reality is only those delusions that we have in common...

Saturday, November 28, 2009

week ending Nov 28

The threatened Fed - the Economist - THE minutes from the Federal Reserve's last meeting are now available to the public. But the minutes reflect no inclination to do anything more than what has already been put in motion. Indeed, participants remain very concerned about how they'll pull back on their various interventions. I noted last week that political control of monetary policy would inevitably lead to accelerating inflation. Central bankers seem to have warped this truth into its mistaken corollary—that price stability means never doing what political actors want, even if what they want is actually what's best. But now the Fed finds itself in a real bind. If it continues ignoring unemployment, then it may face angry legislators determined to rein in the central bank. If it agrees that taking more steps to try and engineer some inflation is a good idea, it may well be perceived to have given in to political pressure

“A significant portion of policymakers are simply clueless” - Read that FOMC statement carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting? I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

A defence of the FOMC: Bad forecasters can be good policymakers - VoxEU - The Federal Reserve Open Market Committee has been criticised for making forecasts that are inferior to Federal Reserve staff forecasts. This column argues that FOMC forecasts are worst-case scenarios used to inform policy decisions, rather than best estimates of future events. It says that FOMC forecasts are a rational response to doubts about the staff’s model.

Policymakers adrift - The Economist - I might settle for that 3% per year GDP deflator inflation target as well, but it doesn't seem to be forthcoming. Instead, the FOMC seems to be focused on heading off even the hint of the threat of a movement toward 2% inflation, despite the fact that almost one in five American workers is un- or under-employed. I don't need to see Mr Bernanke's head on a pike, but I would very much like to know what the justification is for actively fighting dormant inflation while unemployment continues to rise. And if the Fed would answer that it believes it is powerless to do anything more, then there is no reason Mr Bernanke couldn't call on the government to help it achieve more through fiscal policy, promising that he would not use monetary policy to offset fiscal stimulus. Given the disinflationary pressure in the economy, Mr Bernanke would be doing a poor job as Fed chairman if he failed to say as much.

Fed’s Bullard: Asset Buying Efforts Should Remain Active - Federal Reserve Bank of St. Louis President James Bullard wants the Federal Reserve to continue to buy mortgage-backed securities beyond the current end-March 2010 cut-off date to give policy makers more flexibility as they seek to shepherd the economy toward recovery.“I have advocated to keep the asset purchase program open but at a very low level, and wait and see what happens, and as information comes in about the economy we can adjust that program while the federal funds rate remains at zero,”  He added “no decision has been made” about the program’s fate.

Fed Agency MBS Purchases Top $1T - The Federal Reserve Bank of New York’s purchase of agency mortgage-backed securities topped $1 trillion after it bought another $16 billion of the securities in the week ended Nov. 18. In the latest transaction, the Fed acquired $6.77 billion from Ginnie Mae, $5.9 billion from Freddie Mac and $4.55 billion from Fannie Mae. Overall, most of the Fed’s total net purchases (58%) were from Fannie Mae, followed by Freddie Mac (33%) and Ginnie Mae (9%).

The Ides of March and the Fed exit strategy  - Over this crisis the Federal Reserve increased the money supply by literally trillions of dollars and several hundred percent. In an ordinary world this would have caused very rapid inflation – but suffice to say that this is still not an ordinary world. Short term interest rates are stuck at zero and medium term rates are pinned very close to zero. People (and financial institutions) are willing to hold (and not spend) inordinate amounts of money. Liquidity preference is very high and it has absorbed all the extra money the Fed has printed.  Obviously some day liquidity preference will wane (though Japan tells us that day might be very far into the future). When the liquidity preference has waned all that money that was printed will be excess and might turn into inflation.  The Fed will need an exit strategy. The determining factor as to whether the end game here is inflation is whether March was a liquidity or solvency crisis.

No exit - Paul Krugman - NYTimes The latest Fed minutes, together with the forecast, are out. What do they tell us?  Well, the Fed expects unemployment to come down only very gradually — over 9 percent at the end of 2010, over 8 percent at the end of 2011, around 7 percent at the end of 2012. Inflation, meanwhile is expected to remain consistently below the Fed’s target.Which raises the question, why is anyone talking about an “exit strategy”? On the Fed’s own forecasts, the economy will remain seriously depressed three years from now.

The Fed Is Bailing Out Every Bank In The World - The following is John Mauldin's weekly e-letter. You can sign up to receive it each week here > Where the Wild Things Are is a beloved children's book and now a beautiful movie. But in the investment world there are really scary wild things lurking about in the hidden recesses of the economic landscape. Today we look at one of the unintended consequences of the Federal Reserve's low interest rate policy. For quite some time, I have been arguing that we are faced with no good choices, not just in the US but in the entire "developed" world. I see a low-growth, Muddle Through world over the next years (with a double-dip recession just to liven things up). However, that does not mean that we will lack for volatility. Things could get volatile rather quickly. Let's quickly set the background.

Free Money From The Federal Reserve Fuels Dangerous New Wall Street Bubble - Is irrational exuberance making a comeback at the Fed’s invitation? Irwin Kellner thinks so, arguing that the “humongous volume” of Fed injected liquidity invites a speculative fever. The Fed’s bogus money has not produced consumer price inflation because the wealthy beneficiaries of the liquidity are keeping it engaged in speculative pursuits, with little trickling down to consumers. Likewise, the nearly free money for the Wall Street wealthy is not showing up in worker wages since the general public is unable to press for improved wages in the context of high unemployment. In this environment it is of little consequence for workers that productivity measures show significant gains.

Fed Reserve Endorses “Crony Communism” for Wealthy - Here’s a candidate for the understatement of the year: The Federal Reserve is concerned that their free-wheeling, money-printing, dollar-destroying, quantitative-easing, zero-percent interest rate policy might be “fueling undue financial-market speculation.” Do ya think? The Fed is a serial bubble blower worse yet, they have refused to hold the most aggressive and damaging speculators accountable for their own losses. Instead, they have participated in a massive socialization of risk, where profits remain private but losses are the taxpayers’ burden. Is this anyway to run a Central Bank?

Heed the danger of asset bubbles - Robert Zoellick - Perhaps the primary lesson from history is for countries to co-operate in making assessments that distinguish their situations, avoiding one-size-fits-all “exit strategies”, and cautioning against currency or trade protectionism. Debates about new financial regulatory structures should not distract governments from using tools they have to counter these emerging risks. These will be the challenges for the Group of 20 nations in 2010. The G20 had better put asset price bubbles and new growth strategies on its agenda. Otherwise, the solutions of 2008-09 could plant the seeds of trouble in 2010 and beyond.”

Can Asset-Price Bubbles Be Harmless? - Some commentators, such as John Taylor (the inventor of the Taylor rule), are urging the US central-bank policy makers to start considering a tighter stance as soon as possible, in order to prevent a repetition of the Greenspan Fed's interest-rate policy, which kept rates at very low levels for too long. (The Fed lowered its policy rate from 6.5% in December 2000 to 1% by June 2003. The Fed kept the rate at 1% until June 2004).  Taylor and others are of the view that the current financial crisis is the outcome of the Greenspan Fed's very loose monetary stance, which caused gigantic asset-price bubbles. In contrast to this way of thinking, the former Fed governor and current professor of economics at Columbia University, Frederic Mishkin, holds that the Fed should continue with its loose stance. Mishkin is known as a close confidant of Fed Chairman Ben Bernanke.

Fed Rage Boils Over Ahead Of Bernanke's Confirmation Hearing - Federal Reserve Chairman Ben Bernanke has a tough road ahead. Very tough.  Bernanke, whose four-year term expires in January, is certain to face a contentious Senate banking panel at his confirmation hearing, set for Dec. 3. He is also defending against the sharpest attack on Federal Reserve powers ever. The latest blow came last week, when a House panel overwhelmingly agreed to tack on to must-pass regulatory reform a proposal to dig into the Fed's books, despite attempts by Rep. Barney Frank, D-Mass., to make it less intrusive.Fed watchers say they expect that Bernanke will be confirmed for a second term as chairman. But he may get the fewest favorable votes on record - and end up at the helm of a vastly changed Federal Reserve.

The Fed And Treasury - "Unconstitutional Abuse Of Power"? - The policy of the Fed and Treasury amounts to obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. The actions of the Fed and Treasury have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of Congress alone.

Systemic Risk Panel Would Lack Independence; Treasury Secretary Would Call The Shots - If the White House and congressional leaders get their way, the vaunted new oversight council charged with overseeing systemic risk in the financial markets will actually be a house organ of the Treasury Department, lacking the independence required to challenge decisions. The House bill calls for the council to be headed by the Treasury Secretary, who would pick his own staff from within the Treasury Department.

The Washington establishment suffers a serious defeat - Something quite amazing happened in Congress:  the House Finance Committee -- in a truly bipartisan and even trans-ideological vote -- defied the banking industry, the Federal Reserve, the Democratic leadership, and mainstream Beltway opinion in order to pass an amendment, sponsored by GOP Rep. Ron Paul and Democratic Rep. Alan Grayson, mandating a genuine and probing audit of the Fed.  The Huffington Post's Ryan Grim has the best account of what took place Key to winning Democratic support was a letter posted early Thursday from labor leaders and progressive economists. The letter, organized by the liberal blog, called for a rejection of the Watt substitute and support for Paul.

Ron Paul Defends His Plan for Fed Oversight - NYTimes - Defending himself against critics, Representative Ron Paul of Texas played down continuing concerns on Friday that his amendment to give Congress sweeping new oversight powers over the Federal Reserve would compromise the central bank’s political independence. He asserted that the Fed was not truly as independent as it would like the public to believe. “There is already a tremendous amount of political pressure on the Fed,” Mr. Paul, a libertarian Republican, told DealBook. “The Federal Reserve Board chairmen have notoriously been sympathetic to the presidents who might be reappointing them and there has been evidence to show that.” Mr. Paul also asserted that the Fed was beholden to pressures beyond the government from special interests, including Wall Street.“It’s not like the banks and Goldman Sachs doesn’t have influence over the Fed,” Mr. Paul said. “Every time the Fed says it wants its independence, what they are really saying is we want to keep our secrets.”

Ron Paul on CNBC - Audit the Fed (Video)

Audit The Fed Would Hurt Economic Prospects: Bernanke (Reuters) - Federal Reserve Chairman Ben Bernanke said on Friday congressional proposals to audit the Fed and strip it of regulatory powers as part of post-crisis reforms could damage prospects for economic and financial health in the future. "These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States," Bernanke wrote in a column posted on the Washington Post's website. The rare newspaper column by a Fed chairman comes shortly before Bernanke testifies before a Senate panel on his renomination to serve a second four-year term at the helm of the central bank and answers a series of steps on Capitol Hill that could diminish the central bank's role

Beware the result of outrage - NY Times - The biggest news story of last week?  Representative Ron Paul of Texas won committee approval of a far-reaching amendment that would give Congress vast new authority over the Federal Reserve. The Fed has long enjoyed Lone Ranger autonomy, but that will quickly end if the final bill passes.  Representative Brad Miller, Democrat of North Carolina, and Representative Dennis Moore, Democrat of Kansas, added their own bell-ringer for voters still outraged over bailouts: the next time the government has to step in and rescue a company, secured creditors will take a hit, too.

Clearing up Miller-Moore - Conceptually, what’s happening here is that the FDIC is getting resolution authority not just for the community banks and thrifts which it’s been overseeing up until now, but also for systemically-important financial institutions like Goldman Sachs or AIG. It’s important for the FDIC to have a certain degree of freedom to maneuver — but a lot of these firms, especially when things start falling apart at the very end, find themselves pledging substantially all of their assets in a desperate search for liquidity at any price. “What precipitated the final collapse of AIG was a collateral call,” says Miller. “It complicates life for the FDIC to walk in to a firm which has all of its assets pledged as collateral.”When a firm like AIG fails, its list of creditors on the date of failure can look very, very different to its list of creditors a few weeks earlier — because all of its assets have been pledged to last-minute emergency funders. Unsecured creditors who took solace in the large number of assets on the firm’s books can wind up with little or nothing as a result; and the people who get paid out in full are people who were most aggressive in seizing collateral in the final days and weeks.The Miller-Moore amendment seeks to make it more dangerous for those last-minute secured creditors to jump the queue and get first dibs on a failing firm’s assets. In doing so, it gives the FDIC the ability to seize some of those assets itself, to minimize the hit to taxpayers. As Yves Smith says, Creditors ARE risk capital, if they made bad decisions, they should take their lumps before innocent bystanders like taxpayers. That is a perfectly sensible idea.

The Thing about the Fed Most Worth Knowing - - Those who think that relatively independent central banking is crucial to maintaining order in the modern world must be discouraged by the news from Washington these days. It was the House of Representatives that this week made headlines. The Senate takes its turn after the Thanksgiving holiday. Confusion is far more likely than better regulation and oversight, at least for several years. And that leads to a point that Bernanke cannot make publicly – probably the single most important thing to understand about the Fed. The Federal Reserve Board never has to ask Congress for an appropriation. Interest on the enormous portfolio of government bonds that it has accumulated over the years through open market operations is huge, $27.5 billion in 2008 – sufficient to cover its own $3.9 billion payroll. Last year it handed over to the US Treasury a total of $31.7 billion, which included earnings from various other odds and end, according to its Annual Report.

Defending the Fed’s Independence, Part II - Back in July, I expressed concern that Congress might undermine a key pillar of U.S. economic policy: the independence of the Federal Reserve. Why is that so important? Because independent central banks do a better job of controlling inflation. Inflation may not be an immediate threat to the U.S. economy, but as that day approaches, the Federal Reserve needs to be able to pull back on monetary stimulus without political interference.Of course, the remarkable scale of Fed actions over the past 18 months requires close review. Both practically and politically, Congress needs to exercise careful oversight over a now-multi-trillion arm of the Federal government. The political challenge is finding a way to provide such oversight, while defending the Fed’ independence.

Scare-Mongering Over Fed Oversight Bill - Yves Smith - In today’s piece in the New York Times, Sorkin hones in on an amendment added to the Paul/Grayson bill passed last week that is admittedly problematic (I was asked by a Congressional staffer about it, I said I thought it was badly thought out and gave the reasons why). But Sorkin comes off as if he has become a mouthpiece for the aggrieved officialdom (in this case, the Fed) when there is more to the story than meets they eye.  First, let’s start with the eyesore:

Mark Thoma: What’s Wrong With the Dodd Proposal to Restructure the Fed - A proposal from Senate Banking Committee Chairman Christopher Dodd changes the selection process for key positions within the Federal Reserve system. Unfortunately, this proposal makes the selection process worse, not better. If this proposal is passed into law, it would further concentrate power within the Federal Reserve system, and it would politicize the selection process, both of which are the opposite of where reform should take the system.

Economists: Wrong Again - As if they didn't cause enough damage by espousing theories that failed to account for the inefficiencies and irrationalities of the real world, many economists are advocating aggressive spend-and-borrow policies to revive the financial crisis-hit U.S. economy that reflect an astonishing degree of naïveté and ivory tower hubris. In a word, the Keynesian Kool-Aid drinkers are saying that debt doesn't matter.  But as someone whose long experience in financial markets helped him to anticipate the kinds of earth-shattering developments most economists didn't see coming, I find the popular argument that current low yields on government bonds are a vote of confidence on current policies to be utterly ridiculous.

IN DEBT WE TRUST? - Is it time to consider more radical strategies for repairing the U.S. economy? Perhaps, although as a recent essay from the Levy Economics Institute argues, it’s also clear that the old game of trying to reflate bubbles isn’t going to work this time. In our view, most administration proposals are fundamentally misguided, since they are based on the twin presumptions that Big Banks face only a liquidity problem and that, if this problem is resolved, the economy will recover. We believe these presumptions are entirely mistaken. The Big Bank problem is insolvency, and these banks should not be saved because they form a barrier to a sustainable recovery. Given a chance, they will resurrect the bubble conditions that led to the current crisis.

Global sovereign debt to hit $49.5 trln-Moody's - Global sovereign debt is expected to hit $49.5 trillion by year end, a 45 percent climb since 2007 as the credit crisis takes a toll, Moody's Investors Service said on Tuesday. The expected $15.3 trillion increase in worldwide government debt is more than 100 times the inflation-adjusted cost of the Marshall plan, Moody's ( MCO - news - people ) said in a report.

Will sovereign debt be the new subprime? - Could this flight to the "safety" of government bonds in itself be creating subtle new dangers? Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain - not least because with yields currently so low there is less pressure on politicians to push through reform. That does not necessarily mean an outright default looms any time soon; indeed, default seems highly unlikely. However, it is easy to imagine that some countries will end up eroding the value of their bonds by debasing their currencies in the coming years, printing money and stoking inflation."

CDS Volumes Spike As Traders Bet The U.S And U.K. Will Default - Trading volumes have spiked for credit default swaps that insure against default by developed nations such as the U.S., U.K., and Japan according to The Financial Times. Meanwhile, the volume of trading for similar bets against emerging markets has been falling. FT: In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote. However, rising debt levels and growing political and economic uncertainty have created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.

Role reversal - Krugman - Many people on Wall Street are now warning that there’s a huge bubble in government debt, that interest rates will spike any day now; it’s a warning that clearly has the Obama administration’s ear. A good sample is this piece from Morgan Stanley, according to which “Our US economics team expects bond yields to rise to 5.5% by the end of 2010 - an increase of 220bp that outstrips the 137bp increase in the fed funds rate expected over the same horizon.” Btw: what? Almost everyone expects unemployment in late 2010 to remain close to 10%. Why, exactly, would the Fed funds rate rise sharply? Anyway, it’s my impression that the same people now warning about the alleged Treasury bubble dismissed warnings about the housing bubble. Is this true? I think so. Morgan Stanley, September 2006:

Wave of Debt Payments Facing U.S. Government - Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed. Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages. With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

Deficit hysteriaPaul Krugman - Urg. Big piece on the front page saying that, on the one hand, some people say that we’re going to have a debt crisis any day now, while on the other hand … well, actually we never hear from the other side. As Dean says, the numbers don’t fit the scare story — a decade from now interest payments will reach a level not seen since … 1992. And the market seems unworried, since long-term rates remain low.

How worried should we be about the deficit? - A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms.  It's a sign that you have dysfunctional institutions and decision-making procedures.  I believe that the not-always-swift American voter in fact understands high deficits -- correctly -- in this light.  They don't hold theories about "crowding out," rather they sense something in the house must be rotten.  And so they rail against deficits, as do some of their elected representatives.  It's a more justified reaction than the pure economics alone can illuminate. When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.

