONFERENCIA QUITO HONESTO: Ambiente Etico = Municipio Eficiente: Principios de Conducta Etica, 2014
My Work in Peru / Mi trabajo en el Perú
CONFERENCIA EN HUANUCO, PERU - El Auditor enfrenta la Erupcion de Corrup$ion del Siglo XXI -2013
CONFERENCIAS EN CHILE - 3 Mayores Desafios al Auditor Interno - 2012 - VIDEO y TEXTO
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AMERICA IN DECLINE? The Life Cycle of a Great Power
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Wesberry v. Sanders, 376 US 1 Landmark US House Reapportionment Case
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Think -------- Pensar
WOMAN -------------- MUJER
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COLOMBIA VS KLEPTOKAKISTOCRACIA: Presentación para el Día Internacional Anti-Corrupción 2011
LECTURE AT MANILA'S UNIVERSITY OF THE EAST: Integrity & Honor, Corruption & Dishonor VIDEO
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Items on this page are from December, 2009.  Some links may no longer be active

  • "The American political process is about as broken as the financial system."
  • "The Treasury is an outstanding example of a broken system, but it's not the only one."
  • "Slow is too fast a word to describe what's going on."
  • "I wish the Administration would pay more attention to what's needed to improve the ordinary functioning of government"

CLICK HERE TO READ >>> Paul Volcker: The Lion Lets Loose Charlie Rose talks financial reform with former Federal Reserve Chairman Paul Volcker


Tumultuous economy enters new decade

Fed official: We're still learning from crisis

Stocks: Good year, bad decade

Few called market turn, fewer predict it will last

AUSTRALIA: Financial crisis may yet have a sting in its tail >>> 2009 was not as bad as feared but 2010 may be worse

MAYLASIA: Rebuilding the world after the twin crises

2010 'key year' for China to overcome economic crisis

Para China 2010 es "clave"

El sector financiero español afronta 10 grandes retos en el 2010

Con dudas e incertidumbre, el mundo recibió la nueva década

Los argentinos ya tienen bajo el colchón US$ 131.000 millones, US$ 22.000 más que en diciembre de 2006, antes del comienzo de la crisis financiera global.

PERU: La Bolsa de Valores de Lima registró en 2009 una ganancia del 101% apoyada en la fuerte subida de los precios internacionales de los minerales y el desempeño de la economía peruana frente a la crisis

A Sad but True Editorial Comment

A decade of decline

Barbarians inside the gates in 2000-2009

America is going the way of ancient Rome. The past decade will be remembered as the pivotal tipping point where the United States ceased to be a superpower. Like the Roman Empire in its later stages, America's imperial grandeur masked moral rot and economic decay.

The beginning of the 21st century promised continued U.S. global dominance. Our economic might seemed unrivaled; the dot-com boom had not yet gone bust. Washington was still basking in the warm glow of its victory in the Cold War. America bestrode the world like a military and economic colossus.

The Sept. 11, 2001, attacks changed everything. Like Rome and Imperial Britain, the United States embarked upon costly, prolonged wars in far-away countries. The result is that America remains mired in Iraq and Afghanistan. The two wars have cost more than 5,200 dead and $1 trillion with no victory or end in sight.

The fundamental mistake was made by President Bush. Contrary to popular myth, Mr. Bush was not a unilateralist conservative traditionalist; rather, he was a Great Society Republican who championed nation-building abroad and Big Government corporatism at home. Our goal should have been to smash the forces of global jihad through a strategy of total victory through total war - just as in World War II, when every domestic priority was subordinated to defeating the Axis Powers.

Instead, Mr. Bush tried to plant democracy in the sands of Mesopotamia and the stony soil of Afghanistan. He followed a foolish - and ultimately, destructive - policy of seeking to implement social engineering, nation-building projects. The result was imperial overstretch.

Moreover, he also stressed that America could have both guns and butter.

There was no need to choose. Tax cuts, federalizing education, a massive Medicare prescription drug plan, runaway government spending, soaring deficits, huge bank bailouts and expensive stimulus programs - Mr. Bush's brand of corporatist Keynesianism paved the way for socialism and reckless spending.

President Obama is making the same mistake. He is not the antithesis of Mr. Bush, but his culmination. Mr. Obama represents Bushism on steroids. He is seeking to erect a European-style social democracy characterized by a bloated public sector, a burdensome welfare state, economic sclerosis and foreign policy impotence.

Mr. Obama is slowly pushing America toward financial ruin. His $787 billion stimulus failed to regenerate the economy. His health care reform bill will cost taxpayers nearly $2.5 trillion. He has effectively nationalized the automakers, the financial sector and the banking system. His environmental regulations will stifle industry and manufacturing. Unemployment is high. The housing market continues to sag. Inflation is increasing. The dollar is plummeting. The nation's infrastructure is crumbling.

The budget deficit for 2009 was over $1.4 trillion. It is scheduled to be $1.5 trillion in 2010. Under his administration, the national debt is projected to explode by more than $10 trillion in 10 years. He is burying America under a mountain of debt. We are becoming the United States of Argentina.

Mr. Obama's decision to surge 30,000 additional troops into Afghanistan is a dangerous - and reckless - escalation of the war. It will only deepen our military quagmire, draining America of further blood and treasure. Repeating the tragic mistakes of Vietnam, Mr. Obama is sending U.S. troops to die without a clear strategy for victory.

Yet, as Americans are being bled white in the caves and mountains of Afghanistan, terrorists are penetrating our homeland defenses.

The United States is increasingly vulnerable to Islamist attacks: Hezbollah is crossing our porous southern border, the Fort Hood massacre and the attempted suicide bombing of Northwest Airlines flight 253. Similar to Rome in its final days, America is no longer feared or respected. Instead, we are being invaded - and slowly conquered - by barbarians.

Rome collapsed due to moral decline, pervasive corruption and a loss of will. The Roman Empire became plagued by crushing taxation, a ubiquitous bureaucracy, economic stagnation, political factionalism, military adventurism and a lack of civic virtue. Its culture had become so decadent - with its glorification of homosexuality, infanticide, sexual permissiveness and constant entertainment (such as circuses and games in the Coliseum) - that Rome was not only scorned but reviled.

America is repeating the same tragic mistakes. Our sexualized, celebrity-obsessed, libertine culture is despised around the world. Power trumps patriotism. Washington no longer embodies democratic virtue.

If America does not veer course quickly, we, too, like the Romans, will squander our glorious heritage.

Jeffrey T. Kuhner is a columnist at The Washington Times and president of the Edmund Burke Institute, a Washington think tank.


2000-2009  a lost decade for U.S. economy, workers

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different....
The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money...

The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth.

It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism -- there was a current of thought among economists in 1999 that recessions were a thing of the past...

...There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009...

And the net worth of American households -- the value of their houses, retirement funds and other assets minus debts -- has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1950s.

Global Economic Crisis Abated, But Effects Linger

... In January 2009, global unemployment was soaring, the international financial system was in near-meltdown, world trade was in free fall, and economists were warning that a turnaround was not in sight. Governments faced the prospect of widespread social instability and popular unrest, and historians were recalling that the Great Depression set the stage for World War II. In February, the director of national intelligence, Dennis Blair, told the U.S. Congress that the global economic crisis had replaced terrorism as "the primary near-term security concern of the United States."

Since then, international stock markets have rebounded, unemployment rates have leveled off, world trade has picked up and the global economy is growing again. ...

Economic recovery, however, has been anemic in many countries, and the global recession has had repercussions that are likely to be felt for a long time...

..The big winner in 2009 was clearly China, with its global economic position actually strengthening as a result of the crisis....

..Brazil has also become a superstar performer, with stock values there surging more than 80 percent in 2009. European countries, meanwhile, have lagged far behind.....

...while the global financial crisis has abated, new economic challenges are still emerging. One concern is the growing seriousness of sovereign debt, which is debt owed by governments rather than private companies or financial institutions. 


Chinese banks find their credit in high demand

China's state-owned banks have become a main engine of the global recovery, financing the construction of copper mines, purchase of airplanes, expansion of retail stores and other projects even as their U.S. and European counterparts scale back lending.

The surge in Chinese lending, triple the 2008 rate, has provided a lifeline to international corporations during the worst recession in decades, and it reflects a diversification in China's global economic role beyond its holdings of vast amounts of U.S. government debt.

Over the first nine months of 2009, new lending by Chinese banks has injected $1.3 trillion into the world economy...


A religious response to the financial crisis: We need a values recovery

Clearly, the financial crisis is a structural meltdown that calls for increased government regulation of banks and other financial players. Members of faith communities, such as those who joined me in front of the Treasury building, are helping to push for this sort of reform.

But at its core, this is also a spiritual crisis. More and more people are coming to understand that underlying the economic crisis is a values crisis, and that any economic recovery must be accompanied by a moral recovery. We have been asking the wrong question: When will the financial crisis end? The right question is: How will it change us? This could be a moment to reexamine the ways we measure success, do business and live our lives; a time to renew spiritual values and practices such as simplicity, patience, modesty, family, friendship, rest and Sabbath.

Faith communities can help lead the way, challenging the idols of the market and reminding us who is God and who is not. "The Earth is the Lord's and the fullness thereof, the world, and they that dwell therein," say both Christianity and Judaism; the Earth does not belong to the market. Human beings are stewards of God's creation and should preside over the market -- not the other way around. We must replace the market's false promise of limitless growth and consumption with an acknowledgment of human finitude, with a little more humility and with some moral limits. And the market's first commandment, "There is never enough," must be replaced by the dictums of God's economy -- namely, there is enough, if we share it.

Many of our religious teachings, from our many traditions, offer useful correctives to the practices that brought us to this sad place. Jesus's Sermon on the Mount instructs us not to be "anxious" about material things, a notion that runs directly counter to the frenzied pressure of modern consumer culture. Judaism teaches us to leave the edges of the fields for the poor to "glean" and to welcome those in need to our tables. And Islam prohibits the practice of usury. (Muslim-owned financial institutions that charge fees for service rather than interest have done amazingly well during this crisis; their practices offer some interesting models.)

We need nothing less than a pastoral strategy for the financial crisis; we must use these religious teachings to develop Christian, Jewish and Islamic responses to it.

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Goldman Sachs offshore deals deepened global financial crisis

Previously undisclosed documents show that a new breed of offshore securities that hinged on risky home loans were far riskier than investors knew.


When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

McClatchy News Service has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met ``every definition of a Ponzi scheme.''

The documents include the offering circulars for 40 of Goldman's estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.

In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value -- as Goldman was effectively betting they would.

Some of the investors, including foreign banks and even Wall Street giant Merrill Lynch, may have been comforted by the high grades Wall Street ratings agencies had assigned to many of the securities. However, some of the buyers apparently agreed to insure Goldman well after the performance of many offshore deals weakened significantly beginning in June 2006.

Goldman said those investors were fully informed of the risks they were taking.

These Cayman Islands deals, which Goldman assembled through the British territory in the Caribbean, a haven from U.S. taxes and regulation, became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets.

The full cost of the deals, some of which could still blow up on investors, may never be known.

Before the subprime crisis, the U.S. financial system had used securities for 40 years to generate $12 trillion to help Americans finance their houses, cars and college educations, said Gary Kopff, a financial services consultant and the president of Everest Management Inc. in Washington.

While Goldman wasn't alone in the offshore deal making, it was the only big Wall Street investment bank to exit the subprime mortgage market safely, and it played a pivotal role, hedging its bets earlier and with more parties than any of its rivals did.

McClatchy reported on Nov. 1 that in 2006 and 2007, Goldman peddled more than $40 billion in U.S.-registered securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Many of those bets were made in the Caymans deals.

At the time, Goldman's chief spokesman, Lucas van Praag, dismissed as ``untrue'' any suggestion that the firm had misled the pension funds, insurers, foreign banks and other investors that bought those bonds. Two weeks later, however, Chairman and Chief Executive Lloyd Blankfein publicly apologized -- without elaborating -- for Goldman's role in the subprime debacle.

Goldman's wagers against mortgage securities similar to those it was selling to its clients are now the subject of an inquiry by the Securities and Exchange Commission, according to two people familiar with the matter who declined to be identified because of its sensitivity. Spokesmen for Goldman and the SEC declined to comment on the inquiry.

Goldman's defenders argue that the legendary firm's relatively unscathed escape from the housing collapse is further evidence that it's smarter and quicker than its competitors. Its critics, however, say that the firm's behavior in recent years shows that it has slipped its ethical moorings; that Wall Street has degenerated into a casino in which the house constantly invents new games to ensure that its profits keep growing; and that it's high time for tougher federal regulations.

In 2006 and 2007, as the housing market peaked, Goldman underwrote $51 billion of deals in what mushroomed into an under-the-radar, $500 billion offshore frenzy, according to data from the financial services firm Dealogic.

Goldman's activities in the Caymans helped it unload some of its subprime-related risks on others and also amass tens of billions of dollars in protection against a U.S. housing crash that ultimately occurred. These deals have accounted for a sizeable share of the firm's $103 billion in revenues and more than $25 billion in profits since Jan. 1, 2007. At the end of 2009, Goldman had set aside more than $16 billion in cash and stock bonuses for its employees.

