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
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.
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.
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.
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.
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.
Percent change in total non-farm payroll employment
Article from The Washington Post
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
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
...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.
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.
Goldman Sachs offshore deals deepened global
documents show that a new breed of offshore securities that hinged on risky home loans were far riskier than investors knew.
BY GREG GORDON
NEW YORK --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
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
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.
Two recent reports from China point to one of the major challenges facing the Obama administration in formulating trade
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
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
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.
- 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
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.
MIND OVER MATTERS
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."
ENTER THE SLACKERS
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.
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.
Make no mistake; the developed world is drowning in debt and
there are only two viable options – a global economic depression or very
It is our contention that the policymakers have chosen the latter option and
over the following years, we will experience the trauma of severe inflation.
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.
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.
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
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.
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.
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.
Commodity Futures Trading Commission filed 31 civil actions in Ponzi cases this year, more than twice the 2008 amount.
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.
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.
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 therecession 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 paperOffshoring
Bias: The Effect of Import Price Mismeasurement on Manufacturing Productivityhighlights 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.BusinessWeekrecently
reported that by overlooking cuts in research and development,GDP probably overstates the economy's strengthby 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.
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
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...
willdwindle, along with consumer prices...
households to pay down debt...
...the mother of all jobless recoveries...
hollowing-out of the middle class...
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
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...
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.Furthercontributing
to high unemployment is the likelihood of more people competing for jobs, baby boomers delaying retirement and interest rates
Economists warn of jobless recovery, long-term malaise
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
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.
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
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
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
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.
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.
...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 handdollarsover
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.
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.
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....
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.
...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.
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 current-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.
$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.
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.”
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.
… 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...
was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
of this depression have been lessened by economic stimulus and government support.
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.
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
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
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 theWealth Effect). That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
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.
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.
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.
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.
this dynamic will induce aScylla 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.
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.
of a Second Wave in Economic Slump
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.
of the key indicators and reasons for a second wave in this historic slump/depression are as follows:
Fall in Mortgage Demand
Rise in inventories
High Private Debt in the country
Limited arsenal with the Federal Reserve
Futility of Government efforts
8. Price to Earnings ratio,Unprecedented rise in the market
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
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
"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.
"The world does not have
so much money to buy more US Treasuries."...Zhu Min, deputy governor of the People's Bank of China
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.
has named Ben Bernanke its2009 Person of the Year.The magazine said the Federal Reserve chairman's
foresight and success at preventing a second Great Depression -- the history thatwasn'tmade 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,writesin 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."
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."
TIME managing editor Rick Stengel explains why the magazine chose Federal Reserve
Chairman Ben Bernanke as 2009's Person of the Year in the video below:
BREAKING NEWS >>>
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.
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.
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.
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
• 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
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
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 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.
...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."
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
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.
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.
board, the Public Company Accounting Oversight Board (sometimes called peekaboo by accountants), is overseen by
the Securities and Exchange Commission, itself an independent agency.
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
The U.S. Economic Crisis: Root Causes and the Road to Recovery
Return to prosperity
requires reversal of excessive consumption, low savings trends
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 (seeExhibit 1).Excessive consumption was fueled by a loosening of lending standards
prompted by government policy to increase homeownership rates, and accompanied by record low savingsrates. 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...
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.
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...
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.
How the financial crisis could leave Europe even stronger than America.
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.
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.
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.
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.
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
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 thegrowthof
GDP, will hit its maximum impact on thelevelof
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...
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
The chances of a relapse into recession seem to be rising.
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.
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."
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,
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
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.
NEW YORK CITY
MARKET FLASH >>>
CURRENT VALUE OF A VOTE IN NEW YORK CITY
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
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
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
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:
Trust Fund Loan
*Employment data as of October 31, 2009.
In Wake of Dubai, Trying to Predict the Next Blowup
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 latestfinancial crisisan
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 highoilprices
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...
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).
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.
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
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 Differentpresents
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 Differentexposes
centuries of financial missteps.
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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