What If the Government Just Prints Money? - L. Randall Wray creatively suggests not raising the debt ceiling but instead having the Treasury continue spending as it always does: by simply crediting bank accounts. As he puts it: The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let’s support Senator Bayh’s proposal to “just say no” to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts. This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs.

On debt monetization - This is a pretty wonkish post but I hope you appreciate the concepts presented.I made some allusions to modern monetary theory in a recent post when I asked, “If the U.S. stopped issuing treasuries, would it go broke?” The short answer is no. But that still leaves questions about the inflationary impact of all of this debt. The fact is a lot of base money is being added to the system. Normally, one would expect this to be inflationary. However, it has not been because the money multiplier (the relationship between base money, more inclusive monetary aggregates and credit) has dropped precipitously. Still, if and when the economy picks up – and with it the demand for credit, inflation could be a serious problem.

The fiscal-prudence debate - Edmund Andrews has a long front-page story today on what he calls “the United States’ long-term budget crisis” — and has occasioned a strangulated “Urg” out of Paul Krugman in doing so. Krugman wrote a very smart blog entry on Friday (Tyler Cowen called it one of the best recent economics posts in some time) which talks about exactly the issue that Andrews is addressing — the question of whether and how the interest rates that the US pays on its borrowings might rise in future. But none of that nuance made it onto the NYT’s front page.

Menacing Krugman - Paul Krugman insists that the nearly ten trillion dollars of projected U.S. government budget deficits over the next decade is a “phantom menace” (”The Phantom Menace,”).  The real problem, according to Mr. Krugman, is that government’s spending plans are too modest (!).  He believes that only by spending even more will Uncle Sam assuredly save Americans from “the greatest economic catastrophe since the Great Depression.”  Reasonable people can disagree about the proper role of government in dealing with recessions.  But to suggest that today’s troubles are remotely akin to those of the 1930s is decidedly unreasonable; it’s a demagogic scare tactic unfit for a serious scholar.

Yes the future deficits are worrisome - Paul Krugman ([1], [2], [3]) has been arguing vigorously that U.S. budget deficits are no cause for concern. I see things differently. One of the arguments that Krugman makes is that, although the U.S. debt-to-GDP ratio is expected to double over a short period, the higher level would still be substantially below those currently observed in Italy and Japan, and only modestly above that of Belgium. Paul suggests that if these countries can run up debts of this magnitude without serious repercussions, so can the United States. But European politics may not import all that well to this side of the Atlantic. Receipts of the U.S. federal government have never exceeded 21% of U.S. GDP, even at the height of World War II. A permanent move to taxation levels significantly above that would require a major shift in the political landscape, for which I see no consensus of support.

Also sprach ZaKrugman - Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess! ... If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we. Yoohoo! Mr. Nobel! Greece would like a word with you:  Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.

Mark Thoma: Worries about Budget Deficits and Inflation: Let’s Avoid Repeating Our Mistakes - The purpose of this post is to distinguish between the two sets of worries, and to discuss whether the worries are justified. The confusion comes from the failure to distinguish between the policies implemented by the Fed and Treasury in an attempt to bailout and stabilize the banking system, and the policies passed by Congress and signed into law by the president in an attempt to jump start the economy. Many people think of these two separate polices as one large government bailout program, but the policies and the worries associated with them are distinct…

The deficit problem: Dealing with America's fiscal hole - The Economist - Don’t cut the deficit now—but explain how, eventually, you will - FOR years America’s fiscal problems had a surreal quality. No one disputed that an ageing population and health-care inflation could bust the budget, but that prospect was decades away and procrastination seemed painless. No longer. A giant hole has opened in the budget because of stimulus, bail-outs and a recession that has savaged economic growth and tax revenue. On current policies the publicly held federal debt, 41% of GDP last year, will double in the next decade (see article). Total government debt will move well above the G20 average. In a few years the AAA rating of Treasury bonds, the world’s most important security, could be in jeopardy.

The Economist Magazine on Why We Have to Be Biased Toward Tax Increases in the Short Term - The cover story in this week’s Economist magazine discusses “dealing with America’s fiscal hole.” The “hole” is described not as something we’ll have to dig ourselves out of in the far-off future, but something we’re already too far in now. The point is that we have to be biased toward tax increases over spending cuts if we really want to at least “stop digging” right away.  It doesn’t matter if the profligate spending of the past is more to blame than the unaffordable tax cuts of the past for the mess we’re in today.  What matters is the best, most sensible way forward to get out of the fiscal hole both immediately (mostly tax increases) and sustainably over the longer term (mostly entitlement reform).

National Debt Hysteria? - In a front piece story in today’s NYT, Edmund Andrews warns that the bill is about to come due on the massive borrowing the federal government has engaged in.  Andrews argues that most of the debt is in short-term loans whose price will go up as there becomes more competition for money.  He makes what strikes me as a plausible case that higher interest rates, growth in entitlement spending, and a smaller tax base will make servicing the debt very, very difficult.   Countervailing factors could offset this but neither Krugman nor Baker tell us what they might be. It’s true that we had gloom and doom forecasts during the 1992 recession.  But we only solved those through the dual magic of the dotcom bubble and the post-Cold War defense drawdown.  It’s not likely that those events will repeat themselves.

NYT: The Government Will Get Creamed When It Has To Refi Its Debt - The New York Times - not usually the first publication you'd think of when it comes to calling fiscal prudence -- sounds the alarm over the government's massive debt load.The premise is that, although we're fine now, borrowing money cheaply, we've got a huge refi coming up, and there's an excellent chance it will be way more expensive.  A really astounding fact, noted in the article, is that due to uber-low interest rates, our annual debt-service requirements are lower this year than they were last. Says one advocate of lower deficits: "the government is living on teaser rates."

The U.S. Government As Subprime Homebuyer - I find it hard to get too exercised about the debt issue. And I certainly think people like Robert Bixby of the Concord Coalition, who's quoted in the piece comparing the U.S. government to a reckless home-buyer with a low teaser rate, are missing the point. It's not like we borrowed all that money because we felt like buying a bunch of stuff we didn't have the cash to pay for. We borrowed it because the alternative would have been an economic apocalypse, and we happened to get a great deal in the process. What's not to like?

A Chart That Should Keep Progressives Up at Night - In my last post, I noted that progressives need to turn their attention toward the medium- and long-term fiscal crisis the country faces. How massive is the challenge we face? The following chart says it all:  Obviously the first thing to jump out is the escalating divergence between federal spending and revenues in the decades ahead. And the spending projection in the chart is from 2007, so it doesn’t include the stimulus or spending on the financial crisis (or the projected cost of health care reform). That’s scary enough. But the scariest part may not be evident at first glance...

Debt Dynamics Will Hold Back Economy - We believe that U.S. government and private debt levels will diverge over the next four or five years as the authorities attempt to use government debt to replace the private debt that is almost certain to decline substantially.  U.S. total debt is presently just under $55 trillion, comprised of public (government) debt of about $15 trillion and private debt (U.S. corporations and individuals) of about $40 trillion.  The similarities to Japan at its 1989 economic and market peak leads us to believe that we are close to the same road map that Japan was on starting at that time and continuing until today.  With that said, we expect current U.S. government debt of $15 trillion to double to about $30 trillion and private debt to drop in half to about $20 trillion over the next 4-5 years. 

Unsustainable Path -The United States of America is $12 trillion in debt. It’s actually worse than that, but let’s start there. The “National Debt Clock” above the IRS office on 45th Street in midtown Manhattan tripped the $12 trillion level this week. And that is just the actual, concrete debt. There are tens of trillions more in so-called unfunded liabilities — promises made to current and future recipients of Social Security and Medicare — that push the national debt up to somewhere in the $50-$60 trillion range. How do you grasp a problem that big? But make no mistake, friends, this is a problem that will grind the economy into dust, in a gradual, evolutionary kind of way. It’ll take years, maybe decades, a slow, grueling, almost invisible force. But if we do not address this, now, we, and our children, will wake up one day in a far less prosperous place.  We are going down, as I first saw Harvard’s Greg Mankiw call it, an unsustainable path. And we are barreling down it.

Stemming the tide - The Economist - Unprecedented levels of government debt may require radical solutions - STUDENTS at National Defence University in Washington, DC, were recently given a model of the economy and told to fix the budget. To get the federal debt down, they jacked up taxes and slashed spending. The economy promptly tanked, sending the debt to higher levels than before. This is the ugly arithmetic of America’s public finances. Recession and aggressive fiscal stimulus have hugely swollen the federal deficit. Stimulus was essential to cushion a collapse in private demand. In spite of that, the economy has barely emerged from recession and unemployment is still rising, feeding speculation that more stimulus is needed. Yet at the same time voters are growing alarmed at the tide of red ink, and it may be only a matter of time before markets do, too.

The dollar and the budget deficit - VoxEU - Current US fiscal policy is likely to produce current account deficits rising to $1 trillion by 2015 and $3 trillion by 2025; net foreign debt would reach $15 trillion by 2020, taking the US’s foreign-debt-to-GDP ratio far beyond the threshold that normally triggers currency crises and forces painful economic retrenchment. To avoid catastrophic risks stemming from soaring foreign debt, the US needs a plan for long-run fiscal sustainability.

Dollar Slump Persisting as Top Analysts See No Bottom (Bloomberg) -- The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates, which policy makers say is an “extended period” away. About $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs and a record $4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation’s 10.2 percent unemployment rate and signs that the economic recovery may falter, they said. “History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,”“It’ll take time to drain the oversupply of dollars from the market,” Henderson said. “The dollar will remain weak until the Fed’s rates rise above the competitors’.”

JPMorgan Cuts 2010 Dollar Forecast on Rates, Cash Stockpiles - (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank, said the dollar will fall to a record low next year on signs the Federal Reserve will keep interest rates near zero until 2011 and investors seek higher-yielding assets.  The dollar will weaken to $1.62 per euro in the second quarter, JPMorgan foreign-exchange strategists led by London- based John Normand wrote in the bank’s Global FX Outlook 2010, published today. The bank previously predicted a trough of $1.50 in the first quarter. U.S. rates at an all-time low make the dollar attractive to sell in so-called carry trades, in which investors use the greenback to fund purchases of higher-yielding currencies such as the Australian dollar and Norwegian krone. The greenback also weakened this year as central banks increased the percentage of foreign reserves held in euros at the expense of the dollar.

Here Is Why The Dollar Is Now Effectively Worthless - A picture is worth a thousand Krugman essays, which is why we present a chart comparing the US Monetary Base (and by subtracting Reserve Balances with Fed Reserve Banks, Currency in Circulation), and the Fed's holdings of MBS and Agency paper (worthless GSE/FHA garbage). In summary: Currency in Circulation: $920 billion; MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.

U.S. dollar collapse could devastate economy: book (Reuters) - A dollar plunge could ravage the U.S. economy as soon as 2012, when foreign investors are likely to exit en masse from U.S. assets, according to a new book by two analysts who forecast the recent credit crisis. Even after credit, stock and housing bubbles popped in the past two years, dollar denominated assets are still overvalued, and a bigger crisis is yet to come, write the authors of "Aftershock: Protect yourself and profit in the next global financial meltdown". Huge U.S. government debt issuance will drag the dollar into a much deeper dive, say analysts David Wiedemer and Robert Wiedemer, and writer Cindy Spitzer. Though most of the pressure on the dollar will come from the Chinese yuan and other resurgent Asian currencies, the euro will eventually punish the debt-burdened dollar, said Wiedemer in a telephone interview with Reuters this week.

The Dollar Bubble (Video)

U.S. dollar no longer a one-way bet (Reuters) - The one-way bet in the U.S. dollar that has lasted several months may be over for now despite distress over its malaise that has stretched from Washington to Paris.The dollar recently hit a 15-month low against a basket of other major currencies. This weakness has become a political football in the United States, as opponents of the Obama administration charge that it shows fiscal policy is hurting the U.S. economy. Other countries have also become increasingly vocal about the dollar's decline. Even Federal Reserve Chairman Ben Bernanke commented on the dollar, saying on Monday that the Fed does watch the dollar's value.

Russia sparks Canadian dollar rally - Russia's central bank says it will add the Canadian currency to its reserves, sparking a jump in the loonie. Mr. Stannard sees further Canadian dollar gains in the short run as investors seek assets in commodity-based currencies. “I would expect it to remain well supported in the current environment, given that we're seeing quite a high level of risk appetite, which is fuelling the rally.” Further moves to diversify away from the U.S. dollar will bolster the Canadian currency, Royal Bank of Canada added.

Russia Signals More Rate Cuts to Stem Hot Capital  (Bloomberg) -- Russia’s central bank will keep cutting interest rates as policy makers try to prevent speculative capital from flowing in and destabilizing the currency, Bank Rossii First Deputy Chairman Alexei Ulyukayev said. Russia needs to keep cutting rates to stem the use of the ruble as a vehicle for the carry trade, and after the economic decline removed inflation risks, Ulyukayev said at a conference in Moscow today organized by the Vedomosti newspaper.  The bank yesterday cut the key refinancing rate to a record low 9 percent in the ninth reduction since it started easing in April as it tries to curb speculative gains in the ruble and ease credit flows.

Russia says Brazil interested in trade in national FX - (Reuters) - Brazil is interested in settling bilateral trade with Russia in roubles and real, a Russian central bank official said on Wednesday, echoing Moscow's drive for more use of national currencies and less of the U.S. dollar. Moscow is already discussing trade in national currencies with China and India -- which with Russia and Brazil make up the BRIC group of emerging market states -- as well as other countries including Turkey and Vietnam."There was an initiative within the framework of the BRIC. These countries intend to create the conditions for direct payment for trade in national currencies," Alexander Potemkin, an advisor to the Russian central bank chairman, said.

Iran gained $5bn on shift from US dollar - TEHRAN // Iran has gained $5 billion through its policy of shifting away from the US currency in favour of the euro, state television reported on Monday, citing Central Bank Governor Mahmoud Bahmani. Since 2007, Iran has received 85 percent of its oil income in currencies other than the US dollar, Iran’s English-language Press TV reported on its web site. “Iran has considerably reduced the total of U.S. dollars in its currency basket,” Mr Bahmani said.

House raises concern over weak dollar - The falling price of the US dollar has raised concern among MPs that Kenya's foreign currency reserves are at risk. Githunguri MP Njoroge Baiya (PNU) and Rangwe MP Martin Ogindo (ODM) Wednesday put the government on the spot over the depreciating value of the dollar, the primary unit in the foreign currency reserves. The MPs argued that the falling value of the dollar was due to deliberate policies of the Obama Administration. Therefore, they said, Kenya had to take steps to protect its foreign currency reserves by avoiding the dollar.

The Irresistible Rise of the Renminbi -China is making a big push to encourage greater international use of its currency, the renminbi. It has an agreement with Brazil to facilitate use of the two countries’ currencies in bilateral trade transactions. It has signed renminbi swap agreements with Argentina, Belarus, Hong Kong, Indonesia, South Korea, and Malaysia. Last summer, it expanded renminbi settlement agreements between Hong Kong and five mainland cities, and authorized HSBC Holdings to sell renminbi bonds in Hong Kong. Then, in September, the Chinese government issued in Hong Kong about $1 billion worth of its own renminbi-denominated bonds. All of these initiatives are aimed at reducing dependence on the dollar both at home and abroad by encouraging importers, exporters, and investors to make more use of China’s currency. The ultimate goal is to ensure that China eventually gains the flexibility and financial prerogatives that come with being a reserve-currency country.

Should China Allow its Currency to Appreciate? - Becker - By all accounts, President Obama's visit to China last week was pretty much a failure on all the major issues, which include China's contributions to climate change, nuclear weapons, and various aspects of the world economy. I will concentrate my discussion on two of the most important and closely related economic issues: the valuation of the Chinese currency, the renminbi, and the huge assets accumulated by China that are mainly held in the form of US Treasury bills and other US government assets.

China's Currency and Reserves--Becker's analysis is impressive, but I hesitate to state with confidence that China would be better off to revalue its currency. As Becker points out, China has pegged its currency to the dollar at a rate of exchange that greatly undervalues its currency relative to ours. As a result China sells goods to U.S. producers and consumers at very low dollar prices and buys goods from U.S. producers at very high prices. In consequence it exports a lot to the U.S. (and to other countries as well, for its currency is undervalued relative to other currencies besides just the dollar, notably the euro) and imports little. Since it receives more dollars than it pays, it has accumulated huge dollar reserves--accumulated them rather than giving them to its people. It has more than $2 trillion in foreign reserves, mostly U.S. dollars. The dollar has been falling lately, and the value of China's dollar reserves with it.

The Truth Behind China's Currency Peg - During President Obama's high profile visit to China last week, the most frequently discussed, yet least understood, topic was how currency valuations are affecting the economic relationship between the United States and China. The focal problem is the Chinese government's policy of fixing the value of the renminbi against the U.S. dollar. While many correctly perceive that this 'peg' has contributed greatly to the current global imbalances, few fully comprehend the ramifications should that peg be discarded…

China Losses Inevitable as Dollar Weakens, Ex-PBOC Adviser Says (Bloomberg) -- China’s foreign-exchange reserves face a “triple whammy” as inflation, oversupply and the “inevitable” decline of the dollar threaten to erode the value of its holdings of U.S. Treasuries, said Yu Yongding, a former adviser to the Chinese central bank. China needs to divert its trade and investment surpluses away from U.S. debt if it is unable to reduce them, Yu, a member of the central bank’s monetary policy committee from 2004 to 2006, said in a speech in Melbourne last night. The nation, with the world’s largest foreign-exchange reserves of $2.3 trillion, is the U.S.’s biggest creditor, holding $798.9 billion of Treasuries as of September.  “Capital losses -- let alone obtaining decent returns -- seem inevitable,”

The China Debt Dance - "Both the Chinese and Americans are in the same boat," says Yang,  "Chinese has always been trusting the United States. We say the dollar is as good as gold. In Chinese we don't say 'US dollars'; we say 'US gold'--meijin." Now that they've amassed more than $1 trillion, the Chinese can hardly risk precipitating any kind of worldwide sell-off by moving to get rid of dollars en masse. They're like the action hero in the movie who steps on a land mine, hears the click as it engages and then can't move, lest he blow himself up. Furthermore, the Chinese seem intent, at least in the short and medium terms, to continue driving growth by exporting products to the United States (and holding down the value of their own currency), which means they'll continue to amass dollars into the future. In other words, they're stuck with us.