Many of Goldman's winning bets with other large U.S. banks raised the price tags of 2008's government bailouts of Citigroup, Bank of America, Morgan Stanley and others by sums that no one has yet determined because the contracts are private, according to people familiar with some of the transactions.

However, one billion-dollar transaction that Goldman assembled in early 2006 is illustrative. It called for the firm to receive as much as $720 million from Merrill Lynch and other investors if defaults surged in a pool of dicey U.S. residential mortgages, according to documents in a court dispute among the parties.

Securities experts said that deal is headed for a crash that's likely to cause serious losses for Merrill Lynch, which Bank of America acquired a year ago in a $50 billion government-arranged rescue.

Taxpayers got hit for tens of billions of dollars in the Caymans deals because Goldman and others bought up to $80 billion in insurance from American International Group on the risky home mortgage securities underlying the deals.

Go to original article in the Miami Herald

Free trade isn't so free

L. Ronald Scheman

Two recent reports from China point to one of the major challenges facing the Obama administration in formulating trade policy.

First the Chinese National Bureau of Statistics revised Chinese growth projections for 2010 to 9.6 percent. Then Chinese Premier Wen Jiabao strongly rejected pressures to allow its currency to be guided by market forces, purporting that demands to allow the renminbi to appreciate "were an effort to contain the country's development."

While China's determination to promote development is its internal matter, policies that spill over its borders are the concern of all. Policies that foster almost 10 percent growth in the midst of world economies that are gasping for air expose a fundamental systemic problem that must be addressed.

The commitment to free trade that has dominated U.S. policy since World War II has produced enormous benefits to a growing global population. It has helped to increase production, lower prices and bring millions of people out of poverty. However a substantial question remains as to whether trade is really free if the currencies that set prices are not.

The complex issues of free international trade have one simple truth at their core. The value of products traded across borders is determined by the currency in which the trade takes place. Purported "free" trade without freely traded currencies is a charade.

Currency values affect the end price of products the same way as tariffs over which much wrangling takes place at the World Trade Organization. A product manufactured in China for 680 renminbi would be imported into the United States for $100 at the current exchange rate of 6.8 renminbi to $1. If the exchange rate were 5/$1, the product would sell for $136.

Ironically, the Chinese today are joining the chorus blaming the excesses of the U.S. consumer and a liberal U.S. financial market for the current financial crisis. This perception blatantly overlooks a crucial factor.

The U.S. consumer was responding to the value equation in the internal U.S. market. Chinese control of the renminbi kept their goods cheap in comparison to U.S. goods. Currency distortions also made investment in Chinese manufacturing profitable and investment in U.S. manufacturing costly.

Economists the world over emphasize that rebalancing aggregate global demand to raise consumption in the surplus economies is basic to the long-term sustainability of the international economy. In this context pricing, resulting from currency exchange rates, is a major influence on consumer behavior.

Two other implications, however, have equally serious consequences. First, as the dollar declines against other currencies but remains tied to the Renminbi, the Renminbi is effectively accompanying the dollar in devaluingagainst those currencies.

This makes Chinese goods even cheaper in other countries, especially other developing countries. Second, China's ballooning trade surplus produces commodity buying in the West that spurs the same commodity bubbles that ignited the recent financial imbalances.

In the developing countries this imbalance has been devastating.

Chinese exports to these countries have risen dramatically since the dollar began to weaken. China's policy may help create jobs in China but it is a "beggar thy neighbor" policy in regard to the poorer countries, decimating local industry. The well-known fury of anti-globalization activists is attributable far more to job loss from undervalued Chinese goods than to any policies of other developed countries.

While we have little power to induce the Chinese to revalue their currency there are other alternatives to redress the current estimates of an approximate 25 percent undervaluation of the renminbi. Commensurate tariffs on Chinese goods is the logical instrument. Such overriding tariffs should be accepted as fair global policy when faced with controlled currencies that have fallen dramatically out of alignment.

We should also be attentive to more profound implications of Chinese policy. Chinese strategic literature emphasizes that other instruments, not military ones, will be determinative for China's role in the world.

The reality of today's exchange rate policies is that China is gradually draining the industrial strength of the West just as surely as if they were bombing its factories. As they well know, currency manipulation is a stealth instrument of economic competition.

Economists are almost unanimous in their assessment that a balanced global economy requires a shift in consumption to the currency surplus countries. The easiest and least painful way to do this is for all major actors in global trade to play by the same rules in regard to currencies. If the Chinese are unwilling or unable to do this on their own, it is time to consider policies that do it for them.

L. Ronald Scheman, author of "Greater America" (New York University Press, 2003) is former United States executive director of the Inter-American Development Bank.

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The coming Great Inflation, real or imagined

By Pedro Nicolaci da Costa

 - A historic economic crisis has left Americans with plenty of things to worry about. But is inflation one of them? And is there a risk that fretting over higher prices may actually bring them about?

The answers to these questions will help define the timing of the Federal Reserve's pullback from an unprecedented level of monetary stimulus, deployed to combat the worst financial panic since the Great Depression.

In justifying its pledge to leave interest rates near zero for the foreseeable future, the Fed takes comfort in inflation expectations, which policymakers deem comfortably restrained.

On the surface, that appears true. The most recent Reuters/University of Michigan consumer survey showed a 0.2 percentage point decline in expected inflation one-year out, to 2.5 percent. Market-based barometers have fluttered higher, though not alarmingly so.

Yet beneath the weak economic backdrop keeping prices in check, economists and consumers are increasingly uneasy about the prospect of a continuous loss of purchasing power -- the very definition of inflation.

"We have the most potentially inflationary policy I have ever observed in a developed country," said Alan Meltzer, a Fed historian and professor of political economy at the Carnegie Mellon Tepper School of Business in Pittsburgh.

According to widely used economic models, the way consumers perceive the prospect of future inflation has clear implications for prices themselves. Once higher costs are taken for granted, they are more easily tolerated.

Several indicators are already hinting at that possibility .

The price of gold, often viewed as a hedge against inflation, has set record after record, peaking above $1,200 an ounce earlier this month before retreating to below $1,100. A recent JPMorgan survey of clients found that 61 percent expected U.S. inflation to be "above target" between 2011 and 2014.

Another consumer confidence survey, published by The Conference Board, showed Americans expect prices to climb a troubling 5.1 percent over the next 12 months.

And Google Trends, a websearch database, shows a sharp spike in the number of U.S. users looking up the word "hyperinflation" in late 2008 and early 2009.

"There is a real risk that inflation expectations will rise above a certain threshold that suggests a loss of credibility of the Fed," said Laurence Meyer, a former Fed governor now at Macroeconomic Advisers in Washington, DC.


That may seem surprising considering the world has faced a crippling financial crisis that many economists warned might lead to deflation. But it makes sense in the context of the extraordinary measures taken to halt the meltdown.

Experts who have studied bouts of inflation, most common in poor or developing countries, say the makings of an inflationary psychology are already in place in the United States. It begins, they say, when unfathomably large figures are bandied about as if they were mere change.

A cascading series of government bailouts certainly fits into that category. The Treasury spent nearly $800 billion on a stimulus package that has helped ease the pace of job losses but not yet begun to reverse them. The Fed committed to buy more than $1.7 trillion in Treasury and mortgage bonds and expanded credit in the banking system to over $2.2 trillion.

"There is an unprecedented amount of latent inflation represented by the $2 trillion monetary base," said Michael Pento, senior market strategist at Delta Global Advisors. "Unless the Fed can sell those holdings and raise interest rates in a timely manner, intractable inflation will be in our future."


Another camp of economists say all the hand-wringing is overdone. They point to the labor market, in its worst shape since the 1980s, as a sure sign that the economy is sufficiently weak to keep price pressures at bay.

Japan provides the most obvious model for how such "slack" can affect prices. As bubbles popped in the housing and stock markets, the Japanese economy was stuck in a deflationary rut for the better part of two decades, despite heavy government spending.

During America's last run-in with inflation in the 1970s, wages were a key channel for price increases. Stronger unions meant workers could demand cost-of-living increases to keep up with the ever-rising consumer price index. With that dynamic largely absent today, say skeptics, inflation fears are misplaced.

So far, the hard figures corroborate their view. Consumer prices rose just 1.8 percent in the year through November, and were up 1.7 percent, excluding food and energy, well beneath the recent yearly average.

Such tame readings notwithstanding, anxiety about the longer-term outlook is rising and has been reinforced by the resilience of energy costs in the face of a global recession.

"We will emerge from the crisis with an excess money supply because, despite their independence, central bankers are still feeling the pressure from finance ministers to allow slightly higher inflation in order to be able to service large public debts more easily," said Jorg Kramer, chief economist at Commerzbank.

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A Resurgent Dollar Could Be 2010's First Surprise
Many investors saw a crumbling dollar as a sure bet in the wake of the Federal Reserve's unprecedented liquidity injections, but over the last month the greenback has instead mounted a sharp turnaround. And while the mainstream sentiment remains negative on the currency, a high-profile minority of investors – with both more bullish and bearish economic outlooks than most -- are now betting that the rally will continue into the new year...The impact of a rising dollar on other assets remains unclear. While a rise in the dollar usually led to a fall in stocks for much of the year, that correlation has abated recently. Commodities like oil and gold -- the latter was especially seen as a play on a crumbling dollar -- could get hit hard by a resurgent greenback.

But whether the year ahead brings a brisk recovery or more chaos, a sharp rally in the greenback -- left for dead not long ago -- could be in store.



The Debt Bomb

Look. The American government is staring at total obligations of US$115 trillion, America’s debt-to-GDP ratio is off the charts and the American public is also up to its eyeballs in debt. Under this scenario, you can bet your bottom dollar that the American establishment will try to reduce this debt overhang through a process known as monetary inflation. If you have any doubt whatsoever, take a look at the chart below, which captures the incredible expansion in America’s monetary base.

US Monetary Base

As you can see, over the past two years, the monetary base in America has expanded from US$827 billion to an astonishing US$1.93 trillion! Until now, this surge in the monetary base has not produced a highly visible inflationary impact…yet.

But it is notable that America is not alone in pursuing inflationary policies. All over the world, the developed nations are printing money and debasing their currencies. In this era of globalization, no country wants a strong currency and everyone is engaged in competitive currency devaluations. This massive money and debt creation will cause an inflationary boom over the coming years.

In fact, those who erroneously believe that deflation is unavoidable should review Figure 2, which highlights the mind-boggling expansion in the balance sheets of various central banks. As you can see, America is not the only nation guilty of printing money; the Europeans have also jumped on this train to Inflationville.

Global Balance Sheet Expansion


Ponzi nation

_The FBI opened more than 2,100 securities fraud investigations in 2009, up from 1,750 in 2008. The FBI also had 651 agents working in 2009 on high-yield investment fraud cases, which include Ponzis, compared with 429 last year.

_The SEC this year issued 82 percent more restraining orders against Ponzi schemes and other securities fraud cases this year than in 2008, and it opened about 6 percent more investigations. Ponzi scheme investigations now make up 21 percent of the SEC's enforcement workload, compared with 17 percent in 2008 and 9 percent in 2005.

_The Commodity Futures Trading Commission filed 31 civil actions in Ponzi cases this year, more than twice the 2008 amount.

Many of the 2009 cases have yet to head to trial. In its tally, the AP counted schemes in which prosecutions were initiated or in which regulators filed civil cases in 2008 and 2009.


STEALTH STIMULUS >>> Newly House passed "Wall Street Reform and Consumer Protection Act" (H.R. 4173) hides in its 1279 pages authorization of Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes

How Commercial Real Estate Could Trigger a Double-Dip

Treasury Debt Sales Top $2.1 Trillion for Year More Than in Previous Two Years Combined

The Great Recession: A Hidden Depression?

U.S. financial scandals seen sparking 2010 zeal >>> The year of the Ponzi scheme will be followed by heightened regulation and more aggressive prosecutions, experts say, as U.S. officials respond to past failures

Former Soviet Nations Arent Banking on the Dollar >>> Local currency or euro viewed as most profitable

U.S. lenders involved in risky mortgage lending that contributed to the 2007 financial crisis were also some of the fiercest financial lobbyists, according to a report by International Monetary Fund economists.


A Fistful of Dollars: Lobbying and the Financial Crisis


Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during key events of the crisis. The findings are robust to (i) falsification tests using information on lobbying activities on financial sector issues unrelated to mortgage lending, (ii) instrumental variables strategies, and (iii) a difference-in-difference approach based on state-level lending laws. These results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.

Available in PDF format:

Read the full IMF paper

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Get all IMF Conference "Financial Frictions and Macroeconomic Adjustment" Papers

Fed proposes term deposits to drain reserves, avoid hyperinflation

Financial crisis: Economics emerges from the rubble in fragile state This was a crisis economists said couldn't happen an era when macro-economic problems were supposed to have been solved

2009: A Roller-Coaster Year For The Dollar

Hiring, Business Investment and Other Big Variables That Will Drive 2010 Economy

Prepare for a Keynesian Hangover Our government's spending orgy will haunt us in 2010

Measuring the Rebound in 2009 >>> The U.S. Economy Gained 13% Since January

Obama's First Year: Progress, but a Long, Hard Road Remains

Financial Crisis Was Too Short to Teach Us Lessons

After the Bailouts, Washington's the Boss

BOOK REVIEW: The Best Is Yet to Come Cast off gloom: The full benefits of globalization are on their way

Los economistas indicaron que sus estudios mostraron que los prestamistas que tomaron los mayores riesgos fueron además los más activos en usar su influencia para evitar la aprobación de proyectos de ley contrarios al sector y de regulaciones relativas al crédito hipotecario

La nueva dirección del FMI >>> se evitó un desastre de las proporciones de la Gran Depresión, gracias a una coordinación de las políticas económicas sin precedentes por parte de los gobiernos de todo el mundo


La caída del Dow Jones en la última década es más pronunciada si se ajusta a la inflación

Los efectos de la intervención, según Larry Summers

El futuro del capitalismo, según Raghuram Rajan

Tras los rescates, el Estado es el nuevo protagonista del capitalismo

Tres claves que determinarán el desempeño de la economía de EE.UU. durante 2010


How Misleading Economic Data Increase Investor Risks

Most investors heaved a sigh of relief when the nation's gross domestic product, a broad measure of economic activity, rose 3.5% in the third quarter, signaling that the recession had ended. But the Bureau of Labor Statistics (BLS) later revised it downward to 2.8%, and on Dec. 22, GDP was lowered again -- to 2.2%.

This 37% reduction in GDP certainly calls the entire data collection process -- and the value of these "headline" numbers -- into question.
Webmaster's Note: In my opinion, we have now entered the  DISINFORMATION AGE...this article, included in its entirety because of its importance, reflects one of many areas where vital information is not reliable, notwithstanding it is being used for important decision-making. In the cases related here the disinformation may result from difficulties in gathering the right data or human failures, weaknesses or errors, BUT today's information is also subject to flagrant, wilfully and deceptively creative...modification, duplication, spinning, exageration, distortion, fabrication and outright falsification,                                                                                     Who will audit the veracity and reliability of verbal, digital and written information in the new decade?...JW
Statisticians acknowledge that the collection process overstates both GDP and productivity. Because investors, companies and the government all rely on such statistics, flawed data could result in poor investment and business decisions.
Susan Houseman, senior economist at the W.E. Upjohn Institute for Employment Research, was a participant in a recent conference on the problem. "We don't have the data-collection structure to capture what's happening in a real-time way, or what's being traded and how it's affecting workers," Houseman says. "We have no idea how to measure the occupations being off-shored or what's being in-shored."
Houseman's paper 
Offshoring Bias: The Effect of Import Price Mismeasurement on Manufacturing Productivity highlights holes in the valuation of imported goods. As the data are now collected now, a $50 imported auto part may be valued at the $100 price of the American-made part it replaces, and the difference gets attributed to rising productivity of American workers.

That official statistics can't capture the actual value of imported parts is bad enough. But to suggest that that these supposedly $100 parts are now being produced by fewer American workers, is a grave miscalculation of the fundamentals of economic activity that the GDP is supposed to measure. "What we are measuring as productivity gains may in fact be changes in trade," says William Alterman, assistant commissioner for international prices at the BLS.
Granted, the heavily globalized $14 trillion U.S. economy has a lot of moving parts, and no collection system can track every one of them. But the inability to truly reflect imported goods and worker productivity overstates GDP, which sets up a potentially misleading confidence in a mirage of rising GDP and worker productivity.
That's not the only serious statistical flaw in the GDP. BusinessWeek recently reported that by overlooking cuts in research and development, 
GDP probably overstates the economy's strength by at least one percentage point.
The gap between the data and reality arises from the U.S.'s classification of "tangible" investments, like machinery and buildings, and "intangible" investments, like worker training and R&D. As the U.S. economy has geared up to compete in an increasingly global economy, these intangible investments have come to exceed the value of tangible investments: $1.6 trillion to $1.2 trillion in 2007. 
The problem is that U.S. companies alike have slashed intangible investments in the recession. Since R&D isn't fully reflected in the GDP, the net result is that the GDP overstates the strength of the recovery and grossly understates the long-term damage wrought by the reduction of future product development and the reduction of worker training.
In the long term, Corporate America appears to have boosted its short-term profits by slashing investments in the foundation of future earnings: new and improved products and highly trained employees. Thus, even the revised 2.2% increase in third-quarter GDP may well be mostly illusory -- a false gain created by cheaper imported goods and the reduction of R&D staffing, a move that could significantly lower future real growth and productivity.
Not fully reflecting intangible investments creates misleading data in both recession and times of high growth. In periods of rising intangible investments, then the GDP as it's now measured will understate real growth -- a gap between data and reality just as misleading as the one that has probably overstated real GDP in the third quarter.


Krugman & Stiglitz Agree:

 'Reasonably High Chance' the Economy Will Contract in 2010


Nobel Prize winning economist Paul Krugman said he thinks there’s a “reasonably high chance” the economy will contract in the second half of next year. 

On the "This Week" Roundtable, Krugman said he agreed with the assessment of fellow Nobel-winning economist Joseph Stiglitz that there is a significant chance the economy will shrink in 2010.  

“I would go with Joseph Stiglitz,” Krugman added, “I’m really worried about the second half.” 

SEE KRUGMAN VIDEO ON ABC (after suffering through an ad)

More than 150 Ponzi
schemes collapsed in
2009, compared to about
40 in 2008

 It was a rough year for Ponzi schemes. In 2009, the recession unraveled nearly four times as many of the investment scams as fell apart in 2008, with "Ponzi" becoming a buzzword again thanks to the collapse of Bernard Madoff's $50 billion plot.

Tens of thousands of investors, some of them losing their life's savings, watched more than $16.5 billion disappear like smoke in 2009, according to an Associated Press analysis of scams in all 50 states....

In all, more than 150 Ponzi schemes collapsed in 2009, compared to about 40 in 2008, according to the AP's examination of criminal cases at all U.S. attorneys' offices and the FBI, as well as criminal and civil actions taken by state prosecutors and regulators at both the federal and state levels.

The 2009 scams ranged in size from a few hundred thousand dollars to the $7 billion bogus international banking empire authorities say jailed financier Allen Stanford orchestrated, as well as the $1.2 billion scheme they say was operated by disbarred Florida lawyer Scott Rothstein. Both have pleaded not guilty.

While enforcement efforts have ramped up — in large part because of the discovery of Madoff's fraud, estimated at $21 billion to $50 billion — the main reason so many Ponzi schemes have come to light is clear.

"The financial meltdown has resulted in the exposure of numerous fraudulent schemes that otherwise might have gone undetected for a longer period of time," said Lanny Breuer, assistant attorney general for the U.S. Justice Department's criminal division.

A Ponzi scheme depends on a constant infusion of new investors to pay older ones and furnish the cash for the scammers' lavish lifestyles. This year, when the pool of people willing to become new investors shrank and existing investors clamored to withdraw money, scams collapsed across the country.


Estafas financieras casi se cuadruplicaron en 2009 en EEUU

Los escándalos de fraude financiero tipo piramidal adquirieron una nueva dimensión en el 2009 después de que la recesión desentrañara casi cuatro veces más estafas millonarias que en el 2008.

La palabra "ponzi" _término que se refiere a un sistema de inversión piramidal que promete alta rentabilidad sin un negocio real que lo respalde_ se incorporó de nuevo al vocabulario estándar de los estadounidenses tras el colapso de la trama de 50.000 millones de dólares de Bernard Madoff.

Decenas de miles de inversionistas, algunos de ellos perdiendo los ahorros de toda una vida, vieron como más de 16.500 millones de dólares desaparecieron como humo en el 2009, según un análisis de estafas en los 50 estados del país realizado por The Associated Press...En el 2009 el FBI abrió más de 2.100 investigaciones de estafas financieras en comparación con las 1.750 del 2008. La organización destinó además a 651 agentes en el 2009 a trabajar en casos de fraude de alto nivel, que incluyeron estafas de esquema piramidal, en comparación con los 429 agentes que lo hicieron el año pasado...Más de 150 estafas de esquema piramidal fueron descubiertas en el 2009, comparadas con las aproximadamente 40 del 2008, según el análisis de AP de casos penales en todas las oficinas de fiscales del distrito y del FBI, además de demandas civiles y penales presentadas por fiscalías y reguladores a nivel estatal y federal....



...the economy will recover the jobs wiped out by the recession by 2013 or 2014 but...the unemployment rate will stay high....the healing economy will cause more people to stream back into the labor force, vying for too-few jobs...

Intelligent Investing Panel >>> 2010 Will Be Fine...Experts gathered by the Intelligent Investing team express their confidence in the economy's growth. Click here.

...high unemployment

for the next 10 years...

...average pay will dwindle, along with consumer prices...

...harder for households to pay down debt...


...the mother of all jobless recoveries...
...a continued hollowing-out of the middle class...
...the “New Abnormal...” 

A decade of high unemployment is looming

‘New abnormal:’ Some think 10 years won’t be enough to replace losses

The decade ahead could be a brutal one for America's unemployed — and for people with jobs hoping for pay raises.

At best, it could take until the middle of the decade for the nation to generate enough jobs to drive down the unemployment rate to a normal 5 or 6 percent and keep it there. At worst, that won't happen until much later — perhaps not until the next decade...

...Most economists say it could take at least until 2015 for the unemployment rate to drop down to a historically more normal 5.5 percent. And with the job market likely to stay weak, some also foresee another decade of wage stagnation.

Even though the economy will likely keep growing, the pace is expected to be plodding. That will make employers reluctant to hire. Further contributing to high unemployment is the likelihood of more people competing for jobs, baby boomers delaying retirement and interest rates edging higher.


Economists warn of jobless recovery, long-term malaise


• Unemployment will remain chronically high, averaging 8 percent nationally.

• Pay raises will dwindle and perhaps vanish.

• Consumer price inflation will fade away.

• Household debt service, including mortgage payments, will worsen, and mortgage defaults will get much worse.

• Private credit extension will remain stunted.

• Prices of real estate, stocks and other assets will remain in long-term declines except for Treasury bonds and some top-quality corporate bonds.

• Severe public dissatisfaction with the economy will lead to political upheaval and scapegoating, which will also be engaged in by leaders, who in turn will struggle with international relations.

• Federal budget deficits will continue to run high.

The expansion seen in the third quarter was well below what it had seemed at first take. Gross domestic product rose 2.2 percent. That was down from the 2.8 percent estimate of a month ago and down from the initial estimate of 3.5 percent two months ago.

David Levy and S Jay Levy noted that net private investment has ceased, that corporate profits of the S&P 500 fell below zero for the first time ever, and that household wealth as a percentage of disposable personal income is the lowest of the postwar era.


Unemployment Below 9 Percent

Considering where unemployment's been over the past two years, and where we feared it might be headed, sub-9 percent unemployment should be seen as a success 12 months from now, and is certainly attainable. From end to end, this recession cost us 7.2 million jobs, and essentially doubled the unemployment rate, from 4.9 percent in December 2007 to our current 10 percent. Give or take a month or two, that took two years. So shedding one point in 12 months, a 10 percent change, shouldn't be a problem. We're already headed in the right direction, having fallen from 10.2 percent to 10 percent from October to November. Since we usually add jobs in December, if only temporary ones, by early 2010 we'll likely be looking at an unemployment rate in the high 9 percent range. And don't forget: unemployment is a lagging indicator. So the economic growth that began last summer and that most economists think will continue through next year, should be more than enough to pull unemployment below 9 percent, especially with Congress's new job-creation package. Now, that's not to say that it won't spike back above 10 percent in 2011. State budgets are still a huge mess, and with no stimulus cash to bridge deficits next time around, there could be a wave of laid-off cops and teachers and firemen coming down the line. But again, unemployment's lagging, so that probably won't hit, if it does at all, until 2011; just in time for the president to start campaigning again. 


A Contained Depression

The economy may be turning the corner, but it's going to take a very long time to return to normal.


If you're breathing a little easier because the Great Recession seems to be ending, consider this: the U.S. economy may remain in a "contained depression" for months or years to come. That warning comes from economist David Levy, chairman of the Jerome Levy Forecasting Center, an economic research and consulting firm...
We're in for a much longer period of contained depression [than we saw in the 1990s]. The single most overlooked observation about the U.S. economy in the postwar period is that balance sheets grew faster than incomes, decade after decade, both assets and liabilities. The problem is that asset values have to be justified by returns they can earn — or by expectations of future capital gains, and that's where you get into bubbles. What went on in the postwar period couldn't go on indefinitely. We were able to make it go on longer by dropping interest rates in the last two recessions, but we can't do that anymore. We have to shrink the value of assets on balance sheets and shrink liabilities. And that makes it very difficult for the economy to operate.

In fact, without the government sector, the economy would collapse. If you look at the second and third quarters of this year and analyze the sources of profits in the economy — and if you take government out of the picture — everything added up to a net loss, for the first time since the 1930s. But because we had an enormous injection of monetary wealth into the economy by the federal government, we were able to pump up profits and help them climb back to a much better level than they were at during the worst of the recession.

Fortunately, we're not going to have the 1930s all over again, although unemployment will be very high. The banking system will continue to function. The government at times may try to reduce the deficit, as the Japanese government has tried to do as they have been dealing with their own kind of contained depression. But every time you do it, profits are undermined, things get worse, and the deficit widens anyway — and then you feel pressure to do something to stimulate the economy. It's very hard not to run very large deficits.