China Asks Its Banks to Slow Down - NYTimes - Chinese banking regulators are putting pressure on the country’s banks to raise more capital and temper their rapid growth in lending, in the clearest signs yet of official concern about the sustainability of the nation’s credit boom, senior Chinese bankers said Monday. U.S. and European officials have also pressed their banks to shore up their finances in recent months, but the reasons behind the Chinese regulators’ capital-raising push are very different. In some ways, the regulatory pressure reflects the robustness of the Chinese economy, in contrast with lingering economic weakness in the West.

Now Chinese banks are under-capitalised - What happens when you go on a stimulus-funded lending frenzy? Apparently, you do eventually run out of cash.  As Bloomberg reports — China’s five largest banks submitted preliminary plans for raising capital to the industry regulator after they extended unprecedented amounts of new loans this year, according to four people with knowledge of the matter

Repairing China’s financial system - There seems to be a real tug of war.  On the one hand much of China’s industrial and exporting sectors along with provincial and local leaders, are eager to see a continuation of the financial policies that have goosed employment and GDP growth at the expense of domestic consumption.  On the other hand the macro and financial specialists are worried about the growing imbalances and their impacts on the financial sector.  Yu Yonding, a former member of the Monetary Policy Committee and one of the smartest analysts on China, gave a speech in Melbourne yesterday in which he warned about China’s over-reliance on exports and investment and suggested that the imbalances are worsening, not improving.  I strongly recommend that interest readers check out the speech for themselves. In part the debate resolves around the issue of financial sector reform, especially of the banking system.  This is an extremely important topic because most economists and analysts, including me, believe strongly that financial sector reform will be one of the most important steps forward for the healthy development of the Chinese economy.  The Chinese financial system misallocates capital on an heroic scale.

China May Only ‘Fine Tune’ at Annual Policy Meeting (Bloomberg) -- China’s leaders may highlight inflation concerns at a meeting this month to set economic priorities for 2010 without changing existing fiscal and monetary policies, economists said.  “Immediate concerns about the recovery are still likely to dominate,” Mark Williams, a London-based economist., said.  He predicts “only a moderate shift” in policy stance, perhaps by adding “stable prices” as a goal. China’s annual central economic work conference may be held before the end of November, according to reports in state media and the Hong Kong Economic Times. Policy makers weighing when to reduce stimulus measures must balance the strength of the recovery in the world’s third-biggest economy against the risks of bad loans, asset bubbles and resurgent inflation.

Foreign PE investors back yuan as reserve currency - The yuan should become an international reserve currency in five to 10 years to prevent the country from paying for the mistakes of US economic policies, a London-based private equity (PE) manager said in an interview Sunday in Beijing. In the short term, Derek Han, chief executive officer of the Blue Oak Capital, said the country, under international pressure, will gradually allow its currency to rise 2 to 3 percent in value. But the country will ensure that it does not greatly affect export industries, Han said.

Yen soars to 14-year high against dollar, concerns about double-dip recession (Xinhua) -- The Japanese yen soared against the U.S. dollar on Thursday reaching the upper 86-yen level in a sharp appreciation not seen since 1995. As the dollar abruptly fell against other major currencies too, domestic concerns about foreign exchange volatility possibly resulting in a double-dip recession are becoming increasingly pervasive. When pressed on the issue Fujii declined to elaborate saying he would not comment on the possibility of joint intervention in the foreign exchange market, and would be cautious about saying anything given the uncertainty over recent currency moves and the complications presented.

Japan Shows Concern as Dollar Slides - NYTimes - Japanese policy makers on Friday became increasingly vocal about the strength of the yen after the Japanese currency hit a 14-year high against the dollar, fueling speculation that the government may step into the market to artificially weaken the currency.The dollar briefly fell to 84.82 yen — surpassing Thursday’s low and prompting the country’s finance minister, Hirohisa Fujii, to tell reporters in Tokyo Friday that he was “extremely nervous and watching the market carefully. There’s no doubt the market has moved too far in one direction,” Mr. Fujii said. “Moves right now are extreme, and it would be possible to take appropriate measures.”

Yen intervention: maybe, maybe not - Will they, or won’t they? First it was Japanese government bonds, now it’s the yen, which strengthened to a 14-year high against the dollar, climbing past Y85 amid speculation that Japan would intervene in markets.  As Reuters reports on Friday:  Japan’s finance minister raised the prospect of a G7 joint statement on currencies to cool the yen’s rally as the dollar tumbled to a 14-year low against the yen on Friday. In a sign Tokyo was stepping up its warnings of the chance of currency intervention, market sources said the government and the Bank of Japan had been checking dollar/yen rates with commercial banks in the morning.

The dollar’s still not safe - One quote jumped out at me from the Reuters Dubai round-up this morning: “We have seen a classic risk aversion reaction in the markets over the past 24 hours. The dollar has slumped, the yen is stronger,” a Societe Generale note said. Needless to say, this isn’t exactly a classic risk-aversion reaction: when the markets are really scared, they tend to flee to the safety of the dollar, rather than to the Japanese yen.

What’s Really Going On - A headline in today’s edition reads “Dollar Falls Against Yen; Japan Hints at Action.”  A more revealing headline would read “U.S. Goods Become Less Costly for Japanese People; Japanese Government Hints at Preventing Its Citizens from Enjoying this Bounty.”

Emerging Markets Try To Manage Flood Of Foreign Capital - As the global economy lurches from plunge to rebound, key emerging markets are erecting defenses against future financial upheavals. Brazil and Taiwan have imposed new controls on cross-border fund flows, while other Asian and Latin American countries are considering similar moves.  Especially in Asia, emerging markets have rebounded from the global downturn more quickly than the United States, Europe or Japan. Investors who sought safety in dollar-denominated assets one year ago now are rushing into countries such as South Korea or Brazil. For those smaller economies, however, the huge investment flows can:

  • Drive currency values to export-crushing heights.
  • Inflate domestic stock and property market bubbles.
  • Destabilize economies by leaving as quickly as they arrive.

Falling dollar puts reserves at risk -  In a forum organized by the University of the Philippines School of Economics (UPSE) late Wednesday, Bangko Sentral ng Pilipinas (BSP) Sterling Chair Professor of Economics Maria Socorro G. Bautista said that with the global economic crisis and the depreciating value of the US dollar, policymakers should now consider creating and using a "supranational currency" such as special drawing rights (SDRs) as their new main global reserve currency. REPLACING the US dollar as a reserve currency would reduce the risks faced by countries over-reliant on the greenback as a reserve asset, as well as correct global trade imbalances blamed for the recent turmoil, an economist said.

Brazil vs the global carry trade - Even capital controls, it seems, are powerless in the face of the global carry trade: Brazil’s real is the “most overvalued” currency as a “wall of money” coming into Latin America’s biggest economy may overwhelm government efforts to curb its rally, said Goldman Sachs…“After some initial success with capital controls, real appreciation appears to be on the rise again,” Stolper wrote in a note to clients. The real has gained 34 percent this year, making it the second-best performer in the world after the Seychelles rupee…Yes, Brazil has a lot of commodities, but I can assure you that it’s not exporting $17.6 billion of commodities every month. This is hot money, plain and simple, the tool of speculators who fund themselves at near-zero rates in dollars and invest in an appreciating currency paying an interest rate of 8.75% and rising. The influx does no good for Brazil whatsoever (exporters hate overvalued currencies) while feeding huge dividends to hedge funds and others with little long-term stake in Brazil’s future.

On Carry Traders and Long Term Interest Rates - Tyler Cowan thinks that this post by Paul Krugman on long term interest rates and a follow up by Brad DeLong are critically important and "two of the best recent economics blog posts, in some time". Krugman's post deals with the question of why some economists in the administration are concerned that further increases in deficit financing could cause long term rates to spike. What Krugman seems to be advocating is the following: if long term rates should start to rise, the Treasury should finance the deficit by issuing more short-term (and less long-term) debt, thereby flattening the yield curve and holding long term rates low. This would prevent capital losses for carry traders (although it would lower the continuing profitability of the carry trade if short rates rise). In effect, Krugman is arguing that the Treasury should itself act like a carry trader: rolling over short term debt to finance a long-term structural deficit. But why is this not being done already?

The Need to Regulate Cross-Border Flow of Speculative Funds - The root of much of past and current global financial crises lies in the unrestricted cross-border flow of speculative funds and the ability of market participants to deploy cross-border speculative financial and regulatory arbitrage for risky profit at the expense of central banks and local market fundamentals.  The reason low dollar interest rates do not help the US economy is because hot money will respond by flowing into China and other high interest rate economies to profit from carry trade and exchange rate arbitrage, leaving the US with a persistent credit crunch. The only way a low Fed funds rate will help the US economy is if the US regulates cross-border flow of speculative funds, thus forcing the bailout and stimulus money to stay within US border to create jobs locally.

Photographing Phantom Invisible Bond Vigilantes - A specter is haunting Paul Krugman -- it is the specter of apparently sophisticated forecasters who predict a huge spike in US long term bond rates in the near future. He notes that most investors can't believe this or rates would already be high. He also notes that some of those who are predicting a spike seem to be top advisors somewhere in the Obama administration. He is puzzled by this phenomenon. I just note that it is not new at all. Basically such apparently sophisticated people predicting a spike in long term US interest rates are (almost) always with us.

Interest rates at center stage - Atlanta Fed - In case you were just yesterday wondering if interest rates could get any lower, the answer was "yes": "The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end." "Demand for safety" is not the most bullish sounding phrase, and it is not intended to be. It does, in fact, reflect an important but oft-neglected interest rate fundamental: Adjusting for inflation and risk, interest rates are low when times are tough. A bit more precisely, the levels of real interest rates are tied to the growth rate of the economy. When growth is slow, rates are low.

Bills Yielding Zero as Stocks Soar Make 1938 Moment (Bloomberg) -- For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence in U.S. financial markets that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938. That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. As 1939 began, stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized. While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved.

FT Alphaville - T-bill terror - Duh duh duh! The yield on some short-term Treasuries, T-bills, turned negative. That means that investors are piling into Treasuries to such an extent that they’re now willing to effectively pay the government for the benefit of owning them. The last time we saw this happening was in 2008, in the depths of the financial crisis.There are generally two ways to look at this: a portend of imminent financial doom or symptomatic of the wider changes in the banking industry. The former is certainly the line being pursued by the excitable Zero Hedge blog...

Fed asks U.S. banks to submit TARP repayment plans (Reuters) - The U.S. Federal Reserve this month asked banks that were part of its "stress tests" to submit plans to repay government money, if they have not already repaid it, a person familiar with the situation said on Tuesday.Many U.S. banks are eager to repay money borrowed under the government's $700 billion Troubled Asset Relief Program. Participation in the program comes with limitations on pay, dividend payouts and share repurchases.Nine banks may soon be allowed to repay money borrowed under TARP, if they have been able to raise common equity recently and if they show they would continue to exceed capital buffers after redemptions, the source said

Quelle Surprise! Top Brass at Failed Firms Profited Handsomely - Yves Smith  - The New York Times discusses a study (supposedly released, but the paper has yet to be posted) by corporate governance expert and Harvard Law School professor Lucien Bebchuk (along with Alma Cohen and Holger Spamann) on how much the top echelon at failed firms Bear Stearns and Lehman really suffered when their firms imploded.  The study rebuff the widely-held notion that the top executives suffered in a way that made a difference on a practical level. If you net worth goes from, say $200 billion to a mere $100 million, the loss of 1/2 of one’s wealth at that level is not going to have a proportionate impact on one’s lifestyle.

Timmy!’s Testimony - The indisputable fact is that billions of cash went out the door to Goldman et al as a result of the Fed’s actions.  The Fed took ownership of the CDOs underlying the swaps that AIG had entered with the banks, and effectively paid the banks 100 cents on the dollar.  That is, they ensured that the CDO hedges were perfect (belying the old trader adage that the only perfect hedge is in a Japanese garden). The question is, therefore, what were the alternatives?  The alternative that has garnered all the attention is that the Fed should have paid less than 100 cents on the dollar.

Geithner’s Disgrace -  The issue has been festering for months: Why were AIG’s counterparties — including Goldman Sachs, JPMorgan Chase, and UBS — paid 100 cents on the dollar when the feds rescued the insurance giant, helping raising the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then — New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising. Barofsky’s report reads like a case study in failed negotiation. The New York Fed didn’t have the backbone to stand up to Wall Street, didn’t understand its capacity to protect taxpayers, and didn’t appreciate that its responsibility was to taxpayers.

The Key Question No One Asked About Goldman's Role In The AIG Bailout - A key and fundamental question was not broached during the fierce interrogation of Treasury Secretary Geithner during Thursday's hearings before Congress's Joint Economic Committee. The contentious subject at hand was the Fed and Treasury's role on the issue of the American International Group's multi-billion dollar bailout. The key question neither asked nor answered was: What was the nature of the myriad discussions at the height of the crisis in September 2008 between Treasury Secretary and former Goldman Sachs Chairman Hank Paulson and Goldman Sachs Chairman Lloyd Blankfein?

AIG Forcing Poor To Choose Between Running Water And Food  -  What are we getting in return for the bailout? So far, predatory credit card rates, exorbitant bank fees and obscene Wall Street bonuses. But we're being robbed in other, sneakier ways, too. It seems that taxpayers in the poorest, most vulnerable parts of the county are getting plundered by the same institutions they bailed out. One example is AIG's underhanded fleecing of residents of rural Kentucky...

Banks face $7 trln debt maturities by end-2012 -WSJ (Reuters) - As much as $7 trillion of debt piled up by banks falls due by the end of 2012, which could force them to refinance their borrowings at higher cost, the Wall Street Journal said, citing a Moody's Investors Service report. A further $3 trillion comes due by the end of 2015, the paper said, citing the report. Banks took extra debt onto their balance sheets during the credit-market boom that began in the middle of the decade and lasted until the bust in 2007. When the credit crisis struck, they were propped up by government guarantees that enabled them to keep selling debt, but with much shorter maturities, the paper said.Moody's report showed that U.S. banks have seen their average debt maturities drop to 3.2 years from 7.8 years in the past five years, the paper said

FDIC Data Reflects Continued Economic Slump - The Third Quarter FDIC Quarterly Banking Profile shows a deteriorating economy. Case-Shiller shows stability in home prices, but I project this to be just a pause.The Number of Problem Banks increased dramatically in the third quarter to 552 from 416. What’s significant in this is that 50 banks failed in the third quarter up from 24 in the second quarter and 21 in the first quarter. An additional 29 banks have failed since the end of the third quarter. If you assume that the 50 seized banks were on the Problem List, the FDIC added 186 banks to the list in the third quarter.

S&P raises fears over health of some banks - A study by Standard & Poor’s, one of the world’s leading credit ratings agencies, has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest. The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.Although some banks will be able to top up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.  S&P’s risk-adjusted capital (RAC) ratios – a measure of balance sheet strength – foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.

Vampire banks rise again - Wall Street will never be fair while industry lobbyists wander the halls of Congress, sucking the life out of financial reform. Congress is now debating a financial reform bill that is supposed to prevent this sort of disaster from ever happening again. Leaders in Congress are promising us tough measures that will put an end to "too big to fail" institutions and the other implicit and explicit subsidies that allow the Wall Street crew to get incredibly wealthy at our expense.

How Big Is Too Big? - As legislation on restructuring the banking industry moves forward, attention on Capitol Hill is increasingly drawn to the issue of bank size. Should our biggest banks be made smaller? Senator Bernard Sanders, Vt, introduced the “Too Big To Fail Is Too Big to Exist” bill in early November; this helped focus attention. Since then, Representative Paul E. Kanjorski, D, Pa. — proposed an amendment to the Financial Stability Improvement Act (currently before the House Financial Services Committee) that "would empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy."

If banks can delay, pray - The “too-big-to-fail” amendment offered by Representative Paul Kanjorski has good intentions, but fatal flaws. One I wrote about on Monday. Another is a section (see page 7) that gives systemically dangerous institutions (SDIs) the right to appeal regulatory orders in a federal district court. If they don’t like the corrective actions that regulators instruct them to take, they could delay them indefinitely. With bank resolutions, the key issue is speed. We learned that the hard way during the savings and loan debacle. Allowing banks to deteriorate until they have no capital left is like waiting for an infection to turn gangrenous before treating it.

Big U.S banks may be forced to raise more capital soon (Reuters) - Most big U.S. banks may be forced to make public offerings soon if the Treasury demands payback of the funds it issued under the Troubled Assets Relief Program, veteran banking analyst Richard Bove said.The U.S. Federal Reserve this month asked banks that were part of its "stress tests" to submit plans to repay government money, if they have not already repaid it."Virtually all of the banks can easily redeem their TARP preferreds from current cash holdings. However, it may be that only 3 of the top 30 would have an adequate Tier 1 Capital ratio if they redeemed these preferreds," Bove said

Charitable Giving - In an otherwise less than sympathetic piece on the public relations travails of the Vampire Squid everybody loves to hate, Financial Times credits the investment bank's recently announced 10,000 Small Businesses initiative as "cleverly conceived" and "designed for maximum effect." I have to disagree. Like many of you, I am sure, I was impressed when I heard Goldman was going to donate $500 million to a myriad of small businesses, which are widely perceived to be the primary engines of job creation in our economy. Then I read the blasted thing. It is not pretty. Sixty percent of the committed funds will be distributed for "lending and philanthropic support," but this will be directed through "Community Development Financial Institutions." Call me a skeptic, but this does not sound like high powered money coursing directly into the working capital accounts of productive enterprises which can use it. Instead, it sounds like a $300 million slush fund for the functional equivalent of community NGOs. The remaining forty percent—200 million clams—will go toward "education."

Wall Street’s Spin Game (NYTimes) - Lloyd C. Blankfein, chief executive of Goldman Sachs, the bank to bash on a resurgent Wall Street, is receiving a lot of advice lately, and it’s not just about money.  Sitting before an audience of 300 at the Metropolitan Club of New York on Tuesday, he spoke with barely disguised disdain in his voice about the work of the image consultants, reputation experts and public relations advisors who are beating a path to his door, and to the doors of other Wall Street banks vilified for their profits and million-dollar bonuses at a time of continuing economic pain.  “Some people come in and say, ‘You are doing too much. Don’t say another word.’ Other people say we should get on the talk shows,”

Goldman's secret moral pathology  - 15 symptoms of a Wall Street disease destroying democracy and capitalism - MW - The "Goldman Conspiracy" is the perfect B-school case study of Wall Street's secret contagious pathology, with insiders like Lloyd Blankfein, Henry Paulson and others pocketing billions more of the firm's profits than shareholders, evidence the new "mutant capitalism" has replaced Adam Smith's 1776 version which historically endowed the soul of American democracy as well as our capitalistic system. Sadly for America Goldman's disease is rapidly becoming a pandemic spreading beyond Wall Street's too-greedy-to-fail banks, infecting our economy, markets and government as it metastasizes globally.