Seven Looming Financial Bubbles

Investors were burned by three bubbles this decade. Here are more to watch out for.


Despite academic theories that claim markets assign assets the prices that they deserve, Wall Street has a troubling habit of inflating investment values until they pop. Long-term investors would do themselves a favor by steering clear of potential bubbles that could burst in the next decade.

One likely candidate is gold. The precious metal's recent run--up nearly 300% since 2000--has brought with it a boom of pitchmen, ranging from Glenn Beck to late-night infomercial hosts, who play off fears of everything from the dollar's collapse to rampant inflation to all-around financial Armageddon. In the end, their hype tends to boil down to the same thing: Gold is the best hedge against disaster....

China may be another bubble worth avoiding. As Forbes' Gady Epstein recently reported, the Chinese government is responsible for debt equal to over 70% of the country's gross domestic product (the U.S. government, meanwhile, is responsible for debt equal to 50% of GDP.) China's growing boom looks suspiciously like the booms that preceded market crashes in Japan and in the U.S.--big developers are highly leveraged and dependent on the shaky notion that prices will rise and interest rates remain low in perpetuity.

What are the seven bubbles to watch out for in the 2010? Check out this slide show to find out


Premier chino subraya confianza, responsabilidad y cooperación en lucha contra crisis financiera

China Charts Its Own Path >>> China is heading into 2010 with a full head of political and economic steam. While America dithers, the Chinese set up a currency reserve fund against -- U.S. crashes.

Chinese Economist: Expect China's real estate bubble to burst in 2 years

Wen: Chinese stimulus package effective, room for improvement

Europe set for uneven economic recovery-IMF

FHA: New Subprime Crisis?

As if the first subprime crisis wasn’t damaging enough to the economy, U.S. government policy now seems geared toward producing a second act. There is one key difference this time however – taxpayers are directly on the hook and the federal government will have to bail itself out.

The center of this new impending subprime crisis is the FHA (Federal Housing Administration). The FHA insures mortgages that have less than a 20% down payment. It is currently insuring four times as many mortgages daily as it did in 2006 at the height of housing bubble. It now has 5.4 million loans on its books and has become a dominant factor propping up the housing industry. A prominent congresswoman recently stated, "Without the FHA there would be no mortgage market".

In congressional testimony from a few months ago, the head of this government agency claimed that the FHA's finances were sound. Oh really? The FHA currently has $30 billion in cash reserves on the books. How long will that last considering that there are $675 billion in loans and of those 24% of the loans from 2007 are troubled and 20% of the 2008 loans are troubled (these numbers can rise further)? Even a higher percentage of loans from 2009 could wind up troubled. Under the best of circumstances, if more than 4.4% of the loans insured by the FHA default, it will be out of money.

How is it possible that there are an increasing number of problem loans on the FHA books? This is happening because the FHA is picking up the business that subprime brokers used to handle. All you need in order to get this insurance is a 3.5% down payment. A spotty employment record doesn't disqualify you, nor does having filed for bankruptcy in the past. Most outrageous of all is that having a previous mortgage default on your record does not keep you from getting a new loan insured by the FHA! The FHA business model is roughly equivalent to a company offering $100,000 life insurance policies for $100 to hospital patients who are on life support. Yet, the head of the agency claims that their finances are in good shape. 

The FHA is only one of many new bailouts coming. A number of state and local governments are falling deeper into the red. Tax receipts are coming in at even lower levels than anything previously thought possible (chalk this down to another mystery of the supposedly recovering economy). Small and midsized U.S. banks are failing at the fastest clip since the Savings and Loan Crisis. The FDIC insurance fund is insolvent and was only saved at the last minute by having its insured banks prepay three years of insurance premiums.

It looks like the Credit Crisis is by no means over, but we have simply finished phase one and at some point will be entering phase two.

Article by Daryl Montgomery

The Inflation Bomb Hiding On The Fed's Balance Sheeet

Housing, HousingCrisis

Fed Balance Sheet Chart ...there ...THEREisT...HERE THERE IS  good reason to worry about the ability of the Federal Reserve to prevent the massive build up of the monetary base from resulting in out of control inflation.

One of the sources of the growth of the monetary base has been the 
$1 trillion of purchases of mortgage backed securities by the Fed. Much of that hasn’t yet made its way into the broader economy, and instead sits on bank balance sheets. Actually, much of it is on deposit with the Fed itself, where banks can earn risk-free interest instead of lending it to home buyers at risk of losing their jobs or businesses still suffering from diminished consumer demand.

When the economy begins to recover, the Fed will need to reduce the monetary base to prevent all those dollars from flooding the market and triggering hyper-inflation. For some sources of monetary expansion this is relatively straight forward—the Fed can simply shut down various monetary easing facilities that operate like loans to banks. Banks will have to hand 
dollars over in exchange for the collateral they posted to participate in the lending facilities.

But things are not as easy when it comes to the mortgage backed securities the Fed purchased this year. These purchases increased the monetary base, which means they will have an inflationary effect when bank lending loosens. In order for the Fed to start sucking back these funds, it will have to sell these into the market. Unlike the repo and lending programs, however, the Fed cannot simply order the banks to repurchase the mortgage backed securities. It will have to sell them at market prices.

The market’s knowledge that the Fed has become a seller rather than a buyer for mortgage backed securities will likely result in the pricing of these securities falling. In order to bring the yield of these securities up to a level acceptable to the market, they will have to be sold at a discount. This discounting means that the Fed will not be able to withdraw as much liquidity as it added, leaving some portion of that $1 trillion (plus its multiplier effect) in the economy to create inflation.


How The Fed’s Mortgage Subsidy Creates Inflation -[12/21/2009 - Clusterstock]
How The Fed’s Mortgage Subsidy Creates Inflation -[12/21/2009 - Business Insider]
Sorry Folks: The Fed's Mortgage Program Is Infl... -[12/21/2009 - Clusterstock]
Sorry Folks: The Fed's Mortgage Program Is Infl... -[12/21/2009 - Business Insider]
Why the Fed Will Be Sidelined in 2010 - [12/21/2009 - Market Oracle]

Government by Stealth: the GSE affair continues

The U.S. Treasury said it would provide capital as needed to Fannie Mae and Freddie Mac over the next three years, effectively opening its checkbook to the government-controlled companies in a bid to reassure investors in their debt....

This item was released after the closure of the healthcare debate and after the extension of the debt limit passed and after the president left for his Hawaii trip. Sent out on Thursday afternoon, Christmas Eve, the press release outlines the many changes that Treasury is making because of the worsening conditions of Fannie and Freddie. And it paves the way for the recognition of losses in the hundreds of billions in the GSE mortgage pools where the face amounts of the mortgages exceed the property market values or foreclosure amounts.

This action also moves things one step closer to full nationalization of the GSEs and full specific guarantee of the GSE debt by the US Treasury. That would put official GSE debt on the US government’s sovereign debt balance sheet....

We believe this action confirms the seriousness of the GSE problem and is another reason why the Fed must stay on hold with low interest rates for an ”extended period” and why there may even be an extension and enlargement of the Fed’s holdings of GSE paper. If markets do NOT reprice GSE debt at very tight spreads to Treasury debt, the home mortgage interest rate in the US will rise and the nascent housing recovery will be choked off. The Fed knows this and is watching these spreads closely.



Futura recaída en la recesión

...la creencia cada vez más afianzada de que el sistema financiero mundial se ha librado del desplome y de que estamos volviendo lentamente a la actividad normal es una interpretación gravemente equivocada de la situación actual.
La globalización de los mercados financieros que se produjo desde el decenio de 1980 permitió al capital financiero moverse en libertad por el mundo, con lo que resultaba difícil aplicarle impuestos o regularlo. Con ello, el capital financiero se encontró en una situación privilegiada: los gobiernos tenían que prestar más atención a las necesidades del capital internacional que a las aspiraciones de sus propios ciudadanos. A los países les resultó difícil ofrecer resistencia.

Pero el sistema financiero mundial resultante era fundamentalmente inestable, porque estaba basado en la falsa premisa de que se puede dejar con seguridad que los mercados financieros actúen por su cuenta. Ésa es la razón por la que falló y por la que no se puede volver a recomponer.


Storm clouds ahead for America

Rise of China, India could cause headaches for superpower

Robert Pape, a political scientist at the University of Chicago, estimates between 2000 and 2008 the U.S. share of the world's GDP fell by 32%, while that of China rose by 144%.
"America is in unprecedented decline," he says. "The self-inflicted wounds of the Iraq War, growing government debt, increasingly negative curr
ent-account balances and other internal economic weaknesses have cost the United States real power in today's world of rapidly spreading knowledge and technology. If present trends continue, we will look back at the Bush administration years as the death knell of American hegemony."
The United States has experienced the most significant decline of any state, except the Soviet Union, since the mid-19th century, says Prof. Pape, adding: "Something fundamental has changed."...
The U.S. will face increasing competition from rising powers like China and India in the coming years. "We are now at the start of what may become the most dramatic change in international order in several centuries, the biggest shift since European nations were first shuffled into a sovereign order by the peace of Westphalia in 1648," writes Joshua Cooper Ramo in his book The Age of the Unthinkable.

"What we face," he says, "isn't one single shift or revolution, like the end of World War Two or the collapse of the Soviet Union or a financial crisis, so much as an avalanche of ceaseless change.

"We are entering a revolutionary age."


THE DEBT LIMIT: When Is Enough Enough?
by heritage.org
Fact Sheet #48

Why the Debt and the Debt Limit MatterCongress Limit the Debt Limit?

  • $12,000,000,000,000: The total federal debt has reached a whopping $12 trillion. About $7.6 trillion is debt held by the public, which has been borrowed from citizens and foreign countries, and $4.4 trillion is debt held by the government, which has been borrowed primarily from the Social Security trust fund.
  • Debt Is Earning Interest That Taxpayers Must Pay: Public debt holders are paid annual interest from the federal budget, which must be paid with taxpayer dollars. In 2009 interest payments amounted to $209 billion.
  • Too Much Debt Will Slow the Economy: Government borrowing reduces resources available for private investment, leading to lower productivity, wages, and economic growth.
  • Only Getting Worse: The recession and excessive spending have caused the debt held by the public to grow sharply to 56% of the economy, topping the historical average of 36%. To make matters worse, entitlement programs will double in size over the next few decades and cause the national debt to reach 320% of the economy.
  • Raising the Debt Limit: Congress will vote to determine the limit for the federal debt, which currently stands at $12.1 trillion. Since the national debt has hit $12 trillion, Congress plans to raise the debt limit.

Congress Plans to Quietly Raise the Debt Limit

  • Congress Hopes Americans and Credit Markets Don't Notice: To avoid scrutiny, congressional leadership will likely try to sneak the debt limit increase into a "must-pass" measure, such as the defense appropriations bill. Doing so would limit necessary debate on the debt in the hopes that taxpayers and creditors would not respond.
  • Increase Would Be Largest in History: Because this will be a difficult vote, the majority's leadership has suggested raising the limit enough to avoid another vote on the debt limit before the November 2010 elections. The estimated $1.8 trillion increase would be the single-greatest increase of the debt limit in history.

Time to Take the Debt Seriously

  • In Order to Reign in the Debt, Tackle Entitlements: To avoid perpetual trillion-dollar debt limit increases, Members of Congress should finally address the long-term budget problems posed by Social Security, Medicare, and Medicaid.
  • Create a Bipartisan Commission: A growing number in Congress--led by Senators Kent Conrad (D-ND) and Judd Gregg (R-NH) and Representatives Frank Wolf (R-VA) and Jim Cooper (D-TN)--want to tie a vote on the debt limit to the creation of a bipartisan commission that would recommend real reforms to get the nation's debt under control.
  • A Debt Commission Would Be a Step in the Right Direction: A commission would make it politically and procedurally possible for Congress to move on such a difficult issue. An effective commission would put entitlement spending on long-term budgets, which would prevent the debt from growing on autopilot. It would also make Congress think about the long-term obligations posed by entitlements, which now equal $44 trillion.
  • If Not Now, When?: Failure to act now will guarantee that future Congresses will have to raise the debt limit many more times and that future generations will pay the price. Congress must prove it is up to the task by debating the issue on its own merit and taking this hard vote without the subterfuge of burying it in "must-pass" legislation.

Geithner Sees No ‘Second Wave’ Financial Crisis

In wake of the worst economic crisis since the Great Depression, Treasury secretary Timothy Geithner has stated that the Obama administration will prevent another financial collapse like the one that occurred last year. In an interview on Tuesday with National Public Radio, he said the administration “cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable.”

Timothy Geithner

Slow But Stable Recovery

Geithner was against the notion that the commercial real estate problems and a weakening dollar could trigger another crisis again. He did however state (in a different interview) that it would take several months for the economy to experience positive growth. With respects to the current crisis, he believes that large bank have “a long way to go” to earn the trust of the consumers again.


The recession is

over but the

depression has

just begun

… economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring…

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue…

...We are in a fake recovery that could last as long as three or four years or could peter out very quickly in a double dip recession...