Taxing the Speculators - Krugman - NYTimes - Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree — and they’re right.  Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.

Against liquidity - Krugman today argues in favor of a financial-transactions tax on the grounds that it would discourage over-reliance on ultra-short-term repo markets, among other reasons. In other words, reliance on repos is a bad thing, and it’s a good idea for government policy to “nudge” financial institutions away from it. That’s something that opponents of the Miller-Moore amendment should bear in mind, when they complain that it could hit the repo market hard. The problem is that we don’t want to encourage the use of leverage to finance short-term trading positions. Indeed, from a public-policy point of view, we’d ideally want to discourage it.

Default Swap Reforms Roiled as Aiful Tests Settlement (Bloomberg) -- Wall Street’s system for determining payments on derivatives linked to the debt of defaulted companies is showing cracks less than a year after securities firms changed practices to avoid “Draconian” regulation. Disparities are arising in spite of practices adopted in April and July to standardize settlements and curb risk in a market that exacerbated the worst financial crisis since the 1930s. Analysts say changes are needed as dealers examine how to interpret existing rules to maintain investor confidence. “The first cracks are being shown in the protocols,”  The rules are being tested as the global default rate rises. The rate for companies ranked below investment-grade reached the highest since the Great Depression in October and will peak at 12.5 percent next month, Moody’s said

Rethinking The Wall Street Business Model (Part 1) "Too Big To Fail." "Shrink Wall Street."" Ban credit default swaps." These are just a few of the themes dominating the discussion around the Wall Street business model. They all, unfortunately, miss the point. Size, scale, and instruments that properly used help manage risk have their benefits. Lost in the fallout of the financial crisis is the reason why Wall Street exists: to facilitate capital formation and to provide tools for efficient capital allocation. These are customer-focused activities. This cuts across the Wall Street firm, touching underwriting, credit, M&A, security sales and trading, derivatives, foreign exchange and asset management. I'd argue that these business lines are appropriate for the Wall Street firm and really do help customers, be they corporations, municipalities, sovereigns or institutional investors, achieve their objectives. The problem is that both regulators and risk managers have not kept pace with the increasing scale and complexity of the 21st century Wall Street firm

Why You Should Support The Lynch Amendment - So here’s a simple amendment, by Stephen Lynch (D. Mass). Here’s the crucial part of it:(B) BENEFICIAL OWNERSHIP BY A RESTRICTED OWNER – The rules of a clearing agency that clears security-based swaps shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interest in the agency or in persons with a controlling interest in the agency, to the extent that such an acquisition would result in restricted owners controlling more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests.

Could Wall Street Actually Lose In Congress? - Something strange and a little disorienting is happening in the fight to reform Wall Street: It looks like the reformers are actually starting to win.This is not something you could have said as recently as six weeks ago. Back then, House Financial Services Committee Chairman Barney Frank had just released a proposal to regulate derivatives, essentially bets on the movements of other assets (like stocks, bonds, commodities) or interest rates. Derivatives are in some respects the key battle in the broader regulatory campaign.

OTC Derivative Market Reform1 - OTC derivatives are contracts executed outside of the regulated exchange environment whose values depend on (or derive from) the values of underlying assets, reference rates or indexes. Market participants use these instruments to perform a wide variety of useful risk management functions. The Bank of International Settlement (BIS) reports that the notional value of all outstanding OTC derivative contracts ending June 2009 was $49.2 trillion worldwide against a 2009 world GDP of $65.6 trillion.The House Committee on Financial Services oversees and formulates policies and develops legislation that govern the entire US financial services industry, including the securities, insurance, banking, and housing industries...its mandate covers the OTC derivative market where derivative instruments are traded directly between counterparties outside of exchanges. The largely unregulated OTC derivative market has been a major source of systemic risk in financial markets. Witnesses initially called by the Committee for the hearing were all derivative industry representatives.

Strauss-Kahn Says Half of Bank Losses Are Undisclosed (Bloomberg) -- International Monetary Fund Managing Director Dominique Strauss-Kahn said that about half of bank losses from the global financial crisis have yet to be revealed. “It is our view we are still in the situation where a lot of losses haven’t been disclosed,” Strauss-Kahn said during questions at the Confederation of British Industry’s conference in London. “How much is a difficult assessment, but let’s say something which is close to half of it.” Banking systems “remain undercapitalized” in many advanced economies with “far from normal” financial conditions, Strauss-Kahn said in a speech to the conference. The IMF said in September that banks may have $1.5 trillion in toxic debt remaining on their books, which may hurt credit markets and stifle the global economic recovery.

‘Problem’ Banks at 16-Year High in Third Quarter, FDIC Says (Bloomberg) -- U.S. “problem” lenders climbed to the most in 16 years and the Federal Deposit Insurance Corp.’s fund protecting customers against bank failures slipped into a deficit in the third quarter, the agency said.  The FDIC had 552 banks with $345.9 billion in assets on the confidential problem list as of Sept. 30, a 33 percent increase from 416 lenders with $299.8 billion in assets at the end of the second quarter, the regulator said today. The agency’s insurance fund had a negative $8.2 billion balance, its first deficit since 1992.

US Commercial Banks: the Turkeys Are Stuffed - The increase in the monetary base created by the Fed's monetization of debt is striking, not seen since the early stages of the Great Depression. (see chart) Banks are not lending despite the massive quantitative easing. They are fat with reserves, paying huge bonuses again, and obviously doing something with their money other than providing funds for the commercial activity of the nation.(see chart)  Excess Reserves are an accounting function. The banks themselves do not reduce their reserves significantly through lending in the aggregate, but seek to minimize the opportunity cost of reserves. But it is symptomatic in the sense that the lack of reserves is most definitely NOT an issue with lending.

IMF warns second bailout would 'threaten democracy' - The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning. Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy. Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates."

Bankers' Pay Revisited - Yet again the debate on bankers’ bonuses has taken an ugly turn, with ostensibly sober commentators getting caught into the populist flow…Which is really too bad, as op-eds like this are a missed opportunity to inform the public about the fundamental problems in the financial sector (of which compensation is a by-product) and build support for policies to address them. It’s in this latter spirit that I’ll raise here three key questions on bankers’ pay and hopefully offer some food for (constructive) thought/policy:

BBC - Banks 'should disclose number of workers earning £1m' - The UK's banks should be forced to publicly disclose the number of their employees who earn more than £1m a year, a report has concluded.That is one of the main findings of the government-commissioned Walker Review into the corporate governance of banks. Sir David Walker, who led the report, also said non-executive directors needed more power to monitor banks' risk taking and pay deals. The government said it would now move to implement Sir David's proposals.

Sharp drop in lending largest since 1984 - Lending by U.S. banks plunged by 2.8 percent in the third quarter, the largest drop since at least 1984 and the fifth consecutive quarter in which banks have reduced lending, the Federal Deposit Insurance Corp. reported Tuesday. The decline in lending is emerging as a serious impediment to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. Large banks, the beneficiaries of billions of dollars in federal aid intended to spur new lending, were responsible for a disproportionate share of the decline, the FDIC said

Banks' newest game: Debit card fees - (CNNMoney) -- Could debit cards be the next cash cow for banks? If banks have their way, they will.Americans have conducted more transactions and spent more money using debit cards than credit cards this year -- the first time that's ever happened.Next year, consumers are expected to spend $1.64 trillion with their debit cards, nearly two-thirds more than in 2006, according to the payments industry trade publication The Nilson Report.And there is no indication this growth is slowing down anytime soon. Not only are Americans increasingly reluctant to take on more debt, but banks are expected to become more stingy with credit cards once new federal legislation takes effect next year, which could make the debit card the preferred form of payment for many consumers.This hasn't gone unnoticed by large and small banks, who are currently looking for ways to wring any extra dollars out of their business at a time of severe loan losses.

Limit on Bank Fee Won’t Be Painless - NYTimes - Regulators and politicians are competing to rein in bank overdraft fees. The Federal Reserve decided this month that banks must receive customers’ consent before allowing them to overdraw their accounts. Other proposals in Congress go even further, limiting charges or prescribing the structure of fees. Whatever changes come, however, customers this holiday season should not expect any free gifts from their banks. Financial institutions have been collecting up to $30 billion a year in overdraft fees, according to the management consultants Oliver Wyman. Furthermore, the fees have been a big source of profit, accounting for nearly a fifth of the black ink at depository institutions in recent years.

Sorry America: You're Probably Doomed To Financial Illiteracy - Americans have a truly depressingly low level of financial literacy, raising questions about whether many of our fellow citizens have the basic cognitive skills necessary to prosper in a complex modern economy. Can anything be done about this? The behavioral economics types want the government to craft rules that would nudge the illiterate to make smart choices. Unfortunately, this program is hobbled by the reality of government operations. Instead of nudging the illiterate toward wise financial decisions, any paternalistic program will likely nudge people toward decisions that benefit influential special interest groups.

FDIC on REO Sales: Keep'em in the Dark!  - In October the FDIC held a large auction of properties it had acquired as a result of failed banks in Georgia. I thought this was an interesting story and wrote about it before the auction took place. It was my intention to write about it again after the results of the auction were released. No such luck. The FDIC has decided to keep us in the dark on this one. The following is an email I got from JP King, the auction house who ran the Georgia auction: “Unfortunately, FDIC has prohibited us from releasing any information regarding the auction. We've been trying to get them to let us release the results, but they have denied our requests. We aren't allowed to release any details.”
I would have thought that the results of a pubic auction of properties owned by FDIC would have to be publicly disclosed. So why is the FDIC trying to cover this up?

Wall St. Finds Profits Again, Now by Reducing Mortgages- As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess. Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans. But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

The Fed and Mortgage Rates - Meredith Whitney expressed concern about what will happen when the Fed stops buying GSE MBS by the end of the first quarter 2010. The Federal Reserve has begun slowing purchases in the $5 trillion market for so-called agency mortgage-backed securities after announcing in September that it would extend the timeline for its $1.25 trillion program to March 31 from year-end. Whitney said that banks are only originating home loans that they can sell to Fannie Mae and Freddie Mac. “If Fannie and Freddie can’t sell to an end buyer, i.e. the U.S. government steps back, the mortgage market at minimum contracts, rates go higher, and banks are poised with more writedowns,” said Whitney.

Fannie Mae cuts portfolio, delinquencies jump - Fannie Mae shrunk its gross mortgage portfolio by an annual rate of about 28 percent in October and delinquencies on loans it guarantees rose sharply in September, the largest U.S. home funding company said on Tuesday. The government-controlled company slashed its mortgage holdings to $771 billion last month, for a 2.4 percent drop year-to-date. The portfolio was even smaller at the end of October after factoring in $44.3 billion of net outstanding commitments to sell. That reduced the gross retained mortgage assets to $727.1 billion. In another sign of the struggle homeowners face in making timely loan payments, Fannie Mae reported a continual jump in the rate delinquency on loans it guarantees in September, the most recent figures available.

Fannie Mae to tighten lending standards - Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, plans next month to raise minimum credit score requirements and limit the amount of overall debt that borrowers can carry relative to their incomes. Starting Dec. 12, the automated system that Fannie Mae uses to approve loans will reject borrowers who have at least a 20 percent down payment but whose credit scores fall below 620 out of 850. Previously, the cut-off was 580.
Also, for borrowers with a 20 percent down payment, no more than 45 percent of their gross monthly income can go toward paying debts. Fannie declined to disclose the previous threshold, except to say that it was higher.

Mortgage Delinquencies and Foreclosures by Period Past Due - This graph shows the delinquencies by time period (30, 60, 90 day, and in foreclosure) for all loans. Clearly most of the increase was in the 90 day and in foreclosure buckets. And that is why the modification programs are so important. The second graph provides the same data for prime fixed rate mortgages. Both the 30 and 60 day buckets are still at record levels, although the rate of increase has slowed.

States: Seriously Delinquent Mortgages vs. Unemployment Rate - Here is a scatter graph comparing the seriously delinquency rate for mortgage loans vs. unemployment rate for all states. The seriously delinquent rate include 90+ days delinquent loans, and loans in the foreclosure process for Q3 2009. There is a relationship between delinquency rates and the unemployment rate. As the unemployment rate continues to rise, the mortgage delinquency rate will increase too.

Home Prices Declined 3.8% in Third Quarter on Foreclosures  (Bloomberg) -- U.S. home prices fell 3.8 percent in the third quarter from a year earlier, the smallest decline since the first quarter of 2008, as a tax credit for first-time homebuyers boosted demand and slowed foreclosure-driven price drops.  Prices were little changed in September from August, according to a report today from the Federal Housing Finance Agency in Washington. Prices were 0.2 percent higher in the third quarter than in the second quarter. Prices fell in all nine U.S. regions in the three months ended in September from a year earlier as banks seized real estate from delinquent borrowers

Case-Shiller: Home Price Recovery Stumbles, Results Worse Than Expected - Home prices fell 9.4% in September, according to the widely-respected S&P/Case-Shiller housing index. Analysts had been looking for a 9.1% decline, so this is a bit worse than expected.On a sequential basis, home prices rose .3%, again, a bit worse than the .8% analysts had been looking for. The market is now back to where it was in Fall 2003.The housing market is creeping back, but at a pace disappointing to the bulls.Speaking on CNBC S&P's David Blitzer said the report showed clear signs that the strong momentum seen over the summer is starting to crack.

House Prices: Real Prices, Price-to-Rent, and Price-to-Income - Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices based on the Case-Shiller quarterly national home price index. This graph shows the price to rent ratio (Q1 1987 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used. The second graph shows the price-to-income ratio:  This graph is based off the Case-Shiller national index, and the Census Bureau's median income tables, and flat for 2009. This graph shows the real and nominal house prices based on the Case-Shiller national index. (Q1 2000 = 100 for nominal index)  Nominal prices are adjusted using CPI less Shelter.

Investors May Skew Housing Reality - I want to look at the impact investors are having on the monthly sales numbers. After the regular press briefing at the National Association of Realtors this morning, I did my usual chat with Lawrence Yun, NAR's chief economist. He volunteered, "We have seen some bulk purchases by investors, but we are not picking up that data through the Multiple Listing Service or through our release data, but we do know that there is some bulk purchases by investors who plan on releasing those properties within a year's time, when they see a better market condition."

An Upturn in the Housing Market May Be Reversing - NYTimes - Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, N.C.A report from the Federal Housing Financing Agency showed that prices were flat in September from August. Real estate, which has traditionally brought the economy out of recession, seems increasingly likely this time to hold it back. The housing market’s epic boom early this decade has turned into an epic bust whose effects may take years to shake off.

Citi Mortgage Reveals What Treasury Won't - Citigroup released its eighth quarterly mortgage data report today, touting the fact that it had helped "approximately 130,000 distressed homeowners with loans it owns or services remain in their homes and avoid foreclosure on mortgages valued at more than $20 billion."...redefault rates are still running high, even in the second quarter, which would have been when at least some of the bank's modifications fell under the HAMP program. In any case, in the first part of this year, banks supposedly got away from offering just repayment plans, which can often raise a monthly payment, to real modifications that either reduce principal or reduce mortgage interest rates. Redefaults now are likely less to do with a poor modification and more to do with unemployment and loss of home equity.

Few Mortgages Have Been Permanently Modified - Lenders have temporarily restructured hundreds of thousands of loans, but long-term changes have proved elusive, raising the specter of a new wave of foreclosures that could cause a fresh decline in home prices only months after they appeared to hit bottom. - Responding to an Obama administration initiative, lenders have temporarily restructured hundreds of thousands of mortgages, with hundreds of thousands more modified under the banks' own programs.  But achieving longer-term changes in the terms of mortgages has proved elusive...

One in Four Borrowers Is Underwater - WSJ - The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American (negative equity by state interactive graphic)

Are Housing Fundamentals Still Deteriorating? - There's a good amount of buzz surrounding the Wall Street Journal's piece on the staggering number of homeowners underwater on their mortgages. This, on the same day the Case-Shiller Home Price Index posted its fourth consecutive month-over-month increase.  Mixed signals? Possibly. But in reality, these two seemingly disparate data points suggest that even as foreclosure moratoria continue to keep bank-owned properties off the market -- which is artificially limiting supply and creating the illusion of a tight housing market (the supply of existing homes is back to historical norms) -- behind the scenes, more and more borrowers are falling behind, and staying that way.

Economists React: Payback to Come in Existing-Home Sales? - WSJ - Economists and others weigh in on the jump in existing-home sales. - What a difference a deadline makes: existing home sales rocketed higher in Oct to the fastest pace since Feb 2007 after buyers flooded back into the markets ahead of the original Nov 30 deadline for homebuyer tax credits. That the credits were extended made no difference for soon-to-be homeowners who needed to pen contracts by Sep 30 to make it under the wire. Ironically, it seems that this deadline is far more effective in guiding behavior than the actual tax credit itself…

Housing Sector Mirage - U.S. perma-bulls were once again giddy this morning with the latest reading on “existing home sales” - However this comes only days after a piece of much gloomier news. One in seven U.S. homeowners with a mortgage are either delinquent on their mortgage payments, or already in the foreclosure process. Thus, we are presented with data that more people are buying homes in the U.S. but less people are paying for them. Surely it is evident to even the most obtuse market-observer that it is irrelevant how many people are buying homes if they can't afford to make the mortgage payments.

Tax Credit Gives Temporary Boost to Home Sales, Prices - There continues to be enormous excess supply in the housing market; the overall vacancy rate is at an all-time high.
Existing home sales jumped 10.1 percent in October, while the Case-Shiller 20-City Index showed a rise of 0.3 percent for September, its fourth consecutive monthly increase. (The Case-Shiller data is a three month average centered on September.) Both increases were driven by the expiration of the first-time homebuyers tax credit at the end of November. The surge in sales in October is consistent with earlier releases showing that pending home sales were sharply higher in August and September, as were purchase mortgage applications. However, the sharp rise in sales in October is coming at the expense of sales in future months. The Mortgage Applications Index has plummeted over the last 6 weeks, hitting its lowest level since 1997

Econbrowser: Factors in local house price declines - UCSD Ph.D. candidate Sam Dastrup has completed a  very interesting study of what accounts for differences across U.S. communities in the magnitude of the decline in real estate prices that we've seen over the last several years. Although many commentators write as if there were a national housing market, there have been huge differences in the experience across communities. Dastrup and Carson examine the OFHEO matched-sale data for house prices as calculated separately for 358 U.S. standard metropolitan statistical areas. As seen in the map, the magnitude of the price decline has differed greatly across U.S. communities, with the biggest drops in the southwest, Florida, and Michigan.

Farm Income Collapse Will Weaken Construction Recovery in the Plains States - After soaring in 2007 and again in 2008, farm income has plunged in 2009 with little improvement expected in the next few years. A 30% drop in 2009 farm income is projected by the US Agriculture Department. Except for recession in 2002, this will drop the constant dollar value of farm income back to the level of the early 1980s when the farm crisis was headline news. The relatively strong economies and construction markets in the plains states in the last few years were due largely to soaring farm income.

Dead Farmers Get Millions From Tax Dollars - Hundreds of farmers who have been dead for years are still receiving checks from the government. There's just billions of dollars being sent to farmers every year and no accountability for where the money goes. You don't have to farm to get farm subsidies. You don't have to have ever farmed to get farm subsidies. You don't even have to be alive to get farm subsidies.

'See No Evil' Accounting - Losses on commercial real estate have been the proverbial "other shoe" waiting to drop on bank balance sheets for months now. So far, though, loan losses on office buildings, shopping malls and real estate developments have been subdued. What's the holdup? A troubling report from one analyst contains some clues. Banks are doing everything they can to avoid placing a firm value on buildings that have likely fallen sharply in price, writes Joe Morford, who monitors bank stocks for RBC Capital. This kind of "see no evil" asset management has so far spared investors much commercial real estate pain, but it can't go on forever.

FT - All roads lead to retranching in CRE crunch - Restructuring. Re-tranching. Re-remics. Repeat?  FDIC, the regulator in charge of insuring US bank deposits, has given banks the ability to restructure commercial real estate (CRE) loans to creditworthy borrowers, without having to classify the loan as delinquent — something they would have had to have done before the workout agreement. So not just tranching, but creative tranching.

Commercial real estate sales poised to hit $49B in 2009 - Real Capital Analytics predicts sales volume for all commercial real estate sectors will hit $49 billion in 2009, less than half the amount sold in 2008 and significantly less than the $80 billion sold in 2001. The New York firm said in the report released Tuesday that the 2009 total represents a “modestly improving investment picture,” as investors tiptoe back into the market.

Moody's Finds Commercial Property at 2002 Prices - An index compiled by Moody's Investors Service found that prices of commercial real estate have, on average, returned to levels seen seven years ago. The Moody's/REAL Commercial Property Price Index declined 3.9% in September to 109.61 from 114.06 in August. Based on the index, prices for commercial real estate were 37% lower than in September 2008 and 42.9% below the peak measured in October 2007. The index is based on repeat sales of the same properties across the U.S. at different times.

$430 Billion in CRE Losses? - From the O.C. Register: How banks may lose $430 billion more  Banks are projected to lose $430 billion on commercial real estate loans in the next two to three years... Highlight’s: $1.4 trillion in commercial loans are coming due in the next five years. That’s equal to the same amount that came due in the last 15 years. Lenders could take massive losses on their real estate portfolios from 2010-2013. This is similar to the recent presentation by Dr. Randall Zisler, CEO of Zisler Capital , and  from the WSJ in October...

Commercial Real Estate Will Collapse - Forbes - The long-feared financial disaster is still looming. Bad court decisions could set it off. The commercial real estate market is on its last legs and unless drastic actions are taken, the effects on the broader economy will be catastrophic. The obvious problem is the excessive amount of debt placed on the properties and the amount of debt that has to be refinanced during a relatively short period of time. Between now and 2013, at least $1.3 trillion of financing comes due, of which $160 billion was the result of securitizations. Unfortunately, as a result of the virtual disappearance of the secondary market, the weakened condition of the banks, and the amount of debt already held by insurance companies and pension funds, even under the best of circumstances, less than half of the outstanding debt can be refinanced. This is compounded by the collapse of the commercial rental market in the last 18 months as a result of the Great Recession.

Insurers' next headache? Commercial-mortgage defaults, says Fitch - Unless the commercial real estate market recovers, Fitch estimates that commercial-mortgage-backed securities of recent vintages will suffer losses that average out to about 9%. The ratings firm expects pressure on the securities and other non-AAA rated bundles of commercial mortgages to rise sharply next year.Fitch projects the potential losses from commercial-mortgage-backed securities owned by life carriers to be between $13.1 billion and $16.0 billion. Directly-placed mortgages will generate $5.4 billion to $6.6 billion in losses through 2011, under Fitch's core stress scenario.

Fed sees slow recovery holding jobless rate high - Federal Reserve officials believe the recovery is going to expand at a slow rate while unemployment will continue to remain high, according to the minutes of their closed-door Nov. 3 and Nov 4 meeting released Tuesday. The Fed forecast that the U.S. unemployment rate could stay elevated in 2010 in the range of 9.3% to 9.7% and would only drop modestly to 8.6% in 2011, according to the summary of the latest meetings. The unemployment rate hit 10.2% in November, a 26-year high. The Fed forecast in June that the unemployment rate could hit a range of 9.5% to 9.8% in 2010 and 8.8% in 2011 in a slightly more negative projection.

JP MORGAN: THE JOBLESS RECOVERY WON’T BE SO BAD - The Pragmatic capitalist points us to thinking that works for some: The strategy outlook at JP Morgan is little changed over the last week despite some sobering news out of the labor department last Friday. The bad news on jobs is no longer a surprise to investors and history has shown that past jobless recoveries were dealt with fine by most major asset classes. Although the jobless recovery creates some greater headwinds than most recoveries it is not an immediate headwind as JP Morgan analysts continue to see a flight into equities as portfolio managers chase performance in to year-end.

POLL: Layoffs Take Heavy Emotional Toll - When the pink slip comes, trouble follows – financial, but emotional as well.  Three in 10 Americans in the latest ABC News/Washington Post poll say they or someone in their household has lost a job in the past year -- a new high. And the impacts can be devastating: Beyond financial hardship, large numbers report anger, stress and depression as a result. Click here for PDF with charts and questionnaire.

Blacks hit hard by economy's punch - Joblessness for 16-to-24-year-old black men has reached Great Depression proportions -- 34.5 percent in October, more than three times the rate for the general U.S. population. And last Friday, the Bureau of Labor Statistics reported that unemployment in the District, home to many young black men, rose to 11.9 percent from 11.4 percent, even as it stayed relatively stable in Virginia and Maryland.

To create jobs, Congress draws on imperfect arsenal - (CNN) -- The economy is not out of the woods, and Congress is feeling pressure to do something about it.Third-quarter growth was weaker than initially thought. Twenty-nine states reported rising unemployment rates in October. And 1 million people are at risk of losing their unemployment benefits by January.What can Washington do to help?Throwing another lifeline - such as extending unemployment benefits and subsidies to help jobless Americans continue paying for health insurance - are likely possibilities. But the stickiest wicket is how to spur job growth.

Realtime: Creating New Jobs Rather Than Sharing Old Ones - Instead, in the short term, Congress should implement a temporary holiday for Social Security and Medicare payroll taxes for new hires. This could provide an urgently needed, powerful broad-based and immediately implementable job creation stimulus for the US labor market.11 For the long term, Congress needs to get serious about multi-year funding for broad-based workforce skills improvement and retraining programs. The one-off funding for the Workforce Investment Act (WIA) included in the stimulus bill and the long-warranted expansion of Trade Adjustment Assistance (TAA) to services sector workers are welcome,12 but must be prolonged. Only sustained funding will insure that the relevant skills-enhancing programs are in place when US workers need them. With job losses in the current recession increasingly of a structural nature (meaning that workers will need to seek new jobs in a new industry),13 such programs will be more needed to avoid another jobless US recovery.

Weighing Jobs and Deficit - WSJ - The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said. There is as yet no agreement within the White House or in Congress on how to try to curb the U.S. jobless rate. But the differences in opinion suggest that rifts could emerge among Democrats as they wrestle with how to beat back the highest unemployment rate in a generation. Democrats' fates in 2010 midterm elections could hinge in part on the success of their efforts to curb unemployment. Recessions historically have cost incumbents in an election year. Heavy losses could threaten Democratic majorities in the House and Senate, and affect the party's chances of passing legislation addressing President Barack Obama's priorities.

The Case for a Job-Creation Tax Credit - NYTimes - Last week, President Obama announced that he was convening a jobs summit meeting, where policy makers would discuss how to reduce the country’s high unemployment rate. One idea that has received attention lately — and which I heartily support — is a job-creation tax credit, which would make it cheaper for employers to hire new workers.The federal government has not tried this kind of policy since the 1970s. But the record of that policy gives hope that a temporary tax credit could help solve our unemployment problems today.

How To Tackle Youth Unemployment - As Congress struggles with whether and how to craft a new job creation package, it’s worth revisiting how little information the unemployment rate (currently at 10.2 percent) actually gives us. For instance, the underemployment rate (the U-6), which incorporates people who are working part-time that want to be working full time and those who have given up searching for work, stands at 17.5 percent. And even that falls short in certain ways, which becomes clear when the unemployment rate is broken down further: The national unemployment rate for the entire 16-24 age bracket is 19.1 percent. According to the Pew Research Center, ten percent of adults younger than 35 have moved back in with their parents due to the recession. Only 46 percent of 16-to-24-year-olds are employed, which is the smallest share since the government began keeping track in 1948, while 56 percent of men 18 to 24 years old and 48 percent of women are “still under the same roof as their parents.”

Will The Unemployment Crisis Be Obama's Katrina? - There's a Category 5 storm about to make landfall, and officials in charge of preparing for the approaching disaster don't seem to be particularly worried. Sound familiar? And it's not like the levees haven't begun to crack, with the real unemployment rate -- factoring in discouraged and partially employed workers -- at 17.5 percent, the unemployment rate for workers aged 16 to 24 at 19 percent, and the unemployment rate for young African-Americans at 30 percent. What's more, the average length of unemployment is at a record high, while the ratio of job seekers to open positions is now 6 to 1.

Democrats work on multibillion-dollar jobs package (LATimes) Troubled by the rising jobless rate, President Obama and the Democratic majority in Congress are assembling a new jobs package that would devote billions of dollars to projects meant to put people back on payrolls in 2010 and keep them working. Discussions over the scale of the bill are fluid, but lawmakers said the intent was to move swiftly and get a bill to Obama's desk as early as January.The renewed push to create jobs is driven by a recognition that the $787-billion stimulus program enacted in February is not a sufficient remedy for an unemployment rate that stands at 10.2%

Jobs creation effort needs to focus on good jobs - Many of the 8.1 million jobs lost during the current recession, have been good jobs. EPI defines a good job as one that pays at least 60% of the median household income and also provides health care and retirement benefits. By that measure, American men are losing ground. The figure shows that the share of male workers employed in good jobs dropped from 46.5% in 1979 to 31.3% in 2008. Of the major racial and ethnic groups, Hispanic men experienced the largest percentage-point decline although in 1979, they already had the lowest rate of employment in good jobs. In 1979, 30.8% of Hispanic men were employed in a good job. By 2008, only 15.3% were in good jobs.

The "investmentless" recovery - The behavior of employment will depend on many factors (amount of labor hoarding, productivity) but at the end of the day, the major factor be remain the strength of the recovery and how fast GDP and demand can grow. If we look at different components of demand (or GDP) there is an interesting factor about the last two recessions: In both of them, investment played a weaker role during the recovery phase. Below is a chart comparing the behavior of investment (measured as a % of GDP) around the recovery time (0 is the quarter when the recovery started according to the NBER).

Amid Higher Unemployment, Fewer Workplace Injuries - WSJ - The Labor Department’s report of occupational injuries and illnesses that required days away from work mimicked the shifts the recession caused in the labor market in 2008. Hard-hit sectors, such as construction and retail, reported fewer injury and illness cases. Older workers experienced more injuries as their labor force participation rose. And incidents among younger workers fell as fewer remained employed. The rate of injuries or illnesses in the private sector that required days away from work fell 7%

One Hand Taking Back What the Other Is Doling Out - At least some of the trillions of dollars of monetary and fiscal stimulus that has been thrown at the economy to "rescue" it has been offset by contractionary fallout from the bursting credit bubble. Money has been sucked into deflationary chasms that have opened up in the wake of debt defaults, loan repayments, and a rising tide of red ink. Some of stimulative impact has also been neutralized by procyclical forces that have wreaked havoc with municipal finances. In some respects, what Reuters details in "State, Local Budget Cuts a "Time Bomb" for Jobs" is a bit like one hand of the government taking back what the other is doling out...

Federal tax payments versus federal tax allotments, by state (graphic)

State Tax Revenues Slip - State tax revenues continue to fall off a cliff, according to a report released Monday by the Rockefeller Institute of Government. The institute looked at preliminary tax revenue data for the third quarter, and found declines in every one of the 44 states reporting the information early. Overall, state tax revenue declined 10.7 percent in nominal terms compared with the same quarter of 2008. After adjusting for inflation, tax revenues declined 11.3 percent.

Dire states—State and local budget relief needed - EPI Briefing Paper in PDF format

Michigan jobless crowd state aid offices - Michigan's welfare system is gorged with new clients who often wait hours in crowded state offices to get food stamps and medical care. The last 12 months have been tough on Michigan: Food-benefit and Medicaid cases increased by nearly half a million from a year ago; many people receive both. Individual caseworkers sometimes juggle as many as 900 cases and face threats from angry, frustrated clients. Some blame a new computer system for delays. "You can only do so many cases in a day,"

Bare necessities top holiday wish lists - Michigan, with one of the highest unemployment rates in the nation at 14.8 percent in September, has a food crisis going into the holiday season. "We have people coming to the food bank who said they were donating to us last year, but who are now out of work and in need themselves," said Alison Bono, who coordinates marketing for the Mid-Michigan Food Bank in Lansing. She said that close to 1,000 people stand in line for produce handouts each week as they seek to supplement food stamps with fresh fruits and vegetables.  A little more than week before Thanksgiving, food bank supplies that used to be enough to last for six to eight weeks are now down to 10 days, said Ms. Bono, who calls the current seasonal needs extreme.

Michigan's economic future is more bleak than first believed - ANN ARBOR - Every November, University of Michigan economists hold a two-day seminar and issue predictions for the state's economy over the next year.Last week, they unveiled their newest forecast. Possibly the best short way to sum it up would be something like this: "However bad you thought things were, they are worse. Michigan's automotive, manufacturing-based economy is history, at least as a mass employer of millions. The old days are never coming back, and the state will continue to lose jobs for years to come."

Wall Street Plays Hardball - Squeezing Cities Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28% and rising, while home prices have plunged 39% since 2007. Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

Bing to seek council's OK to sell $250M bond - Municipal bonds are typically issued to allow local governments to borrow money for large capital improvements to bridges, roads, power plants or sewer systems. In Detroit's case, the money would be used to chip away at the city's debt, which is forecast to grow to $480 million by the end of the next fiscal year and to $750 million in fiscal year 2011-12.

An American Catastrophe - NYTimes - In many ways, Detroit’s like a ghost town. It’s eerily quiet. Driving around in the middle of the afternoon, in a city that once was among the most productive on the planet, you see very little traffic, minimal commercial activity, hardly any pedestrians.What you’ll see are endless acres of urban ruin, block after block and mile after mile of empty and rotting office buildings, storefronts, hotels, apartment buildings and private homes. It’s a scene of devastation and disintegration that stuns the mind, a major American city that still is home to 900,0000 people but which looks at times like a cross between postwar Berlin and the ruin of an ancient civilization.

Unburied bodies tell the tale of Detroit — a city in despair - The abandoned corpses, in white body bags with number tags tied to each toe, lie one above the other on steel racks inside a giant freezer in Detroit’s central mortuary, like discarded shoes in the back of a wardrobe. Some have lain here for years, but in recent months the number of unclaimed bodies has reached a record high. For in this city that once symbolised the American Dream many cannot even afford to bury their dead. “I have not seen this many unclaimed bodies in 13 years on the job,” said Albert Samuels, chief investigator at the mortuary. “It started happening when the economy went south last year. I have never seen this many people struggling to give people their last resting place.”

Another California crisis: Unemployment fund facing $7.4 billion deficit - "SACRAMENTO — Already grappling with one multibillion-dollar budget deficit, cash-strapped California now is facing a crisis in its unemployment insurance fund — source of the tens of millions paid each week to jobless residents. Amid record unemployment, the fund will likely finish the year $7.4 billion in the red, according to the latest projections from the state's Employment Development Department. Just to keep checks coming, California has had to reach into Uncle Sam's pockets for some $4.7 billion to date. The state must return what it borrows by 2011 — or face hundreds of millions in interest payments that would come at the expense of funding for schools, parks and social services. But with unemployment expected to remain high as the economy slowly turns around, officials fret they won't be able to pony up on time. And to prevent the fund's shortfall from ballooning even further in the next two years, Gov. Arnold Schwarzenegger and the Legislature face a nettlesome dilemma: Cut back on benefits, raise taxes on employers or do both."

L.A. analysts project $1-billion budget gap by 2013 - Los Angeles could face a $1-billion deficit by the time Mayor Antonio Villaraigosa wraps up his second term in 2013, a dire forecast driven primarily by escalating employee pension costs and stagnant tax revenues, the city's top budget analyst said Wednesday. The grim financial outlook came a day after the city's credit rating was downgraded by Wall Street-based Fitch Ratings. That could worsen L.A.'s already precarious financial situation by making it more expensive for the city to borrow money."

Los Angeles' budget gaps may force dramatic change - Reuters - Los Angeles must take dramatic steps in coming months to bring its budget back into balance, including measures to slim the size of its government and reduce how much it spends on pensions for retired employees, the city's top budget official said on Wednesday. Los Angeles, California's biggest city, is seeing a steep drop in revenues fueled by the state's 12.5 percent unemployment rate, a slump in consumer spending, an uncertain housing market and a weakening commercial real estate sector.

CalPERS rate hike delayed a year - CalPERS is delaying a contribution rate hike for local governments and schools a year, pushing back the impact of huge investment losses in the stock market crash last year. The change puts even more distance between the historic crash and the higher annual payments from employers needed to make up for the losses, which will not fully kick in until five or six years later.If the critics are right and the current level of retirement benefits are “unsustainable” for future employees, the financial crunch may not be a sudden rate shock but instead a kind of slow-motion train wreck over a number of years.