...to recap:

  1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
  2. The effects of this depression have been lessened by economic stimulus and government support.
  3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
  4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
  5. Because large scale government deficit spending is politically unpalatable and unsustainable over the long-term, expect a second economic dip within three to four years at the latest...

...what does this mean for the American and global economy?

  1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect).  That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
  2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
  3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
  4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
  5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.  While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver.  However, when the prop of government spending is taken away, the global economy will relapse into recession.
  6. I believe this dynamic will induce a Scylla and Charybdis of inflationary and deflationary forces, forcing central bankers to add and withdraw liquidity in a manic way. The likely volatility in government spending and taxation gives you the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.



Nine Indicators of a Second Wave in Economic Slump

The DJIA has risen upwards of 60% since March this year. As each day passes, the belief that we have entered a long bull market, like the one that began in 1983 and ended in 2000, is strengthened. We at Keystone State Capital are skeptical of the possibility of another bull onslaught anytime soon. The reasons for our conviction are galore, while the rationale for staying invested is hard to find and more importantly, hard to digest.

Some of the key indicators and reasons for a second wave in this historic slump/depression are as follows:

1. Fall in Mortgage Demand

2. Rise in inventories

3. Total Credit

4. High Private Debt in the country

5. Limited arsenal with the Federal Reserve

6. Kondratieff Wave

7. Futility of Government efforts

8. Price to Earnings ratio, Unprecedented rise in the market

9. Sentiment Indicators



In Ireland's deep budget cuts, an omen for a heavily indebted United States?

 Is this the ghost of America's future?

Like other heavily indebted nations around the world, Ireland is borrowing vast sums from foreign investors to plug its budget deficit. Fearing that the country will buckle under the weight of so much debt, the Irish have an answer: Put the government on a diet...

More than $4 billion in cuts coming into effect after New Year's Day will slash salaries for 400,000 government workers while making painful reductions in benefits for such groups as widows and single mothers to the blind and disabled childre

The world's richest nations, according to the Organization for Economic Cooperation and Development, are more indebted than at any time in at least the past 50 years.

Budget deficits in the world's industrialized nations have more than tripled during the financial crisis. Nations have injected huge amounts into bank bailouts and stimulus packages, even as tax collection has collapsed. With borrowing still soaring, the OECD projects that by 2011, wealthy nations could owe investors more than the value of their gross domestic product...

"The U.S. government, like the U.K. government, the Greeks and the Irish, is going to need to draw down fiscal stimulus, pare expenditures, raise revenues and probably take a look at [cuts] in their entitlement programs" such as Social Security, said John Chambers, chairman of Standard & Poor's sovereign rating committee...some have criticized the government for what they view as a thinly veiled message encouraging members of a new generation of Irish to set forth overseas to find their fortune, as many of their parents, grandparents and great-grandparents did. The new cuts specifically target Irish 20-somethings who cannot find work, reducing their unemployment benefits, in some cases, by as much as 30 percent.

Read the full article


Top business story: Recovery from Great Recession

Fed's approach to regulation left banks exposed to crisis >>> The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts

The U.S. dollar will continue to depreciate over the long term and the world's largest economy is expected to remain sluggish for a long time - Fan Gang, adviser to the Chinese central bank.

Are Americans currently living in another depression?

Policy makers and leaders of financial institutions are now turning their attention more to a set of interrelated issues that caused the economic meltdown while the world is beginning to emerge from the global financial crisis - Karim Pakravan, Associate Professor of Finance at DePaul University, Chicago

Year's best business books to make sense of financial crisis

Con más influencia y esperanza, América Latina recibe nueva década ¡Cuánto puede cambiar en solo una década! Hace diez años, América Latina y el Caribe recibieron el nuevo siglo en medio de una profunda incertidumbre

La crisis financiera y los derivados OTC

China hace gran aportación a recuperación económica gradual del mundo

Cuba admite que la crisis le ahoga El Gobierno reconoce que las predicciones para 2010 son mucho peores de lo que se esperaba.- Raúl Castro acusa a Obama de tener un doble juego hacia la isla

"The world does not have so much money to buy more US Treasuries."...Zhu Min, deputy governor of the People's Bank of China
IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday...Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending..."The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said..."The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."



Exclusive Interview: Nouriel Roubini on Latin America's 2010 Outlook

December 18, 2009

"These countries have shown their own resilience. Their economic policies have been sound and they’ve been able to conduct countercyclical policies."

Chairman of Roubini Global Economic and New York University Professor of Economics Nouriel Roubini joined AS/COA Online's Carin Zissis for an exclusive interview regarding Latin America's economic outlook. Roubini forecasts and regional growth rate of 3.8 percent for 2010. He also offered his outlook for specific countries, including Brazil, Mexico, and Venezuela.


CLICK HERE TO VIEW >>> Video: Nouriel Roubini on the Global Economic Outlook

Time to Reinstate Glass-Steagall?

See video below for insight on the new amendment that would stop taxpayer-backed commercial banks from trading risky assets, with Sen. John McCain (R-AZ).



 magazine has named Ben Bernanke its 2009 Person of the Year. The magazine said the Federal Reserve chairman's foresight and success at preventing a second Great Depression -- the history that wasn't made this year -- drove its choice.

"We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it," Richard Stengel, Time's managing editor,
writes in an introduction to this week's issue. "Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it. Bernanke decided to do the opposite of what the Fed did back in the '30s: he would loosen the money supply as far as it would go, he would save as many banks as he could, and he wasn't going to hector the American public about pulling up their socks."
From Time:
"Professor Bernanke of Princeton was a leading scholar of the Great Depression. He knew how the passive Fed of the 1930s helped create the calamity — through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation. Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0. So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years, he conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed's balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation. He didn't just reshape U.S. monetary policy; he led an effort to save the world economy."




U.S. National Debt Tops Debt Limit


The latest calculation of the
National Debt as posted by the
Treasury Department   has - at least numerically - exceeded the statutory Debt Limit approved by Congress last February as part of the Recovery Act stimulus bill. 

The ceiling was set at $12.104 trillion dollars. The latest posting by Treasury shows the National Debt at nearly $12.135 trillion. 

A senior Treasury official told CBS News that the department has some "extraordinary accounting tools" it can use to give the government breathing room in the range of $150-billion when the Debt exceeds the Debt Ceiling. 

Were it not for those "tools," the U.S. Government would not have the statutory authority to borrow any more money. It might block issuance of Social Security checks and require a shutdown of some parts of the federal government. 


"extraordinary accounting tools"

A Call to Action to Stem the

Mounting Federal Debt

The Peterson-Pew Commission on Budget Reform

Executive Summary

A call to action

Over the past year alone, the public debt of the United States rose sharply from 41 to 53 percent of gross domestic product (GDP). Under reasonable assumptions, the debt is projected to grow steadily, reaching 85 percent of GDP by 2018, 100 percent by 2022, and 200 percent in 2038.

However, before the debt reached such high levels, the United States would almost certainly experience a debtdriven crisis—something previously viewed as almost unfathomable in the world’s largest economy. The crisis could unfold gradually or it could happen suddenly, but with great costs either way. The tipping point is impossible to predict, but the United States is already hearing concerns about its fiscal management from some of its largest creditors, and the country is uncomfortably vulnerable to shifts in confidence around the world.

The Peterson-Pew Commission on Budget Reform is calling for Congress and the White House to take immediate action to stem the growing federal debt. Our proposal is crafted both to accommodate the needs of the still-recovering economy, and reflect the tremendous risks posed by the large and expanding debt burden. We recommend that Congress and the White House formulate a fiscal framework that includes:

• A commitment to stabilize the public debt over the medium term;

• Specific policies to stabilize the debt;

• Annual debt targets with an automatic enforcement mechanism to ensure targets are met; and

• A commitment to reduce further the debt level over the longer term.

The looming fiscal crisis

The economic crisis that the United States just experienced resulted in the deterioration of the country’s fiscal metrics as revenue plummeted and spending soared due to the recession’s effects and the government’s response.

The 2009 budget deficit was $1.4 trillion, almost 10 percent of GDP. The public debt grew 31 percent from $5.8 trillion to $7.6 trillion. And the total debt, which includes what the government has borrowed from itself, grew from almost $10 trillion to $11.9 trillion.

However, even after the recession abates, its lingering effect, the extension of a number of deficit-financed policies, demographic changes, and growing health care costs will all create an unsustainable fiscal situation where the debt will continue to grow as a share of the economy.

Under the Commission’s “fiscal baseline” , which assumes the extension of many of the 2001 and 2003 tax cuts and other expiring policies, lower war costs, and discretionary spending that keeps pace with the economy, the United States would see:

• Total government spending—driven by an aging population and rising health care costs—rise from 25 percent of GDP today to 36 percent in 2038.

• Revenue—which fell to below 15 percent of GDP during the recession—grow gradually to 18.5 percent in 2018, surpassing historical averages, but not by nearly enough to keep pace with spending.

• Deficits slip from their current level of 10 percent of GDP to below 6 percent over the next five years but rise to above 16 percent in 2038.

Without a dramatic shift in course, the debt will grow to unprecedented levels, breaking the 200 percent mark in 2038. Well before the debt approaches such startling heights, fears of inflation and a prospective decline in the value of the dollar would cause investors to demand higher interest rates and shift out of U.S. Treasury securities. The excessive debt would also affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest,  or provide a safety net.

Stabilizing the debt

The Peterson-Pew Commission on Budget Reform knows that fiscal problems of this size cannot be fixed overnight or even in a year. Indeed, rushing the process could harm the economy, choking off the budding recovery. But to buy some breathing room, the United States must show its creditors that it is serious about stabilizing the federal debt over a reasonable timeframe. Both spending cuts and tax increases will be necessary.

The Commission recommends that Congress and the White House follow a six-step plan:

Step 1: Commit immediately to stabilize the debt at 60 percent of GDP by 2018;

Step 2: Develop a specific and credible debt stabilization package in 2010;

Step 3: Begin to phase in policy changes in 2012;

Step 4: Review progress annually and implement an enforcement regime to stay on track;

Step 5: Stabilize the debt by 2018; and

Step 6: Continue to reduce the debt as a share of the economy over the longer term.


1. Commit immediately to stabilize the debt at 60 percent of GDP by 2018.

Congress and the White House should immediately commit to stabilizing the public debt at a reasonable level over a reasonable timeframe: we recommend 60 percent of GDP by 2018. Waiting too long could fail to reassure creditors—one of the primary objectives of acting quickly. The “announcement effect” of such a commitment, if credible, can have positive economic effects by signaling that the United States is serious about reducing its debt.

We believe that the 60 percent goal is the most ambitious yet realistic goal that can be achieved in this timeframe.

The 60 percent debt threshold is now an international standard—regularly identified by the European Union (EU) and the International Monetary Fund (IMF) as a reasonable debt target. A more ambitious target could easily prove to be such a heavy political lift that lawmakers would not embrace it or it would not be credible. Given the significant risks of high U.S. debt, however, a less aggressive target might be insufficient to reassure markets.

While cutting government spending or raising taxes too early could slow or reverse the economic recovery, other countries have shown that a credible commitment to reducing the debt prior to actual policy changes can improve creditors’ expectations and diminish the risks of a debtdriven crisis. A number of advanced countries including Canada and Sweden offer fiscal success stories.

2. Develop a specific and credible debt stabilization package in 2010.

A glide path for getting from today to 2018 is critical. So are the specific policies. Congress and the White House must agree on the necessary reforms and the timing for implementing them. We do not recommend a specific mix but believe that both spending cuts and tax increases will be necessary.

Under the Commission’s fiscal baseline, average annual deficits are projected to be about 6 percent of GDP. To meet the proposed goal, the average deficit would need to shrink to about 2 percent. For illustrative purposes, we propose a glide path that starts gradually with a deficit of 5 percent in 2012 and that requires a deficit of less than 1 percent by 2018. We allow seven years for the plan so that the impact of policy changes made in any single year is not drastic and does not stall the recovery of the economy.

The magnitude of deficit reduction needed to reach the 60 percent goal depends on the level of debt when policymakers start. If no new deficit-financed policies were added to the budget and any extensions of expiring policies were paid for, deficits would average around 3 percent of GDP, instead of 6 percent, and would only need to shrink to around 2 percent to meet the Commission’s goal—clearly a more manageable scenario.

3. Begin to phase in policy changes in 2012.

Given current economic conditions, we recommend waiting to implement the policy changes until 2012. Clearly, policymakers need to closely monitor economic conditions between now and then, but making aggressive changes any earlier could harm the economic recovery, particularly with unemployment reaching a 25-year high in 2009. However, waiting any longer could undermine the plan’s credibility and leave the country reliant on excessively high borrowing for too long with no plan in place to change course. Some policymakers will no doubt try to use the struggling economy as an excuse for delay.

Keep in mind however, that not putting a plan in place could derail the economic recovery.

4. Review progress annually and implement an enforcement regime to stay on track.

Once a plan is adopted, it will be critical to have a mechanism to ensure that it stays on track. We suggest a broadbased companion enforcement mechanism, or a “debt trigger.” The trigger would take effect if an annual debt target were missed. Any breach of the target would be offset through automatic spending reductions and tax increases.

The Commission recommends that the trigger apply equally to spending and revenue. There would be a broadbased surtax, and all programs, projects, and activities would be subject to this trigger. The trigger should be punitive enough to cause lawmakers to act but realistic enough that it can be pulled as a last resort if policymakers fail to act or select policies that fall short of the goal.

5. Stabilize the debt by 2018.

Reducing the debt to 60 percent of GDP will be no small feat. It will require small changes in the first year from the projected level of 69 percent to 68 percent but, more significantly, will require a dramatic deviation from the current debt path. Preventing that projected path is critical for the United States if it is to avoid the economic risks associated with excessive debt.

But hitting a 60 percent target is, in and of itself, not a sufficient goal. What matters just as much—if not more—is that the debt does not continue to grow as a share of the economy thereafter. This makes deriving a package of revenue increases and spending cuts to bring the debt down to 60 percent even more difficult. It would be easier if policymakers could implement temporary measures, timing shifts, and short-term policies that did not address the major drivers of the budget’s growth. This shortsightedness, however, would leave the debt on track to grow again after the medium-term goal was achieved.

To be effective over the longer term, a stabilization package will have to include permanent changes to current policies and must be weighted to control the budget’s most problematic areas.

We believe the problem is so large that nearly all areas of the budget will be affected, and certainly both spending and taxes will have to be part of the ultimate package. Reforms in programs that are growing faster than the economy—notably Medicare, Medicaid, Social Security, and certain tax policies—afford the best opportunities for savings and will provide the greatest benefits to longer term debt stability.

6. Continue to reduce the debt as a share of the economy over the longer term.

Though preventing the debt from expanding again over the coming decades will be quite challenging given the demographic and health care cost pressures, we believe that policymakers must, over time, bring the debt down beyond the initial 60 percent target to something closer to the U.S. historical fifty-year average of below 40 percent.

Fiscally-responsible federal policies are necessary so that the government has the fiscal flexibility to respond to crises.

Even though the United States had budget deficits when the recent economic and financial crises hit, the relatively low level of debt as a share of the economy gave policymakers the ability to respond quickly and borrow large amounts to respond to those crises without worrying about the federal government’s ability to borrow. If the debt level had been at its current level, or where it is projected to grow to, responding to the economic crisis would have been much more challenging.

Implementing reforms that slow the growth of government spending, keep revenue apace with spending, and are conducive to economic growth will be critical to bringing down the debt levels further. Ultimately, this task will almost certainly require more than one package of debt reduction. The Commission hopes that policymakers will monitor the debt to ensure that it stays at a manageable level and does not grow faster than the economy. Ensuring the future fiscal health of the country depends on it.

The difference between the deficit and debt

The deficit is the difference in a given fiscal year between federal revenue, and spending. The government can have either a deficit or a surplus. In order to finance operations when there is a deficit, the government borrows money by issuing government securities to cover the deficit.

The debt is the amount owed to creditors who have financed the government’s borrowing. It does not increase by the exact amount of the deficit, but deficits are the primary factor. The debt can also rise or fall because of changes in the Treasury’s operating cash balance, the exercise of sovereign monetary power, federal credit financing, and federal financial stabilization activities.

The deficit and debt can be expressed both in dollars and as a percentage of GDP. The debt-to-GDP ratio and the debt path, or debt trends over time, are key measures of the debt in comparison to the nation’s total economy, and reflect the nation’s ability to manage its debt. For this analysis, the Commission uses publicly-held debt, as opposed to gross debt, which includes federal debt held internally by government trust funds to redeem future commitments.


President Obama: Federal Government 'Will Go Bankrupt' if Health Care Costs Are Not Reined In

Runaway Debt Must Be Stopped Now

Greenspan: United States must quickly begin to erase red ink to avert possible disaster.

Obama administration launches Financial Fraud Task Force to investigate issues related to the economic crisis.

FedEx sees strong demand in Asia and Latin America leading the way to global economic recovery

Economic reports point to gradual recovery

U.S. inflation rises more than expected

Gulf closer to single currency

"I can't say this enough: The state has run out of money," New York Governor Paterson



First, the Good News on the Economic Recovery... A Commentary by Lawrence Kudlow

Why the real unemployment rate is far higher than the official one

Democrats plan nearly $2 trillion debt limit hike


...by far not all of the credits borrowed by the government were financed by the Fed. According to preliminary and rough estimates, not 40 percent but "only“ about 13 percent of U.S. expenditures are presently financed this way. Moreover, in discussing this problem it has to be taken into account that about two-thirds of dollar bills are estimated to circulate abroad. This—together with the fact that incredibly huge holdings of dollar assets are owned especially by the central banks of China, India, and the Gulf States—may pose other and later dangers. But these dangers will be, except for a return of the dollar bills and a purchase of foreign-owned dollar assets by the Fed, of a different nature. Inflation may rise more or less strongly during the next years, but there is presently no danger of a hyperinflation in the United States... Peter Bernholz


At a time when the White House is projecting the largest deficit in the nation's history, Uncle Sam is trying to recover billions of dollars in unpaid taxes from its own employees. Federal workers owe more than $3 billion in income taxes they failed to pay in 2008. According to Internal Revenue Service documents, 276,300 federal employees and retirees owe $3,042,200,000.


Forecasts of recovery through 2011 are pessimistic
The U.S. recovery may feature prolonged high unemployment amid slow growth, according to economists. The so-called European-style rebound is unlike Japan, where stagnation is a hallmark of recovery. Economists are offering their first forecasts that extend through 2011. "We had been worried about turning into Japan," said David Wyss, chief economist at Standard & Poor's Corp., New York "But it may be more likely that we end up with sclerosis."



Another Big Shoe Yet to Drop

Commercial real estate is one of the big shoes yet to drop, warns Gary Schlossberg, senior economist at Wells Capital Management in the video below. He outlines the risks this could pose U.S. banks


Watch CBS News Videos Online


US House passes Obama banking bill >>> The Obama administration won a victory for its vision of financial reform as the House of Representatives passed a landmark regulation bill. The legislation included a new Consumer Financial Protection Agency, an innovation fiercely opposed by banks and some Democrats.

Corruption threatens "soul and fabric" of U.S.: FBI

Could Dubai World's Debt Default Spark a Crisis in the Middle East and Beyond?

Financial Crisis Hits Pension Systems in Europe and Central Asia >>> World Bank cautions countries against addressing short-run fiscal constraints with long-term policy changes

Treasury Secretary Timothy Geithner said on Thursday the government had to beware declaring victory too soon after managing to avert complete financial collapse by bailing out the nation's banks

Democrats to lift debt ceiling by $1.8 trillion, fear 2010 backlash


Rates on 30-year mortgages set new record low

Aprueba cámara baja de EU reforma financiera >>> La cámara baja de Estados Unidos aprobó hoy una ambiciosa iniciativa para reformar el sistema regulatorio del país, a fin de prevenir nuevas crisis financieras y fijar estándares más estrictos de operación en Wall Street. ...la iniciativa de ley HR4173 busca proteger a consumidores e inversionistas y regular los complejos instrumentos financieros derivados. La llamada Ley de Reforma de Wall Street y de Protección de los Consumidores otorga por primera vez a la Reserva Federal, el banco central estadunidense, poderes adicionales para imponer estándares prudenciales más estrictos a las empresas financieras. Asimismo establece un nuevo Consejo de Supervisión de Servicios Financieros, formado por el secretario del Tesoro y titulares de las agencias regulatorias, que fijará reglas de operación y mecanismos para detectar amenazas a la estabilidad del sistema financiero.

Trichet critica las primas y pide a los bancos que gasten el dinero en provisiones El presidente del BCE solicita a las entidades financieras que aprovechen la recuperación para adoptar medidas frente a futuras crisis y no para alimentar sueldos multimillonarios

Corrupción amenaza "alma y tejido" de EEUU: FBI

Temores sobre las finanzas de los gobiernos del mundo se propagaron a los mercados el martes, a medida que varias reducciones de calificación de riesgo sirvieron para recordar la fragilidad de la recuperación global

La deuda de España alimenta los temores de una crisis fiscal en Europa

Dólar, déficit y crisis global >>> constituye una bomba termonuclear que se cierne latente sobre la economía global

Volcker respalda a la Fed como un organismo de supervisión bancaria

Crisis financiera (Primera Parte - Once TV Mexico)


Moodys Investors Service said its top debt ratings on the U.S. and the U.K. may test the Aaa boundaries because their public finances are worsening in the wake of the global financial crisis

Why So Few In Dubai Saw The Debt Crisis Coming

Chairman Ben S. Bernanke SPEECH At the Economic Club of Washington D.C., Washington D.C., December 7, 2009 >>> Too early to declare lasting recovery

A "speculative fervor" has returned to markets after the global financial crisis, causing a bubble to form in commodities and creating risks for the dollar


Moody's Investors Service señala que Estados Unidos y Reino Unido deben demostrar que pueden reducir sus crecientes déficit para evitar amenazas para sus calificaciones crediticias triple-A.

ORGANIZACION INTERNACIONAL DE TRABAJO: 14 meses, 33 desempleados por minuto >>> La crisis financiera global pegó menos duro de lo que se esperaba en el mercado laboral, en comparación con episodios anteriores similares.

Chávez trata de apagar el incendio del escándalo bancario

Obama reducirá rescate financiero para crear nuevos empleos

Las ayudas estatales se quintuplicaron en 2008 por la crisis financiera



Recession Elsewhere, but It’s Booming in China

For more and more consumer goods, China is surpassing the United States as the world’s biggest market — from cars to refrigerators to washing machines, even desktop computers.

The Chinese market is “on full tilt — booming is an understatement these days,” said John Bonnell, the director of Asia vehicle forecasting at J.D. Power & Associates.

China is pulling ahead at this particular moment partly because Americans, debt-laden and worried about their jobs, are pulling back. After decades of gorging on consumption, Americans are saving. And the Chinese, whom economists thought were addicted to saving, are spending more.

Among China’s 1.3 billion people, rising incomes are finally making large numbers of Chinese prosperous enough to make big-ticket purchases.

Read full article

Court Spars on Oversight of Agencies

Just how independent may a government agency be?

In a spirited argument at the Supreme Court on Monday, the justices considered whether Congress had violated separation-of-powers principles in 2002 when it created a board to regulate the accounting industry. The problem, critics of the law say, is that the board is too insulated from presidential oversight.

The board, the Public Company Accounting Oversight Board (sometimes called peekaboo by accountants), is overseen by the Securities and Exchange Commission, itself an independent agency.

Under the 2002 law, the Sarbanes-Oxley Act, board members are doubly insulated from presidential control. The S.E.C., but not the president, can remove them, and only for cause. One level up, the president can remove S.E.C. commissioners, but again only for cause.

Read full article

Journal of Accountancy Large Logo

The U.S. Economic Crisis: Root Causes and the Road to Recovery

Return to prosperity requires reversal of excessive consumption, low savings trends

...we have witnessed a consumption boom over the last two decades, where U.S. aggregate household consumption grew to represent more than 70% of gross domestic product (GDP), a historically and unsustainably high level (see Exhibit 1). Excessive consumption was fueled by a loosening of lending standards prompted by government policy to increase homeownership rates, and accompanied by record low savings rates. Cheap credit from both home and abroad and a substantial increase in financial intermediation including new structured derivative products also contributed. In line with the private sector, the U.S. government also ran sizable budget deficits and a huge current account deficit.

...the U.S. will need to foster export growth as opposed to relying on declines in imports as foreign (especially developing) economies rebound... 

...after a few years, the government will be forced to rein in spending. This fiscal contraction will retard growth in the intermediate term. The uncertain pace of a retreat in government spending represents a significant risk to our outlook in that this requires restraint by policymakers. Under the president’s proposed budget, the Congressional Budget Office (CBO) forecasts that government debt held by the public, as a percentage of GDP, will increase significantly in the next decade (see Exhibit 5); for historical comparison, these levels were last touched during World War II.


Furthermore, government policy still eventually has to deal with the increasingly impending unfunded liabilities. Social Security, Medicare/Medicaid, and the prescription drug benefit, with their estimated unfunded liabilities of around $40 trillion to $50 trillion, stand in sharp contrast to the current total federal debt of about $11 trillion and the projected $1 trillion to $2 trillion federal deficits for 2009 and 2010. The CBO forecasts that government debt held by the public will exceed 200% of GDP in several decades. ..


...the entire restructuring process will come at a substantial cost to us all. The mind-set that consumption and government expenditures do not carry costs has pervaded the U.S. economy for too long. Steps forward should focus on facilitating a greater balance to the economy, spanning the household, government and external sectors. Greater rates of taxation and lower spending (or, in the worst case, higher inflation) at the end of all this will be required once the economy has stabilized. We can perhaps continue to spend beyond our means for a bit longer, but this will not persist indefinitely...

Read the full article


The two most significant structural consequences of the recent financial debacle:

  • > the USA's massive deficits and debts 

 >> the shift of economic power from west to east. 

The American budget deficit of this past fiscal year reached 10 per cent of gross domestic product, the largest since the aftermath of the second world war. Meanwhile, the net external debt of the US nearly tripled last year to $3,500bn and it is projected to increase by nearly $1,000bn every year for the next decade. All this underestimates the problems of a country where unfunded liabilities for baby boomer entitlements are in the stratosphere, infrastructure deterioration is scandalous and many large states are out of money. To close the gaps, taxes would have to be raised to sky-high levels and spending brutally slashed. It would take a miracle if America's political system - one rife with vicious partisanship and riddled with well-financed special interests - could do either, let alone both.