Moody’s Says New York’s Credit Rating Could Be Downgraded - NYTimes - ALBANY — Moody’s Investors Service this week warned that the state’s credit rating could be downgraded if the Legislature does not take serious steps to close the $3.2 billion budget gap and revenue continues to lag. The warning, released on Thursday, comes as Gov. David A. Paterson presses lawmakers to come to a consensus on how to address the deficit after weeks of sputtering negotiations. Mr. Paterson has urged reductions to schools and health care, which have long been third rails of state budget politics.“This is a lot more serious than the interests of some of the legislators who would rather go home and be heroes saying, ‘Look, I didn’t cut school aid,’ or ‘Look, I didn’t cut health care,’ ” Mr. Paterson said at a news conference Friday morning in Albany. “People had better get serious here.”

Paterson: Layoffs loom if state's deficit isn't reduced - ALBANY -- Lawmakers enjoyed the day off Friday as Governor David Paterson warned of a pending disaster looming over the state: New York will run out of money in December when a huge chunk of the $3.2 billion deficit is due."  "Furloughs, layoffs, borrowing, downgraded credit rating, delayed payment to schools, delayed payments to local governments, delayed payments to service providers, delayed payments to workforce," Gov. Paterson said, listing the measures. "I've been telling you what's been happening in other states. That's what we're going to have to do: All of the above."

Comptroller's budget red alert - ALBANY -- It's hard to believe, but New York's budget crisis is even worse than Gov. Paterson says it is. State Comptroller Tom DiNapoli yesterday branded as "optimistic" Paterson's projection that the state would end the year virtually bankrupt, with just $36 million in the bank, if the Legislature failed to close the looming $3 billion-plus budget deficit. "We think the governor's number is too optimistic," said DiNapoli spokesman Dennis Tompkins. "We think if no action is taken, the state will end December with a negative balance, about minus $3 million," he said."

2001 pension deal will hit taxpayers in wallet - Pennsylvania taxpayers are about to get the bill for a 2001 deal hatched by former Gov. Tom Ridge and the General Assembly that granted state workers — including legislators — and public school employees a handsome pension increase. Two employee retirement systems that oversee state pension funds estimate that the total necessary to cover unfunded pension liabilities could be as high as $5.9 billion in 2012. That would require $536 from every single state resident, including children.

West Virginia governor to approve pension rescue, new bonds - West Virginia Governor Joe Manchin expects to sign bills giving the state's large cities pension-funding relief and approving the sale of $225 million in stimulus bonds, a spokesman said on Friday. One West Virginia city, Huntington, has warned that $125 million in unfunded pension-plan liabilities might force it into insolvency.

$1 billion gap in state's next budget is predicted - Iowa next year will face the largest budget gap in its history: more than $1 billion, a new budget review projects.The review, released Wednesday by the state's Legislative Services Agency, shows Iowa lawmakers will face a projected shortfall between revenue and expenses of $1.07 billion in the fiscal year that begins July 1. That's nearly $300 million more than the previous record gap - the one projected before lawmakers began hammering out the current budget."

N.J. budget deficit could reach $1.5 billion - TRENTON — New Jersey's budget problem worsened in October, with a $222 million shortfall that exceeded its deficit in tax collections from July, August and September combined. In a prospectus sent Wednesday to prospective bondholders, the state says its deficit could be $1 billion. It said that could be closed in part through "up to $400 million actions affecting major cost centers, including: school aid, municipal aid, higher education, hospitals and the state contribution to the pension plans." However, the 5.1 percent, $412.7 million year-to-date tax shortfall would, if maintained over the course of the next eight months, leave collections almost $1.5 billion behind budget."

Budget gap forces N.J. to seek out more cuts - Gov. Jon Corzine said yesterday he will once again scour the state's budget to fill another unexpected shortfall that reared its head this year. The governor, who said he found out about the $1 billion budget gap after returning from a post-election vacation around Nov. 10, said his administration has come up with some options, but he did not disclose specifics. Wednesday's revelation that sagging tax revenue and higher expenses widened the budget gap to five times larger than expected is the latest hurdle in an ongoing fiscal battle that has dogged Corzine. The governor may freeze up to $400 million in payments to schools, higher education, hospitals, pension funds and municipalities...

Oregon board juggles ways to lessen retirement costs - Board members of Oregon's Public Employees Retirement System said Friday they are disinclined to change the system's rules to alleviate the impact of skyrocketing employer contribution costs in 2011. Oregon's $50 billion public employee pension fund lost $17 billion last year. Though financial markets have recovered some this year, PERS still has only 75 cents in assets for every dollar in liabilities, and needs to reset the rates it charges employers to start digging out of that actuarial hole.

NC cities, counties may see higher pension costs The state will have to boost employer contributions to the pension fund for its retirees from the 3.57 percent of payroll level it has been in recent years to 6.71 percent in the fiscal year beginning in July, the state treasurer's office said last month.

Mo Debt, Mo Debt, Mo Debt – Unfunded Pension Liabilities —One of the unpleasant – and largely ignored – fiscal realities facing state and local government is unfunded pension liabilities. Think about it: so-called “defined benefit pension plans” under which the recipient receives a fixed pension upon retirement all must be funded. If you’re a government employee, that means the taxpayers will be contributing to your pension fund. The problem, however, is that governments don’t rigidly fund their plans as they should, thereby creating an unfunded obligation for a future payout. Scared yet? It’s all of us who’ll have to foot a future bill. I’ve been plowing through some academic pieces on the state and local unfunded pension problem, but a recent article by Robert Novy-Marx and Joshua Rauh is about the most frightening.... 

other states unemployment insurance funds running out of money:

Phoenix braces for more cuts to services - Phoenix number crunchers already are projecting up to a $95 million shortfall in the current fiscal year, and that's not even factoring in the deficit expected for the new fiscal year that begins July 1. The city's balance sheet is so out of whack because Phoenix's sales-tax revenue remains about 20 percent lower than two years ago, with no signs of a recovery. State-shared income-tax revenue is forecast to be about 35 percent less than two years ago because of layoffs, pay cuts and furloughs. And the cash-starved Arizona Legislature is poised to take a big chunk of Phoenix's $378 million-a-year state-shared-revenue fund to solve its own fiscal problems.

Parade Magazine's Propaganda Parade Against Social Security - Parade Magazine decided to subject tens of millions of readers of its Sunday newspaper insert to an anti-Social Security diatribe headlined: "Can We Save Social Security?" Since Social Security is not in any real danger this headline would be like saying "Can We Save Apple or the New York Yankees?" The article then wrongly asserts that: "lawmakers agree that something needs to be done—and fast. They even agree on the broad outlines of a solution." The article presents absolutely zero evidence for either part of this assertion. There is no on the record statement showing that either members of Congress agree that something must be done fast or on what should be done

Can the Postal Service be Saved?  - It's been an ugly few years for the United States Postal Service.  The quasi-government agency announced this week that it lost $3.8 billion in the most recent fiscal year, which ended September 30th. It also delivered less mail - 26 billion fewer pieces less, a nearly 13 percent drop from the previous year. The bad news follows losses totaling $7.8 billion in 2007 and 2008.  The Postal Service, as it is quick to point out, is legally prohibited from taking tax dollars. But in order to stay afloat, the agency has been actively borrowing from the U.S. Treasury: At last count, according to Postal Service spokeswoman Yvonne Yoerger, it owes the government $10.2 billion

The Economic Condition of Poor Americans (and the rest of us) Continues to Improve - As many of you know, this is a set of data I've followed closely over the years. The Census Bureau just released the 2005 data on what households have and it has allowed me to update my data.  In addition, I've also rendered the data more consistent.  Each column on the poor below reflects households below the poverty line.  In previous iterations I had said it was the "lowest quintile."  I've discovered that some of my data was that, but the older stuff was "below the poverty line."  I've now made it all poverty line as the cutoff.

Sewers at Capacity, Pollution Spills Into Waterways - Series - NYTimes - One goal of the Clean Water Act of 1972 was to upgrade the nation’s sewer systems, many of them built more than a century ago, to handle growing populations and increasing runoff of rainwater and waste. During the 1970s and 1980s, Congress distributed more than $60 billion to cities to make sure that what goes into toilets, industrial drains and street grates would not endanger human health. But despite those upgrades, many sewer systems are still frequently overwhelmed, according to a New York Times analysis of environmental data. As a result, sewage is spilling into waterways.

Economy Is Forcing Young Adults Back Home in Big Numbers, Survey Finds - For more young adults, there is no place like home for the holidays, and for the rest of the year, too. Ten percent of adults younger than 35 told the Pew Research Center that they had moved back in with their parents because of the recession. They also blamed the economy for other lifestyle decisions. Twelve percent had gotten a roommate to share expenses. Fifteen percent said they had postponed getting married, and 14 percent said they had delayed having a baby.

Durable goods orders fall unexpectedly - Orders for big-ticket factory goods fell unexpectedly in October as the economy struggles to get back to full health. The Commerce Department said Wednesday that orders for costly manufactured goods dropped 0.6 percent last month, following a 2 percent gain in September. It marked the first decline since August. But much of October's weakness came from an 18.4 percent drop in orders for goods related to defense. Excluding those, orders for other types of manufactured goods rose 0.4 percent in October, following a 1.8 percent rise in September.

Old fridge? ‘Cash for Appliances’ looms - In U.S. history, there may have been no better time to own a junk car, a rattling old fridge and a leaking dishwasher. On the heels of its ballyhooed "Cash for Clunkers" program for cars, the federal government is expected to finalize details in the coming weeks of another tax-supported shopping extravaganza, known as "Cash for Appliances." Supported by $300 million from the economic stimulus, the program will offer rebates to consumers who buy energy-efficient refrigerators, dishwashers, air conditioners and other appliances to replace their older models.

Ahead of Black Friday - Oooo, how I have come to loathe this exercise. And yet, here I am again, fretting over the financial state of US households in between checking off items on the Thanksgiving shopping list. It is like a car wreck - you don’t want to watch, but you can't take your eyes off it.  Car wreck is something of an appropriate comparison. Recently I have begun using charts of this sort to depict the current economic environment. The point, obviously, is that even as activity creeps upward, the gap between the past and current trajectory of consumer spending is likely still widening. Much, much faster growth is necessary to close that gap

Lining up at Midnight at Wal-Mart to buy Food is part of the new Recovery - There seems to be a growing divide in the current U.S. economy.  On the one hand, you have the financial sector swimming in their bailout-induced profits like a modern day Scrooge Mcduck.  In their circles, it appears as if the recession is over.  On the other hand, you have average Americans seeing access to credit cards shut down, equity in their homes vanishing, and their stock portfolios looking a little too much like 1999.  Then you have 35.8 million Americans, roughly 11 percent of our population, on food stamps.  To this group the recession is still very much alive.

What if a Recovery Is All in Your Head? - Robert Shiller - NY Times: Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.  Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned... but economic theorists have long been fascinated by such a possibility.

How Overrated is Sentiment in Economics?, Barry Ritholtz: There is a small cadre of Economists — original thinkers, contrarians, out of the box theorists — I respect a great deal. It is a modest list ranging from Richard Thaler to David Rosenberg to Robert Shiller, with lots of econ wonks in between. This morning, however, I find myself somewhat disagreeing with the main premise of Professor Shiller’s NYT column. ... It is with some trepidation that I point out what I find to be flaws in Shiller’s discussion about the recovery... Its a thought provoking but unpersuasive argument... To be fair, he uses the column to provoke a debate, rather than defend the position that the recovery is “all mental.” ...

Hitting the Market - The financial crisis has left many people with little choice but to try and monetize what they hold most dear -- themselves. During the current downturn we've seen reports that growing numbers of individuals in the U.S. and elsewhere are selling their eggs, sperm, plasma, and even their organs, or renting out their wombs and bodies, to raise cash. Under the circumstances, it should come as no surprise, as Agence France-Presse reports in "Crisis Forcing Hard-Up Spaniards to Sell their Hair," that other parts of the body are also hitting the market

Bankruptcy Filings Increase 34 Percent - From the U.S. Courts: Bankruptcy Filings Up 34 Percent over Last Fiscal Year: Bankruptcy cases filed in federal courts for fiscal year 2009 totaled 1,402,816, up 34.5 percent over the 1,042,993 filings reported for the 12-month period ending September 30, 2008, according to statistics released today by the Administrative Office of the U.S. Courts.  The bankruptcies reported today are for October 1, 2008 through September 30, 2009. For the 12-month period ending September 30, 2009, business filings totaled 58,721, up 52 percent from the 38,651 business filings in the 12-month period ending September 30, 2008. Non-business filings totaled 1,344,095, up 34 percent from the 1,004,342 non-business bankruptcy filings in September 2008.

Early Data Suggest Suicides Are Rising - Early signs suggest the number of suicides in the U.S. crept up during the worst recession in decades, according to a Wall Street Journal survey of states that account for about 40% of the U.S. population. Available data, still incomplete, suggest that this recession, like past ones, coincided with an uptick in suicides. The data from 19 states find an increase in suicides in the recessionary year of 2008 from 2007. Those states historically account for about half of annual suicides in the U.S. Calls to suicide hotlines are rising. And suicides in the workplace and the military -- a small sliver all of self-inflicted deaths -- were up in 2008.

One Minimum Wage Increase With a Side of Fries, Please - Economists have debated the employment effects of the minimum wage. A recent study of obesity now weighs in on this debate. A recent study by the researchers David Meltzer from the University of Chicago and Zhuo Chen from the Centers for Disease Control and Prevention now finds that low inflation-adjusted minimum wages are partly to blame for increased obesity. If their study is correct, it suggests that a higher minimum wage indeed reduces employment and output at fast-food restaurants, and makes it a bit easier for Americans to adopt healthier eating habits.

Scientists give grubby children a clean bill of health - For parents too stretched to make sure their offspring are perfectly turned out at all times, it may just be the scientific cover they've been waiting for. They will now be able to answer the disapproving tuts of their more fastidious friends by pointing to research which gives biological backing to the old adage that the more germs a child is exposed to during early childhood, the better their immune system in later life. Researchers from the School of Medicine at the University of California found that being too clean could impair the skin's ability to heal.

Health Care: BLS Spotlight on Statistics - a series of charts from the Bureau of Labor Statistics on health care costs and employment. Health care touches the lives of nearly everyone in the United States at some point in their lives—almost everyone rubs elbows with the U.S. health care system. This Spotlight uses BLS data to shed some light on what is happening in this dynamic and interesting field. Read on to explore these data and discover the "diagnosis" on health care industries and occupations as well as the "prognosis" on future employment!

What If Food Shopping Worked Like Health Care? - Watch the video.

How Much Does the Senate Health Bill Cost? - As regular readers know, CBO reports two estimates of the cost of expanding coverage: the gross cost, which reflects all new spending and tax incentives to increase insurance coverage, and the net cost, which subtracts any tax revenue increases associated with coverage policies. Leader Reid, Finance Chair Baucus, and their Senate colleagues deserve credit for emphasizing the higher figure in explaining the cost of their bill. In contrast, House leaders tried to focus attention on the lower, net cost of their bill, which led to unnecessary confusion...

For Health Bills, A Year Makes a Big Difference - The coverage provisions in the Senate health bill have a much lower ten-year cost that do the coverage provisions in the House bill. According to the Congressional Budget Office (CBO), the coverage provisions in the Senate bill will cost $848 billion from 2010 through 2019, while the corresponding costs for the House bill are $1.052 trillion, more than $200 billion higher. (Please keep in mind, though, that the total cost of both bills is higher because of other provisions.) I noticed several claims that this difference in gross costs could be traced to a timing difference. The main coverage provisions in the House bill start in 2013, while the corresponding provisions in the Senate bill start in 2014. This seems like a potentially important point, so I took another look at the cost estimates to get a sense of how big this effect is. The answer? It’s big. As illustrated in the following chart, a year makes a big difference in the gross coverage costs within the ten-year window:

Advertising to Consumers May Raise Drug Prices - (HealthDay News) -- Direct-to-consumer drug ads may contribute to higher Medicaid costs, according to a new study that examined sales of the widely used antiplatelet drug clopidogrel (Plavix) Consumer ads for clopidogrel began in 2001. Between then and 2005, spending on DTCA for clopidogrel in the United States was more than $350 million, an average of $70 million a year. In that same time frame, use of the drug in Medicaid programs did not increase, but cost per unit per quarter increased by 40 cents (12 percent), leading to an additional $40.58 in pharmacy costs per 1,000 Medicaid enrollees per quarter, the study found."

Worse Than You Think - Forbes - How much of the $2.5 trillion the U.S. spends on health care goes down the drain for tests and treatments that don't help, run up the bill and may even cause harm?When it comes to financial threats to the u.s., President Obama says nothing even comes close to spiraling health care costs, expected to hit $2.5 trillion in the U.S. this year. Legislators are struggling to come up with health reform plans that cover millions more people without boosting the deficit. One obvious place that Congress could look for savings: the waste already embedded in the medical system.

Why we need more foreign nurses - President Obama is opposed to liberalizing restrictions on entry of foreign nurses (White House Forum on Health Reform). THE PRESIDENT: ....The notion that we would have to import nurses makes absolutely no sense.  And for people who get fired up about the immigration debate and yet don't notice that we could be training nurses right here in the United States -- and there are a lot of people who would love to be in that helping profession and yet we just aren't providing the resources to get them trained -- that's something that we've got to fix.... The demand for nurses will only increase as baby-boomers approach their endgame and as the numbers of persons qualifying for medical insurance increases.

The Public Health Care Plan Will Cost More Because It Will Attract Sicker Patients - The Washington Post told readers that: "according to the Congressional Budget Office, a government plan as outlined in both the Senate and House bills would cost more than private coverage and, as a result, attract few customers." It would have been helpful to point out that the reason CBO projects that the plan will have higher costs is that it will attract less healthy patients. The reason is that CBO assumed that private insurers would find ways to effectively cherry pick their patients (in violation of the law) so that their patient pool will be healthier than the population as a whole.

At Least 100 Reasons to Worry That Congress Won’t Follow Through on the Hard Choices in Health Care Reform. - Hooray! Tonight we’re one step closer to getting a deficit-neutral health care reform bill that has at least some hope of “bending the health cost curve” in the future. Oh wait, maybe not… As David Broder worries about in his Sunday column in the Washington Post: I have been writing for months that the acid test for this effort lies less in the publicized fight over the public option or the issue of abortion coverage than in the plausibility of its claim to be fiscally responsible. This is obviously turning out to be the case. While the CBO said that both the House-passed bill and the one Reid has drafted meet Obama’s test by being budget-neutral, every expert I have talked to says that the public has it right. These bills, as they stand, are budget-busters.

Support For Health Care Plan Falls To New Low - Just 38% of voters now favor the health care plan proposed by President Obama and congressional Democrats. That’s the lowest level of support measured for the plan in nearly two dozen tracking polls conducted since June.  The latest Rasmussen Reports national telephone survey finds that 56% now oppose the plan.  Half the survey was conducted before the Senate voted late Saturday to begin debate on its version of the legislation. Support for the plan was slightly lower in the half of the survey conducted after the Senate vote.

Poll - Americans Conflicted Over Health Overhaul - NYTimes - Most Americans don't expect a health care overhaul to affect their lives directly, but those who worry about the fallout outnumber those expecting to come out ahead, a poll out Tuesday has found.The survey by the nonpartisan Robert Wood Johnson Foundation finds that Americans are tuning in to the debate in Washington, with 60 percent saying they're following it very closely or fairly closely.Most see a change ahead for the nation, and they're divided on whether that will be for good or ill. But when it comes to their own personal lives, Americans say they don't expect much of an impact.

Tamiflu-resistant H1N1 cluster found in N. Carolina hospital -- Four North Carolina patients at a single hospital tested positive for a type of swine flu that is resistant to Tamiflu, health officials said Friday.The cases reported at Duke University Medical Center over six weeks make up the biggest cluster seen so far in the U.S. Tamiflu - made by Switzerland's Roche Group - is one of two flu medicines that help against swine flu, and health officials have been closely watching for signs that the virus is mutating, making the drugs ineffective.More than 50 resistant cases have been reported in the world since April, including 21 in the U.S. Almost all in the U.S. were isolated, said officials with the U.S. Centers for Disease Control and Prevention.The BBC reported another cluster of five Tamiflu-resistant cases this week in Wales

Mutation of pandemic influenza A/H1N1 in Norway CCTV-International - Norwegian health authorities say they have discovered a potentially significant mutation of the A/H1N1 strain of influenza. They say it could be responsible for causing the severest symptoms among those infected. But the World Health Organization says the mutation does not appear to be widespread in the country.The mutation has been found in the bodies of two people killed by the virus and in one seriously ill person. The two who died were among Norway's first fatalities from the A/H1N1 pandemic.It is unclear whether the mutated virus is transmitted between humans. It doesn't seem the virus is circulating widely in the population.

Ukraine Flu Death Toll Hits 400 - The flu outbreak in the Ukraine, which is possibly the result of some virulent H1N1 mutation, continues to grow more alarming.The Guardian: A flu pandemic in Ukraine that has triggered a nationwide panic is worsening this weekend with up to 400 deaths already reported.The arrival of the virus, suspected by the World Health Organisation to be swine flu but possibly a combination of the H1N1 strain and a respiratory illness, has paralysed the country's fragile health system and could even lead to the postponement of the general election which is scheduled for 17 January.

A/H1N1 flu vaccine withdrawn in Canada due to high number of allergic reactions OTTAWA, (Xinhua) -- About 170,000 doses of A/H1N1 flu vaccine are being withdrawn in Canada from Friday after health officials reported an unusually high number of allergic reactions. Health officials in the western province of Manitoba reported Thursday a higher-than-usual number of allergic reactions after using vaccine from a batch manufactured by a factory of British drugmaker GlaxoSmithKline (GSK) in Quebec.

School meals key to feeding and educating most vulnerable children – UN report – The introduction of free meal programmes not only ensures children are fed, but are crucial to keeping the poorest and most vulnerable in school while providing a boost to learning and health, according to a United Nations report released today.The new report from the World Bank and the World Food Programme (WFP) noted that although most countries offer meals to their students, poor nations face a double obstacle of expanding under-funded feeding programmes while battling the worst effects of the financial, food, and fuel crises, with little support from the international aid community.“In the face of global crises, we must now focus on how school feeding programmes can be designed and implemented in a cost-effective and sustainable way to benefit and protect those most in need of help today and in the future,” said World Bank President Robert B. Zoellick

Should There Be College Dropout Insurance? -  As David Leonhardt revealed in September, almost half of all students who enter college in the U.S. don't graduate. Cutting this number down should be a national priority, but even a determined effort is likely to leave many students short of a bachelor's degree. Instead, what they'll be leaving school with is a sizable debt burden. Is there a way to protect these students? Philly Fed's Satyajit Chatterjee and Colgate's Felicia Ionescu argue that there is -- a government-backed insurance program. Such insurance would increase the value of going to school which, in turn, would likely encourage graduation rates and encourage more high school students to enroll in college.

We interrupt your regularly scheduled Thanksgiving...Dubai World won't repay its debt on time and the government of Dubai won't pick up the bag, raising doubts about its credibility.  Who would bail out Dubai itself?  Maybe it will be an "interesting" weekend.  Funds are surging into Germany and Japan, etc.  For purposes of comparison, Dubai CDS contracts now cost more than for Iceland.  If you're feeling a little down today, and looking for something to be thankful for, be thankful you have not lent money to Dubai.  Unless, of course, you have lent money to Dubai

Oh well, there goes the quiet day after Thanksgiving - The Dubai request for a standstill agreement as a precursor for a hoped for debt restructuring is not a complete surprise considering the weekly newspaper articles on their $80b+ debt overhang. What is the surprise is the lack of any immediate support from Abu Dhabi (maybe not willing to support another bailout), the uncertainty of what exposure foreign banks have if any and where may other debt laden bodies lie, corporate and/or sovereign. The global central bank push to lower interest rates has spurred and encouraged a massive refinance wave to extend maturities. What we have not seen enough of is debt writedown, extinguishment and restructurings and the Dubai news may highlight that cheap money cannot cure all debt ills.

The Debt Crisis, Next Phase - Dubai is broke. The Middle Eastern Ponzi state asked bondholders of its Dubai World holding company for a standstill agreement until May 30, causing an outcry of of epic proportions. The FT says the decision raises the prospect of Dubai’s state default. Dubai – a Mega Las Vegas with a beach -  was in many ways a symbol of the exuberant pre-crisis world.  Bond markets reacted sharply to the news as the prices of Dubai debt fell to $460,000 on $10m nominal. It is another irony that the rating agencies are among the last to get the message. Moody’s yesterday cut Dubai to junk status

“It’s the Cop’s….Run!” -  Cassandra - I was reminded of such long-ago moments by yesterday and today's market reaction to the ummm errrrr "difficulties" in Dubai, admittedly the land of the "stupidest f*cking national business plan I've seen in my life"(after Iceland, North Korea and Iran). Tempting fate as the old-saw goes, leveraged specs and longs-squeezed-in increased exposures to virtually all category of risk asset AFTER two quarters of stellar returns for said risk assets, and AFTER price moves made forward returns appear rather pedestrian under the majority of likely outcomes DESPITE the unexploded ordnance strewn around including commercial real estate, the reality of possible CB exit strategies being implemented, the realization that The Era of Stupid Loans is behind us, and will not be returning anytime soon, and that energy and debt service along with tax will, in the future, absorb yet high percentages of income presently channeled into consumptive pursuits. Running at the first sight of the cops is, while an amusing sight to see for those unencumbered, is admittedly a wise course of action under the circumstance, but liable to cause a pile up when simultaneously conjured and acted upon.

A Good Old-Fashioned Panic - Macro Man - Sometimes, those little guys matter. That seems to be the message of the past twenty-four hours where rumours/uncertainty over a possible default by Dubai has created a good-old fashioned panic in asset markets. It's been what...eight and a half months since we've felt remotely like this? Seems like a lifetime ago... Still, those itching for a good crisis will take what they can get, and the implication for financial market pricing is exacerbated by the fact that the US is on its Black Friday post-Thanksgiving hangover and that Dubai itself (with the rest of the Muslim world) is out 'til Tuesday for the Eid al-Adha holiday.

A great precedent - The Dubai World default is big news — big enough that it’s even made it into Gawker. Your one-stop shop for bloggy coverage this Thanksgiving is Alphaville, which features for instance this wonderful chart of the debt structure which is now being crawled over by lawyers around the world. Personally, I’m quite happy about this default, since it sets another very useful precedent of a state-owned company defaulting on its debt. Historically investors in state-owned companies have perceived an implicit sovereign guarantee — there’s even a German word for it, Anstaltslast. The result is a huge and unhelpful moral-hazard trade.

The Impact of Dubai Default Has Much More Widespread Consequences, and Opportunities Re. Dubai, Will They Sink? - Until yesterday, 'Dubai' seemed to evoke an economic miracle. The best known of the six monarchies that formed the United Arab Emirates in the early 70s, Dubai appeared to be the best of several worlds. A small country (83 sq. kilometers), with few people (4.7M) and rich in oil, Dubai seemed destined to be another of the Arab dictatorships in which a minority enjoys the petrodollars and mass of the population lives in misery stalls. This script, however, was not true. The Emirates not only reached a high standard of living but also achieved something rare for an Arab country. Its economy reduced dependence on oil. The pharaonic constructions are not royal palaces, but hotels and headquarters of banks. More than bricks and concrete, Dubai managed to establish itself as a regional financial center, while offering a favorable environment for business and an open Islamic society.

Dubai Shows Limits of Government Rescues, Roubini’s Das Says - (Bloomberg) -- The worldwide decline in equities spurred by Dubai’s efforts to reschedule its debt is a sign that government spending alone won’t be enough to protect financial markets, according to Arnab Das, the head of market research and strategy at RGE, the advisory firm founded by economist Nouriel Roubini.  Governments have spent, lent or guaranteed $11.6 trillion and central banks held interest rates near zero percent to end the first global recession since World War II. “We’re bound to see a rise in risk aversion,” Das, who is based in London, said in an interview. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.”

If countries like Dubai begin to fail, who will save them? – Telegraph - As one financial crisis recedes, another may be beginning. In Dubai this week, we've had a foretaste of what may be to come as governments around the globe seek to grapple with the explosive growth of fiscal deficits and public debt. ...the issue is whether this folie de grandeur of a desert kingdom is just an isolated, and therefore containable, incident, or a more worrying outrider for a wider sovereign debt crisis which might eventually engulf major, advanced economies. Everyone thought the financial implosion of the last two years was largely behind us – yet Dubai has reminded us that if nations start defaulting, then it may be about to enter a new and even more frightening phase.

Dubai Debt Woes Raise Fears Of Wider Problem - Creditors and markets had always assumed that when push came to shove, its oil-rich neighbor Abu Dhabi would bail out Dubai. But that assumption was called into question this week, and the resulting fear that Dubai might not be able to pay its bills sent a wave of uncertainty rippling through markets just as investors thought the worst of the global financial instability was over. In a worst-case contagion, Bank of America analysts wrote, “One cannot rule out a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.” And not just emerging markets. “Dubai shows us that what we are now facing is a solvency issue, not a liquidity issue."

Citibank Used Bailout Funds For $8 Billion Loan To Dubai (Mar 2009) The US public will be “outraged” by Citibank’s $8 billion loan to Dubai just 6 wks after the bank was bailed out, US House of Representatives domestic policy subcommittee chairman has said. Dennis Kucinich commented on the Dubai loan and other US banking investments as a congressional panel released a report that strongly questioned Citibank’s actions.

Dubai Debt May Be Higher Than $80 Billion, UBS Analysts Say (Bloomberg) -- Dubai, the Persian Gulf emirate whose state-run companies are seeking to defer debt payments, may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said.  “Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” Dubai- based real estate analyst Saud Masud wrote in a note. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”

Financial Armageddon: The Debacle in Dubai (videos embedded) As I see it, the turmoil that has occurred in global markets over the past 48 hours essentially confirms that investors in risky asset classes have not made allowances for surprises -- or even predictable events. In fact, it seems pretty clear that during the past nine months or so, many people have (again) come to believe they can achieve high returns with little or no risk.Dubai's effective default also shines a light on another concern that economists, policymakers, and permabulls have largely pooh-poohed: the scale of and, especially recently, the rapid rise in public sector debt loads and the long, dark shadow these obligations cast over the economic and financial landscape.

Dubai Debt Woes May Mark End of Risk Trade -THE IMPACT OF THE UPHEAVALS in Dubai extends far beyond the middle eastern emirate. Indeed, it may be the beginning of the end of the global risk trade, if it isn't over already. If the debt standstill by the emirate were the only sign of rising risk in global markets it could be overlooked. But it is no aberration.  Earlier this week, the Chinese government reportedly sought to have its banks to raise additional capital, a move that effectively reins in credit for China, the main engine that is pulling the global economy out of recession. Even sovereign debt securities -- the bunker to which skittish investors traditionally hide -- have come under pressure. The cost to insure Japanese government bonds has jumped in recent weeks amidst growing concerns that nation's debt burden had become insurmountable.

Dubai's Threat To US Banks - Although there's little direct exposure to Dubai World's default risk, U.S. financial institutions could take major indirect hits.  The state-run investment company, Dubai World, owes about $60 billion. It rang up much of that in a building boom that included the world's tallest skyscraper and the Palm Islands in the Persian Gulf, settlements shaped like palm trees. According to CMA DataVision, which tracks credit markets, there's a 35.82% probability that Dubai will default.

Polite suggestion to the Dubai sovereign that creditors of Dubai World not be bailed out - I don’t see what the big deal is. Dubai has experienced for most of this decade the craziest construction boom seen in the Middle East since the construction of the Great Pyramids. That boom turned to bust - as booms invariably do. Property developers tend to be highly geared and very procyclical in their revenue flows and access to the capital markets. During construction slumps they drop like flies. Because the property sector is risky (ask Donald Trump), its creditors tend to get better interest rates than the sovereign rate. Dubai is no exception to this rule. If you earn a risk premium during good times, you should not moan when the borrower defaults from time to time when the going gets tough.

Rashomon in the desert - Krugman - NYTimes - As far as I can tell, there are three ways to look at it — three stories, if you like, about what Dubai means. First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.  Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation. Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

UAE faces up to $184 billion total debt: BofA-Merrill Lynch (Reuters) - The United Arab Emirate (UAE) has total debt amounting to $184 billion at the end of 2009, according to estimates by Bank of America-Merrill Lynch, which said the region faces a heavy redemption schedule until 2013. Dubai's shock announcement this week that it is seeking to suspend payments on debt of its state-owned conglomerate Dubai World and property subsidiary Nakheel has roiled global markets, raising fears that the emirate which funded a spectacular building boom on a mountain of debt could default."

sovereign funds are buying up property and commodities betting on inflation - We have been arguing in recent articles that the current property recovery is more than just a reaction to low interest rates and stimulus packages. It is also about protecting wealth from a destruction in the value of money.  It seems we are not alone in this view. On Friday Reuters reported that Sovereign wealth funds are investing more in property and commodities to hedge against currency devaluation following the massive bail-outs and residual debt level of Western governments. "There is quite a lot of interest in real estate and other long-term hedges against inflation," said David Smart of Franklin Templeton

China: The Vampire Squid of Commodities -- Why We Should Learn to Stop Worrying and Love Our New Chinese Overlords - For my final report on the 2009 ASPO peak oil conference, I must address the world’s new prime mover of commodity demand: China. With flat-to-declining economic growth rates in most of the rest of the world, the Red Dragon has emerged as the dominant force driving global demand for natural resources. Investors are looking at the convergence between falling OECD oil demand and rising demand in non-OECD, and after taking monetary policy into account, see commodities winning either way. Even if the Fed’s fiscal stimulus turns to drag, and we don’t get the recovery, then where does the dollar go? Down – which will be bullish for commodities. And if we have a V-shaped recovery, demand and prices will rise – again, bullish for commodities

China May Re-Export Copper on Stockpiles, Maike Says (Bloomberg) -- Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year, according to Xi’an Maike Metal International Group. “We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview. Copper, used to make pipes and wires, has more than doubled this year as China’s 4 trillion yuan ($586 billion) stimulus spending, increased state stockpiling and a lack of scrap material boosted China’s imports to a record.

Aluminum Bubble Concerns Mount as Surplus May Add 29% (Bloomberg) -- Warehouses holding enough aluminum to build 69,000 Boeing 747 jumbo jets are why Peter Sorrentino says the most abundant metallic element in the earth’s crust is too expensive. “I don’t see why the aluminum price has gotten so high,” said Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors. “There’s plenty of supply around and demand is still quiet. There’s a disconnect between the price and reality.” Barclays Capital forecasts that the global surplus in aluminum will increase 29 percent to 1.63 million metric tons next year as the biggest annual price increase since 1994 spurs producers to increase output. Emirates Aluminium Co. will start the world’s biggest smelter in April, and a plant part-owned by Norsk Hydro ASA in Qatar fires up next month. This year’s 32 percent rally in aluminum and the 46 percent jump in the S&P GSCI index of commodities is prompting concerns of a bubble in the making. China, the biggest aluminum producer, is at risk from an absence of consumer demand from trading partners,

Commodities Surge As Copper, Gold Attract Investors  - WSJ - Copper, an industrial metal used in construction and housing, is at the $7,010 a metric ton level in London Metal Exchange trade, despite the fact that stocks in LME warehouses are at levels last seen in April. Gold meanwhile continues to power higher, with the precious metal leaping to another record high of $1,167.55 a troy ounce overnight. Investment flows into commodity markets have come in at levels never seen before, with Barclays Capital estimating that some $55 billion has entered the asset class year-to-date. This exceeds the previous record of $51 billion achieved in 2006.

Citi: The Commodity Collapse Could Be "Subprime Part II" - So here’s the nightmare scenario, which we hope will not happen: Thousands of very smart speculators have accumulated the biggest ever speculative physical raw material positions ever witnessed in the belief that either the dollar will collapse or an ongoing global ‘Supercycle’ will shake off the effects of the credit crunch and resume business as usual. They are funded in this venture by some of the lowest interest rates on record. What are the threats to their thesis?.

Trading Our Way Out of Crisis - Global trade contracted in 2009 at a rate not seen since the Great Depression, and those paying the heaviest price are those who can least afford it. So, when trade ministers from the World Trade Organization’s 153 members gather in Geneva later this month, the issue of how the WTO and the global trading system can help the poorest countries will be high on the agenda. The world’s poorest countries face the greatest hardship when trade languishes. They do not have the luxury of cobbling together fiscal-stimulus packages or rescuing ailing industries in order to cushion the shock brought about by the economic crisis. For them, trade represents a huge share of overall economic activity and is unquestionably the best avenue for exiting a crisis that has hit them hard.