Washington will therefore have little choice but to take the time-honoured course for big-time debtors: print more dollars, devalue the currency and service debt in ever cheaper greenbacks. In other words, the US will have to camouflage a slow-motion default because politically it is the easiest way out.

Read full article: We must get ready for a weak-dollar world





The Modest Superpower


How the financial crisis could leave Europe even stronger than America.

Even as America and Russia have been humbled by the economic crisis and China and India remain preoccupied with internal problems, Europe is thriving. Exactly two decades after the fall of the Berlin Wall, the continent has been transformed: it is more united, prosperous, and secure than at any time in history. This year, Europe surpassed the United States in wealth, according to the Boston Consulting Group. Next year, Europe's population is expected to hit half a billion and its GDP to nearly match that of the U.S. and China combined. The financial crisis has turned Europe's softer, more regulated brand of capitalism into the preferred model for much of the world—even the United States—and a half-dozen countries are now seeking EU membership in order to gain economic shelter from the ongoing storm. The crisis itself, for all its terrible effects on the EU economy, has unexpectedly strengthened the continent's cohesion, as has the just-ratified Lisbon Treaty, which streamlines the way Europe runs its affairs. Overseas, the EU is now responsible for much of the world's development aid and has 71,000 troops stationed beyond its shores, a global footprint second only to America. This is not to say there aren't many areas where Europe is still divided and punches below its weight. But by most measures, the EU looks better and better by the day.

Read full article

Suggestions that the current
financial crisis was not
as bad as the Great Depression may be
This chart is evidence:  


If you add JP Morgan and Wells Fargo to the chart, it looks much worse. Goldman and Morgan Stanley don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ‘08

Go to Rolf Winkler Blog

September 2009

Multimedia Outline of the U.S. Economy: An Overview

MULTIMEDIA: The productivity of American workers is a standard for the world, exceeding that of their European counterparts by 20 percent. U.S. productivity expanded by an average 2 percent a year from 2000 through 2006, twice the gain enjoyed by most European nations.

MULTIMEDIA: Milestones in U.S. Economic History

The U.S. economy of the 21st century little resembles that of the 18th century, but acceptance of change and embrace of competition remain unchanged. To read "Outline of the US Economy"...click here

Read it all

CLICK HERE for 4th Quarter 2009 Economic Outlook Survey Results


Jobs Report Is Strongest Since the Start of the Recession

The nation’s employers not only have stopped eliminating large numbers of jobs, but appear to be on the verge of rebuilding the American work force, devastated by the recession.

The unexpected improvement comes as a relief to the Obama administration, which plans to unveil new proposals next week to ease the plight of the jobless following its labor forum in Washington on Thursday.

In the best report since the recession began two years ago, only 11,000 jobs disappeared last month, the government said on Friday, and the unemployment rate actually dipped, to 10 percent, from 10.2 percent the previous month.


James Bullard, President and CEO,Federal Reserve Bank of St. Louis

Three Lessons for Monetary Policy from the Panic of 2008

  • Lesson One: Lender-of-last-resort (LOLR) on a grand scale.
  • Lesson Two: Quantitative easing can substitute for policy rate easing after the zero bound is encountered.
  • Lesson Three: Better understanding of the connection between asset pricing and monetary policy is a top priority.

Read press release summary

View presentation slides

Philadelphia Federal Reserve President Charles Plosser
Financial Crisis Not Yet Fully Understood
...it is too soon to say that the financial turmoil of last year is fully understood and that policymakers must continue to learn about the crisis before making major regulatory decisions. 

"My own view is that in the face of so much uncertainty, we should move more deliberately in designing, major regulatory reforms, certainly more deliberately than the current legislative calendar suggests," he said in prepared remarks.

Read the full speech

The great trade collapse

 What caused it and what does it mean?

World trade experienced a sudden, severe, and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. This ebook – written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva – presents the economics profession's received wisdom on the collapse. Two dozen chapters, written by leading economists from across the globe, summarise the latest research on the causes of the collapse as well as its consequences and the prospects for recovery. According to the emerging consensus, the collapse was caused by the sudden, severe and globally synchronised postponement of purchases, especially of durable consumer and investment goods (and their parts and components). The impact was amplified by “compositional” and “synchronicity” effects in which international supply chains played a central role.

The “great trade collapse” occurred between the third quarter of 2008 and the second quarter of 2009. Signs are that it has ended and recovery has begun, but it was huge – the steepest fall of world trade in recorded history and the deepest fall since the Great Depression. The drop was sudden, severe, and synchronised. A few facts justify the label: The Great Trade Collapse.

The Amazing Speed Of The Global World Trade Collapse

But the velocity of the collapse was even worse. Trade fell faster than even during the Great Depression.
Source: Richard Baldwin: The great trade collapse: What caused it and what does it mean?

View slide presentation

Read the full study

KRUGMAN: Double dip warning

I’ve never been fully committed to the notion that we’re going to have a “double dip” — that the economy will slide back into recession. But it has been clear for a while that it’s a serious possibility, for two reasons. First, a large part of the growth we’ve had has been driven by the stimulus — but the stimulus has already had its maximum impact on the growth of GDP, will hit its maximum impact on the level of GDP in the middle of next year, and then will begin to fade out. Second, the rise in manufacturing production is to a large extent an inventory bounce — and this, too, will fade out in the quarters ahead...

Meanwhile, the ISM for manufacturing suggests that industrial growth is already slowing down.

I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing.

The chances of a relapse into recession seem to be rising.

Read it all

Chavez Manufactures A Banking Crisis

Venezuela may be setting itself up to be the next mini financial crisis such as Dubai. has become

That's because Hugo Chavez has decided to start nationalizing Venezuelan banks, which so far have mostly escaped his expropriating ways.

Venezuelan credit markets weren't been happy about this at all.

Reuters: With rumors swirling about stability after the government closed four failing banks, Chavez twice this week stoked fears, threatening to nationalize banks involved in malpractice or failing to aid development in Venezuela.

But on Thursday he cooled his rhetoric after investors dumped Venezuelan bonds and the bolivar. Business groups and banks also released statements saying the system was solid.

"The government is putting out fire ... We are fixing the problem," he said, saying both the country and the bank system will benefit from his measures. "We will all emerge stronger."


The Global Financial Crisis Hits Home in Europe and Central Asia Households need social safety nets now more than ever, warns World Bank report

UN says global economy will bounce back in 2010

The labor sector continues to be on the receiving end of the worst financial crisis since the Great Depression

Fed: Economy 'Modestly' Better >>> The Dec. 2 Beige Book report said conditions improved in 8 of 12 regions, though labor and commercial real estate markets remained weak

European Banks Growing Bigger Sowing the Seeds of Next Crisis

Geithner Testimony to Congress: Derivatives market needs transparency

Joel Osteen encourages faith amid economic depression


Para Krugman hay un "exceso de optimismo" con Brasil

Europa aprobó hoy un nuevo esquema de control y supervisión financiero, con el objetivo de evitar un retorno de la crisis bancaria transfronteriza

Crisis empeora la pobreza en Europa oriental: Banco Mundial

Entre divisiones, UE acuerda nueva regulación financiera

Nuevo caso Madoff: un abogado estafó por u$s1.200 millones

Japón lanza nuevo paquete de estímulo

Economía Global-2009: La vida sigue más desigual 



Congressman Cantor Remarks on Economy, Jobs, Deficit

Remarks as prepared for delivery:

Thank you. And thanks to all of you at Heritage for your commitment to the common sense conservative principles that form the bedrock of this country. With many of these values currently under siege, you are on the front lines of the fight to get our message out and show America a better way forward.

And that’s why I’m here with you today - to offer a contrasting approach to how Republicans would handle our economic struggles.

I want to start by sharing with you what I heard around the Thanksgiving dinner table last week – a set of sentiments I know families around the country are experiencing. While there was plenty of good food and good cheer, I was struck by the overwhelming sense of pessimism about our nation’s future. Instead of looking forward, I heard people talking about the past. “Remember how great we used to be?”

Its not that the folks I was with believe we can’t get back to those days, but there is a fear, an insecurity about the future – not just their own but their neighbors and friends. Nearly everyone knew someone who’d lost a job, or were worrying about paying college tuition or were thinking about working longer instead of retiring. No doubt, America is struggling, and people need our help.

But are the policymakers in charge of our government listening? The last 11 months have been spent on an agenda that is out of step with the struggles of the American people.

An agenda that expands the reach of government, increases the deficit and requires us to borrow even more money from foreign countries.
On everything from spending to cap-and-trade to card check, jobs have taken a back seat. As a result, the debt is set to double over the next five years….triple in 10!

Within four years the federal government will spend $1 billion a day just on interest on the debt. Within ten years it will be nearly $2 billion a day.

The 800-billion dollar stimulus bill that Washington passed has failed to create – or save – the jobs it promised.

The bailout culture in Washington has raised moral hazard problems throughout the economy, signaling to industries that they will not be held accountable for their mistakes or their poor decisions. Even worse, the proposed volley of heavy taxes and mandates has draped small businesses – the nation’s job creators – in a blanket of fear. The result is that small businesses are standing on the sideline. Not hiring. Not investing. And not expanding.

All the while, the Democratic majority continues to push a trillion-dollar government-run health care overhaul. Even the non-partisan CBO warns it will fail to lower costs as promised.

The President and the Democrat Majority have the right to chart their own course. They have all the power. But ignoring the realities of today’s economy and the needs of working families and small businesses only exacerbates our current challenges.

There is now talk of a second -- or is it a third – stimulus bill. But those in charge say we are not allowed to call it a stimulus bill. To do so would acknowledge the failure of their other stimulus bills. So what are the Majority and the President considering for this new “don’t call it a stimulus, stimulus bill?”

More government spending, more bailouts for states, more transfer payments to individuals, expanded government agencies. All, of course, financed with more borrowing, and more debt. It sure sounds like the other stimulus bills doesn’t it?

The question for us then is, “is there a better way?” Can we grow the economy, create jobs, and help struggling families without further mortgaging our children’s future? Is there a “no cost” jobs plan?

I chair the Economic Recovery Solutions Group for House Republicans. This group of Members has been meeting all year on ways to improve the economy. And lately our focus has been on a no-cost jobs plan. So as the President kicks off his jobs summit tomorrow, I would like to highlight some common-sense proposals that we have had under discussion that I believe are worthy of serious consideration by the President and the Congressional Majority.

I know there are philosophical differences between the parties, but surely we can agree on a few common-sense things to help get America back to work. Let’s begin with a simple premise: An overactive government did not make America the land of promise, prosperity and opportunity.

Why have our small businesses, entrepreneurs and workers been so motivated to work hard and innovate over the years? Because hard work was rewarded. Why have investors and job creators around the world gravitated to U.S. capital markets? Because America was a place where taxes and regulations fostered competitiveness, transparency and accountability. Why have countries around the world made the U.S. dollar the world’s reserve currency? Because America was a rock of financial stability that pursued sound fiscal policies.

So with that in mind what policies should we be pursuing?

First . . . we must tear down self-imposed obstacles to economic growth and wealth creation. The prospect of a barrage of tax increases, new government regulation, and costly government mandates have had a paralyzing impact on our job creators. As the CEO of a steelmaker recently told the Wall Street Journal “I am not going to do anything until these things – health care, climate legislation – go away or are resolved.
Therefore Congress and the Administration should stop the deluge of detrimental rules and regulations.

Since taking office, the administration has put on the table over 100 detrimental regulations each with an impact of $100 million or more on the economy. The President should issue an executive order mitigating the impact of any proposed rule that would adversely affect jobs, the economy and small businesses.

Second . . . we should agree to block any federal tax increases until unemployment drops below 5 percent. That includes any new taxes to pay for more spending or any automatic tax increases embedded in federal law. Americans of all political stripes can agree that the government should never raise taxes during periods of high unemployment. The revenues higher taxes will generate are better off in the pockets of families and small businesses.

Third . . . we need to restore confidence in America’s economic future. Record deficits and debts – coupled with runaway spending – have shaken confidence in our economic future. Many believe that the only solutions will be higher taxes or inflating the dollar, which promise lasting pain for small businesses and working families. One Simple solution is to freeze domestic discretionary spending at last year’s level without raising taxes. This would save U.S. taxpayers $53 billion immediately, but more importantly it would send a signal that we are committed to lowering the deficit.

Fourth . . . we should reform the unemployment system to help people out of work find jobs. Federal unemployment recipients who are likely to exhaust benefits should be required to participate in education, training or enhanced job searches. A similar program in Ohio resulted in the return on investment of 5 to 1 in terms of savings compared to program costs. In Georgia, there’s another example of how states are experimenting and paving the way. An innovative program places unemployment insurance recipients in part time jobs with the UI as their benefit. At the end of a six-week trial period, the employer makes a decision about whether to hire them. The initiative has resulted in quicker returns to work and less unemployment payments.

Why not bring this kind of creative, outside-the-box thinking to Washington? Furthermore, declining, negative balances in unemployment trust funds will force states to implement payroll tax increases on employers this year. These will average almost $250 per worker per year through 2012. The federal government could help ease the burden on employers by immediately suspending the Federal unemployment tax. This would save employers $56 per worker per year. And the $7 billion a year “cost” of this tax suspension could be offset through a reduction of improper government payments, which according to the Administration’s own count totaled $98 billion last fiscal year.

That’s an increase of $26 billion over the previous year

Fifth . . . we need to approve three promising free trade agreements with Colombia, South Korea and Panama that have stalled under the new administration. Recently the President stated that increasing U.S. exports by just 1% would create over 250,000 jobs. Sure enough, the independent International Trade Commission estimates that the three deals would boost U.S. exports by over 1 percent. We urge President Obama and Congress to stand on the side of job creation and quickly approve these agreements.

Sixth . . . we must take action to reduce regulatory and tax barriers that inhibit domestic job creation. Federal regulations and tax law often make it easier for large companies to create jobs overseas instead of here at home. Efforts should be taken to ensure the most favorable environment possible for domestic job creation. For example we should act immediately to remove unnecessary obstacles to domestic energy production. Tapping more heavily into oil, natural gas, shale, nuclear and renewable sources will lower costs, create jobs and reduce our reliance on foreign oil.

We can also provide an incentive for companies to repatriate earnings back to the United States. Currently any profits a U.S. based company earns abroad are taxed at the 35% corporate tax rate when those earnings are brought back into the U.S. As a result companies often keep their earnings stranded in subsidiaries overseas. In 2004, Congress allowed companies a limited time to repatriate foreign profits and pay a reduced tax rate of 5.25%. The policy resulted in more than $350 billion dollars of profits being returned to the U.S. and a windfall to the Treasury of about $18 billion in tax revenue. Providing another limited window for repatriation of foreign earnings would help U.S. companies retain domestic workers and weather the current economic downturn.

Finally, we must deal swiftly and honestly with the looming commercial real estate collapse. Congress should move to give bank regulators incentives to deal responsibly with banks and their borrowers. Forcing liquidation of performing loans makes no sense. If regulators assume a prudent posture towards risk the badly wounded credit markets could then begin the process of repair. In addition, reducing the over-extended depreciation standard – currently a whopping 39 and ½ years to 20 years or less - would provide a lift to property values and bring some common sense to the tax code.

These are Seven Simple Solutions that don’t involve massive new government spending, new bureaucracies, or more debt. They are based on time-honored principles proven to create jobs and ultimately economic prosperity in America.

I’d like to share with you a story about Thomas Jefferson. It may be “just a story”, but it illustrates an important point about his leadership, and inspiration for us in these times. President Jefferson was riding on horseback, traveling from Washington to Monticello through the Virginia countryside. The President and his men reached a river without a bridge or ferry so they prepared to walk their horses through the shallow water.

As they prepared to do so, they saw a man waiting on the bank with a large bundle. One by one Jefferson’s people entered the river. But when Jefferson was alongside the man he said, “Sir, could you give me ride across the river?” Jefferson said agreed immediately and carried him across.

Well, one of Jefferson’s men pulled the man aside and said, “How dare you ask the president of the United States for a lift! You could have asked any one of us. Why ever did you ask him?” The man said, “I’m sorry. I had no idea he was the president. But as I saw each of you ride by, I saw written across all of your faces the letters “N-O”! But when it came to the President, across his forehead, I saw written “Y-E-S” …so I asked him.”

Yes, these are troubling and difficult times… some of the worst we have experienced in our lifetimes. But as leaders and public servants, when the people of this country and the world look to us, they need to see a face that says “Y-E-S.”

The contrast between our conservative vision and the policies being pursued by those in charge is stark. While they push for driving us deeper into debt, we will stand for the virtues of restraint. While they seek to expand government control, we will promote common sense solutions proven to work.

If our faces say yes, and we lead with character, enthusiasm and seize the opportunities before us – America can get across this river and continue to build the land of freedom that will lead the whole world.

Thank you for your service to that dream. God bless you all and our country once again. 

 $ 174





How US FEDERAL Unemployment Insurance Works


Unemployment insurance (UI) was established during the Great Depression by the Social Security Act of 1935.  Today, UI currently runs through a joint federal and state program.  Each state operates its own UI Trust Fund, which is used to pay unemployment checks to insured recipients. This trust fund is usually supported through payroll taxes from employers.  Some states, such as Pennsylvania and New Jersey, also collect contributions from employees.


These payroll taxes include two components, a federal component and a state component.   The federal component taxes 0.8% of the first $7,000 earned by an eligible employee, which is used to cover administrative costs for both the federal and state programs.  Each state is then allowed to set its own taxable wage base, which must be more than the $7,000 federal base. 


For employers, the tax rate on the wage base is set through an experience rating.  Employers that have paid more in taxes than their chargeable unemployment claims will have lower rates than those employers who have paid in less than their chargeable unemployment claims.   New employers are charged a rate of 2.7% for the first 36 months, and then are eligible for a rate calculation.  Employers with a positive experience rating can be charged a rate as low as 0.025%, while those with a negative experience rating can be charged a rate as high as 5.40%.  The state may also charge an administrative assessment, which slightly increases the payroll tax rate.


Trust Fund Solvency

The solvency of the 50 states trust funds has been a growing concern since the recession began.  During an economic downturn, two forces affect the trust fund’s solvency.  First, as employers layoff employees, less payroll taxes are paid into the fund.  At the same time, unemployment rates increase and there is a greater demand for unemployment checks.  This is why it is essential for states to build up large trust funds during better economic times.


Solvency can be measured a few different ways, but one of the easiest measurements is called the reserve ratio.  This measure provides a way to gauge the potential size of future claims against the fund. 


Trust Fund Loan

If a state’s trust fund is deemed insolvent, it is still legally required to pay unemployment checks to eligible unemployed individuals.  States may receive loans from the federal government to cover trust fund deficits.  As of November 4th, twenty-five states had received loans from the federal government. The average total loans received were approximately $823 million.

If states are forced to take a trust fund loan, additional federal UI taxes are imposed on employers.  Federal guidelines require that only UI surcharges and general revenue pay interest payments on federal loans.  The state is not allowed to use the trust fund balance to make interest payments.


Trust Fund Information from five Southern states: 


Unemployment Rate

Insured Unemployment Rate

Unemployment Insurance Recipients

Trust Fund Loan
















North Carolina





South Carolina





*Employment data as of October 31, 2009.

In Wake of Dubai, Trying to Predict the Next Blowup

Like overstretched American homeowners, governments and companies across the globe are groaning under the weight of debts that, some fear, might never be fully paid back.

As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?

For the moment, at least, global investors seem to be taking Dubai’s sinking fortunes in their stride. On Monday, the American stock market rose modestly, even as share prices plunged throughout the Persian Gulf.

But the travails of Dubai, a boomtown that, with its palm-shaped islands and indoor ski slope became a potent symbol of hyperwealth, nonetheless have some economists wondering where other debt bombs might be lurking — and just how dangerous they might turn out to be.

Big banks that have only just begun to recover from the financial shocks of last year are now nervously eyeing their potential exposure to highly indebted corporations and governments.

From the Baltics to the Mediterranean, the bills for an unprecedented borrowing binge are starting to fall due. In Russia and the former Soviet bloc, where high oil prices helped feed blistering growth, a mountain of debt must be refinanced as short-term i.o.u.’s come due.

Even in rich nations like the United States and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again.

The numbers are startling. In Germany, long the bastion of fiscal rectitude in Europe, government debt is on the rise. There, the government debt outstanding is expected to increase to the equivalent of 77 percent of the nation’s economic output next year, from 60 percent in 2002. In Britain, that figure is expected to more than double over the same period, to more than 80 percent...

In the meantime, government debt is soaring!

Source: Morgan Stanley: "Strategy: Euroletter Tou


Royal Bank of Scotland

 The Debt Timebomb Is Ticking And Must Be Defused

RBS Research today put out its 2010 Top Themes and Trades report.

Inside, there's a great writeup about the bank's outlook on the Federal Reserve, Treasuries, and private credit:

RBS: Most open to challenge is the idea that supply drives bond yields higher next year. The US budget deficit could perhaps hit USD1.6 trillion, in FY 2010, even worse than consensus expectations as tax receipts lag income growth in the early stages of a recovery, spending rises as more of the stimulus package kicks in, and the Fed is done buying (Treasuries at least). 

The debt time bomb is indeed ticking and must be defused by fiscal restraint. But for calendar 2010, demand should comfortably keep pace with supply. Sovereign issuance fills the void of low private sector borrowing as private credit demand remains subdued. Foreign central banks have increased their Treasury purchases over the last two years and are important. But the biggest swing factor is likely to be commercial banks, sitting on vast amounts of vault cash and reserves at the Fed, and households where Treasuries are near historic lows in terms of share of household assets.

If private credit demands remain weak in the first half of next year, as we expect, banks will continue to be ‘investors’ rather than lenders. Their preferred habitat is likely to be the belly of the curve, centred on the 5 year zone. The Fed being on hold for much of 2010 is likely to cause a rolling flattening of the curve in which successively longer maturities fall toward the Fed Funds rate. 2s have just completed such a move and 5s are next in line to outperform. Unleveraged investors should overweight 5s and leveraged investors should be long the body of the 2s5s10s butterfly.




RECESSION GIVES TRUE LOVES SOMETHING TO BE HAPPY ABOUT >>> PNC CHRISTMAS PRICE INDEX SHOWS MODEST 1.8 PERCENT INCREASE...Thanks to the weak economy in 2009 the PNC Christmas Price Index increased by a modest 1.8 percent compared to last year in the whimsical economic analysis by PNC Wealth Management based on the prices of gifts in the holiday classic, The Twelve Days of Christmas. According to the 26th annual survey, the price tag for the PNC CPI is $21,465.56 in 2009, just $385.46 more than last year. It is the smallest increase since 2002, when the index fell 7.6 percent. The PNC CPI exceeds the U.S. governments Consumer Price Index, the widely used measure of inflation calculated by the Bureau of Labor Statistics, which is down 1.3 percent this year. Among the 12 gifts in the Index, three items fell measurably from last year while five increased in cost and four remained steady. As part of its annual tradition, PNC Wealth Management also tabulates the True Cost of Christmas, which is the total cost of items gifted by a True Love who repeats all of the songs verses. This holiday season, very generous True Loves will receive a bargain and pay $87,402.81 for all 364 gifts, a mere 0.9 percent increase compared to last year. The sharp rise in gold prices proved to be the main contributor to the dramatic 42.9 percent jump to $499.95 for the Five Gold Rings. Typically when the value of the dollar decreases, as it has in the last year, investors buy more gold driving up prices. The cost of the Seven Swans-a-Swimming, which generally provide the biggest swings from year to year in the PNC CPI, fell this year by 6.3 percent to $5,250 following last years eye-opening 33.3 percent rise. As the most volatile item in the Index, the swans are removed to determine the underlying inflation or core PNC CPI, which pushed the rate up 4.8 percent this year. CLICK HERE TO SEE THE PRESENTATION OF THE INDEX


Few signposts mark the road to economic recovery

Morgan Stanley: Here Comes A Brutal 2010

Canada: Economy Out of Recession

India's Economy Grows at Fastest Pace since Global Financial Crisis

Asian Markets Rebound after Dubai Scare, but Concerns Linger


Escaping the Current Depression - Causes and Cures

The dark side of Dubai Dubai was meant to be a Middle-Eastern Shangri-La, a glittering monument to Arab enterprise and western capitalism. But as hard times arrive in the city state that rose from the desert sands, an uglier story is emerging.


Obama leading us right to Great Depression 2

La crisis puede hundir en la pobreza a 39 millones de latinoamericanos

Aún hay crisis financiera

Lecciones del modelo Dubai merecen consideración

Crisis financiera en Dubai, ¡ay¡

Requiere EU un banco central independiente y apolítico: Bernanke

Moratoria en deuda de Dubai revive temor de crisis financiera

FMI pide a bancos tener seguro ante crisis

Crisis de deuda en Dubai suena nueva alarma para manejo de riesgo

Cuestión de confianza



The First Global Financial Crisis of the 21st Century

This book is a selection of VoxEU.org columns that deal with the subprime crisis. VoxEU.org is a portal for research-based policy analysis and commentary written by leading economists. It was launched in June 2007 with the aim of enriching the economic policy debate by making it easier for serious researchers to contribute and to make their contributions more accessible to the public.

The subprime crisis, which boiled over in August 2007, was the perfect showcase for Vox’s unique approach. Mainstream media’s explanations of it as a liquidity crisis did not seem to fit the facts. How could a few deadbeat homeowners in the United States bring down a German Landesbank, force a restructuring on a major French bank, and compel the Fed and the European Central Bank (ECB) to undertake emergency injections of cash? The story was surely deeper than a standard-issue credit problem.


This Time is Different: Eight Centuries of Financial Folly

This Time is Different: Eight Centuries of Financial Folly 

Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. This book proves that premise wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.




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Whenever you find you are on the side of the majority, it is time to pause and reflect

                     --- Mark Twain

We have never observed a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience with advanced welfare states...Charles Murray

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