How preferential are preferential trade agreements? - VoxEU - Almost all economies are party to preferential trade schemes. But how much are they “giving away” or “receiving” in preferential access? This column presents a compact representation of effective market access and applies it to the proposed ASEAN-EU trade agreement.

The great trade collapse: Presenting the new Ebook - VoxEU - World trade experienced a sudden, severe and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. VoxEU today posts a new Ebook – written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva – that presents the economics profession's received wisdom on the collapse. Two dozen chapters, written by leading economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.The Ebook can be downloaded for free from

FT Alphaville - The Emerging Europe debt dog - While the search for yield is setting most emerging markets ablaze in terms of institutional money flow, there is one EM area that appears noticeably excluded from the flow party: Emerging Europe.As Bloomberg noted on Monday, Emerging Europe — “where currencies and equities combined to produce total dollar-denominated returns of about 50 per cent this year” — is increasingly putting off investors with its soaring debt load. This is true even of the region’s best performer, Poland.

East Europe Proving Too Good as Debt Erodes 50% Gain (Bloomberg) -- Eastern Europe, where currencies and equities combined to produce total dollar-denominated returns of about 50 percent this year, is showing signs of unraveling as the continent’s favorite investment because of runaway debts. Hungary’s forint is the second-worst performer in the past month of 26 emerging-market currencies, cutting its gain against the dollar since March 10 to 34 percent. Slovakia, Poland, Bulgaria and the Czech Republic are among seven countries showing the steepest increase in credit risk of 21 sovereign credit-default swaps tracked by Bloomberg. The NTX New Europe Blue Chip Index has fallen 0.4 percent after closing at 1,208.60 on Nov. 16, the highest since Oct. 7, 2008. “Some investors might really underestimate the setback potential” for bonds and currencies

This Time is Different - Fiscal Policy in Low-income Countires - IMFDirect - When it comes to the crisis, most of the media attention is focused on advanced and emerging market countries. But low-income countries have been badly hit too, reflecting their growing integration in the world economy. We can see sharp declines in exports, FDI, tourism, and remittances. Output growth in 2009 will be less than half of the pre-crisis rate of over 5 percent. Sub-Saharan Africa is the worst affected, with a contraction of real per capita GDP of almost 1 percent. This is the bad news. But there is some good news in all of this. Low-income countries have been able to use fiscal policy as a countercyclical tool this time around, far more than in the past. Fiscal deficits are expected to increase in three-quarters of low-income countries in 2009, with an average expansion of 3 percent of GDP

Land Rush In Africa  - Farmland in developing countries has become an unlikely object of investor fascination. Goldman Sachs and Morgan Stanley are each raising hundreds of millions of dollars for agriculture funds aimed at Africa and Latin America. Agribusinesses in the U.S. are leasing vast tracts of African land from which they expect to export crops and glean healthy returns. Arab oil countries, meanwhile, are vying for fertile acreage for fear their homelands are running out of water.

Global protocol could limit Sub-Saharan land grab - - Aggressive moves by China, South Korea and Gulf states to buy vast tracts of agricultural land in sub-Saharan Africa could soon be limited by a new global international protocol.A scramble for African farmland has in recent years seen the equivalent of Italy's entire arable land hoovered up by businesses from emerging economies.The Food and Agriculture Organisation, the UN Conference on Trade and Development (UNCTAD) and the World Bank are now discussing a new code of conduct for land buyers in Africa. Amid increasing concerns over food security, it could include ensuring consent is given prior to selling land from local people as well as ensuring smallholders do not lose out. A first draft is expected to be released next spring.

Africa and the trade crisis - VoxEU - Africa has been hard hit; export revenue collapsed as both prices and volumes of commodity exports dived and emigrant remittances shrunk. National budgets were hit as tariff revenue fell with imports and overseas development assistance slumped. African policy makers tend to view this as a temporary setback. To date, there is little appetite for major reform reversals, but signs of a gathering backlash against the Washington Consensus are clear. African policy makers are pursuing a two-pronged strategy – petitioning the IMF and World Bank to maintain capital flows, and waiting for developed nation growth. Just in case progress is slow on both fronts, they continue to deepen engagement with China.

The World of China Inc. - When China began its global investment push in the early part of this century, the flood of new money was welcomed, particularly in those parts of Asia, Africa and Latin America that felt abandoned by the West. China's promise not to politicize aid and investment by attaching pesky conditions like improved human rights pleased many governments. Between 2003 and 2008, Chinese direct investment overseas skyrocketed — rising from $75 million to $5.5 billion in Africa, 1 billion to $3.7 billion in Latin America and jumping from $1.5 billion to $43.5 billion in Asia. The People's Republic now ranks as the No. 1 foreign investor in countries as diverse as Sudan and Cambodia.

China’s Industrial Policy vs. US Random Behavior - The U.S. China Economic and Security Review Commission has issued its annual report {giant .pdf}. Robert Borosage of the Campaign for America’s Future hosted a conference call for the Co-Chair of the Commission, Carolyn Bartholomew, and Clyde Presotwitz of the Economic Strategy Institute, who was U.S. Trade Representative under Reagan. The call offered these experts an opportunity to talk about China’s industrial policy. Prestowitz said something that focused the entire issue for me. He pointed out that labor is not a significant factor in chip manufacture. Why then are so many chip manufacturing facilities located in China? He says it’s because the Chinese wanted these as part of their industrial policy, so they seized the land, built the infrastructure, provided low-cost loans, granted energy and water subsidies, trained a work force, and gave the manufacturers tax breaks.

A dam tour. What I Saw Inside China's—and the World's—Most Important Dam - China may be taking baby steps to develop a consumer-based economy, but it's pretty clear that business of the nation is still business. The needs and comfort of individuals are routinely suborned to economic development. Much of China's commercial infrastructure—airports, bridges, shipping terminals, office buildings—is state of the art. But the intercity roads are for trucks and buses, not for passenger cars. The airports are designed to accommodate globe-trotting business travelers, not a mass market of local tourists. And while they may be lovely, the green waters of the Yangtze River—and the stunning amounts of concrete that have been poured into them—are intensely commercial.

Stimulus-Driven Overcapacity In China Could Swamp World Markets, Says Group - WSJ - BEIJING – The new investments funded by China's stimulus plan may swamp world markets and lead to a surge in trade conflicts, an international business group said, in a sign of the rising concerns over the side effects of the government's drive to support growth.The European Union Chamber of Commerce in China, in a report released Thursday, said a combination of easy credit and other incentives for Chinese companies to expand has led to the construction of many new factories in areas like steel, aluminum, cement and chemicals. The increase in industrial capacity – at a time of global overcapacity...

Made in China—and sold there, too. - These are grim times for American executives. The public is angry, and consumers are holding on to every nickel. It's hard to escape the sense that the economic future may be less comfortable than the past. But not all American managers are gloomy. "Optimism is higher than it was last year," says Brenda Lei Foster, president of the American Chamber of Commerce in Shanghai. A survey of its 370 members found that more than 90 percent are optimistic about the next five years. The reason: Instead of simply shipping goods made in China back to the United States, "companies here [are] focusing on the Chinese domestic market." Now the Shanghainese are rich, and the foreigners are poor by comparison,"  The biggest change over the last several years: "More Porsches."

Car plate prices closer to record -- Shanghai Daily - SHANGHAI'S car plate prices rose for a second month in November and set the second-highest record for this year. Dealers said rising fuel prices didn't instantly affect robust auto sales and the booming market may continue its upbeat sentiment as government stimulus measures are expected to be extended to next year.The average price for a car license rose to 35,317 yuan (US $5,178) at the monthly auction yesterday, an increase of 915 yuan from last month, according to the organizer, Shanghai International Commodity Auction Co. It's the second-highest price this year after the record 36,231 yuan set in August.The lowest price for this month also rose 1,000 yuan to 34,900 yuan from a month earlier.The city government put 8,000 car license plates up for auction this month, the same quota as last month, and 21,902 new car owners recorded bids.

Krugman on Deficit Spending and the Chinese -  Krugman asserts that Beijing increases global unemployment by “siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters” (”World Out of Balance,” Nov. 16).  This nefarious outcome allegedly results from the Chinese depressing the value of the renminbi “by trading renminbi for dollars, which they have accumulated in vast quantities.” Not quite.  The Chinese don’t hold lots of actual dollars; they hold lots of dollar-denominated securities.  Would Mr. Krugman have the Chinese dramatically reduce their purchases of U.S. Treasuries?  His column today suggests that the answer is “yes” – but his frequent calls for more deficit spending suggest that the answer is “no.”  Awfully confusing.

China could face protectionist backlash -- China faces a protectionist backlash next year because its manufacturers are saddled with overcapacity and are offloading excess output into world markets, the European Union Chamber of Commerce in China said on Thursday. Joerg Wuttke, the head of the business group, said it takes about 12 months to prepare a case alleging dumping, the practice of selling goods for less than it costs to produce them. "This lead time would indicate to me that in the second half of 2010 there will be far more dumping cases against China, unfortunately," Wuttke said. He was speaking at the launch of a study into industrial overcapacity in China, a long-standing scourge that the chamber believes has grown more serious as a result of the global financial meltdown and Beijing's aggressive response to it.

Escalation of US-China trade row biggest global threat-  M.Stanley (Reuters) - A serious escalation in trade or currency disputes between the United States and China could be the biggest risk to global stability over the next few years, a top Morgan Stanley executive said on Friday.If a "bi-partisan anti-China currency bill" being planned by both Republican and Democrats is passed and signed into law by President Barack Obama, China could retaliate, Morgan Stanley (MS.N) Asia chairman Stephen Roach told an American Chamber of Commerce session in Singapore."I worry that next year,... if President Obama would allow that bill to go through, then the Chinese will not show up at the Treasury auctions and we will be back in the soup again," Roach said. China has amassed $2.27 trillion of foreign exchange reserves, the world's largest stockpile, and analysts think about two-thirds of this is invested in dollar-denominated assets. China has a huge trade surplus with the United States, and is the largest foreign holder of U.S. government bonds.

World Trade Barriers Are Increasing - The small dark blue squares indicate the "number of nations that have imposed protectionist measures on each country" and the light blue squares indicate the "number of measures imposed on each category of goods." Source of quotations in caption and of graph: online version of the WSJ article quoted and cited below.

World oil demand growth to outpace supply in 2010: poll (Reuters) - Growing world oil use will likely outpace the rate of new supplies in 2010, eroding the huge stockpiles of crude which have mounted around the world since the start of the global economic crisis.According to a Reuters poll of ten top oil-tracking analysts and organizations, oil demand is predicted to rise by 1.3 million barrels per day (bpd) next year to 85.9 million bpd.At the same time, the rise in production from outside the Organization of the Petroleum Exporting Countries and output of natural gas liquids (NGLs) from OPEC members is seen growing by just 800,000 bpd in total.

The Oil Casino: SEC Heading For Monte Carlo - This is a long article on the subject of oil and gas reserves and due diligence. My purpose is to alert you to the revision of SEC Regulation S-K and Regulation S-X effective January 1, 2010. Concealed in a handful of benign new regs is a financial truck bomb that's going to blow away "proved reserves" as a meaningful metric of oil company assets. Old definition: Proved Reserves are those quantities which can be estimated with reasonable certainty...New definition: Industry is no longer constrained by the criterion of certainty

The Oil Drum - Net Oil Exports and the "Iron Triangle" - Until recently, I had never quantified what percentage of remaining Ultimate Recoverable Reserves (URR) on the ELM would be exported. Note that the ELM is a simple mathematical model for a hypothetical exporting country, but the model is based on actual producing regions.Also note that the percentage of production that goes to consumption at the start of a production decline has a significant effect on when a net exporter becomes a net importer.For example, the top five net exporters, in 2006 (Saudi Arabia, Russia, Norway, Iran and the UAE), consumed about 25% of their total liquids production. Offsetting this, many of the top exporters, based on our mathematical models, are at fairly advanced stages of depletion, especially the top three (Saudi Arabia, Russia and Norway), which showed a combined 3.8% decline in net oil exports from 2005 to 2006 (EIA, Total Liquids).

The Oil Drum | A Nosedive Toward the Desert ...Or, Why the Decline in Saudi Oil Production is Not Voluntary - In this post, I extend my analysis of Saudi Arabian production backwards four years earlier than my post of last week. I explain in detail how the evidence strongly suggests that since late 2004, the Kingdom of Saudi Arabia (KSA) has entered rapid decline of their oil production, at least for the time being.

The oil-economy connection - We are now more than a year past the July 2008 oil price (and production) peak and in that time we have seen the price of oil drop as low as US$30 per barrel to then recover to about $80 per barrel. While the global financial crisis was brought on by a property debt bubble that was destined to burst at some stage, an analysis by economist James Hamilton (PDF 637KB) indicated that it was the record high oil prices of mid-2008 that pricked that bubble. Indeed, as described by commentator David Murphy, most US recessions since the 1970s have followed periods of rapidly rising oil prices: the US economy cannot tolerate an expenditure on oil which constitutes more than 5-6 per cent of GDP. Mainstream thought in peak oil circles is now that the $147/barrel oil price of July 2008 may represent the “peak oil price”. In other words, we may never see an oil price that high again since, at that level, the high cost of energy cripples economic activity, plunges economies into recession and thus kills demand. (Amusingly, this phenomenon has provided a face-saving escape route for the most ardent critics of the peak oil thesis - namely oil industry cheer-leader Cambridge Energy Research Associates -who now declare that the developed world has passed “peak oil demand”. However, that is nothing but a delusion to disguise the fact that dwindling oil supplies have ended economic growth in the developed world for the foreseeable future.)

Oil prices are already high enough to hurt consumers - (Fortune) -- Are cash-strapped American consumers on for another date with energy price misery? The U.S. economy remains weak and one in six Americans can't find enough work. Yet oil prices have risen steadily this year. A barrel of crude costs $79 and change, more than double its price at the end of 2008. This year's runup pales in comparison to the one that peaked last summer above $145 a barrel. Even so, some researchers warn we could once again be approaching the point at which rising energy costs will squeeze consumers.That could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.

Bioengineers succeed in producing plastic without the use of fossil fuels - A team of pioneering South Korean scientists have succeeded in producing the polymers used for everyday plastics through bioengineering, rather than through the use of fossil fuel based chemicals. This groundbreaking research, which may now allow for the production of environmentally conscious plastics, is published in two papers in the journal Biotechnology and Bioengineering to mark the journal's 50th anniversary. Now, through the use of a metabolically engineered strain of E.coli, the team , have developed a one-stage process which produces polylactic acid and its copolymers through direct fermentation. This makes the renewable production of PLA and lactate-containing copolymers cheaper and more commercially viable.

No Plan for Oil Shortages in North America - I was taken aback when I walked in the door at the nondescript, low industrial building. The place was packed. I could hardly find a place to stand and I waited about 15 minutes just to speak to a clerk. The registers were ringing constantly, taking in $100-$300 totals at a whack. Where I come from, we call that a gonga business. The gun business has been strong this year, without a doubt. Guns have been flying off the shelves and ammo shortages have been common (and surrounded by conspiracy theories).  Clearly, the general public has had an increased appetite for guns. And let's not kid ourselves — they're not planning to go deer hunting. It's about fear in an increasingly chaotic world and demand for better personal defense.  From an energy standpoint, that fear is certainly justified...

Ethanol: President Obama And The EPA Face A Tough Decision Soon - U.S. ethanol policy embodies all the classic conflicts between politics and economics. This morning’s New York Times signals that Congress’s mandate on refiners to use 12.6 billion gallons of ethanol in 2011 will be “mathematically impossible.” When Congress passed the Energy Independence and Security Act of 2007, it assumed gasoline consumption would keep rising, but the recession and auto fuel economy improvements have leveled gasoline consumption as the chart at the end of the Energy Department link shows. Next week, the Environmental Protection Agency is expected to choose from options to resolve this impossibility

What Drives Diesel Fuel Prices? - Dallas Fed - Historically, gasoline has commanded a premium over diesel, but that changed in mid-to-late 2007, when diesel rose above gasoline. Diesel prices remained higher until the full brunt of the financial panic hit and the world economy slid into recession. Hard times depressed prices faster for diesel than for gasoline, restoring the historical relationship—for now (see box). On spot markets, diesel has sporadically risen above gasoline, but it’s been rare for diesel to trade significantly higher on a sustained basis.[1] From 1994 through 2004, gasoline traded higher than diesel 61.2 percent of the time (Chart 1).[2] Over the next four years, however, gasoline was higher than diesel only 24.2 percent of the time. If we focus on 2007 and 2008, gasoline traded higher than diesel only 21.1 percent of the time.

The Daily Texan - The petroleum civil war - Our present approach to energy may be seriously altered within the next decade, and not by climate legislation. The further development of new technologies is more important now than ever before, but it seems highly likely that sweet crude, with inherently high energy returned on energy invested, does not have an equal substitute. In 2005, the U.S. Department of Energy sponsored the report “Peaking of World Oil Production: Impacts, Mitigation, and Risk Management.“ The findings were grave.According to the report, even if a crash program were to be implemented a decade before the fact, a production peak would still severely disrupt the global economy. In an interview conducted this September, the report’s lead author, Robert L. Hirsch, said,“Peak oil is a bigger issue than health care, than federal budget deficits. … There are no quick fixes.”

Mexico Credit Rating Cut by Fitch on Oil Output Drop (Bloomberg) -- Mexico’s investment-grade credit rating was lowered by Fitch Ratings as tumbling oil output and the worst recession since the 1930s swell the budget deficit.  Fitch cut Mexico’s foreign debt rating one level to BBB, the second-lowest investment grade and in line with countries including Russia and Thailand, and changed the outlook to stable from negative. The downgrade was the first by Fitch since it gave Mexico an initial rating of BB in 1995 and the first by any ratings company since Standard & Poor’s cut it in the wake of the 1994 peso devaluation.

AFP: Mankind using Earth's resources at alarming rate - Humanity would need five Earths to produce the resources needed if everyone lived as profligately as Americans, according to a report issued Tuesday. As it is, humanity each year uses resources equivalent to nearly one-and-a-half Earths to meet its needs, said the report by Global Footprint Network, an international think tank."We are demanding nature's services -- using resources and creating CO2 emissions -- at a rate 44 percent faster than what nature can regenerate and reabsorb," the document said."That means it takes the Earth just under 18 months to produce the ecological services humanity needs in one year," it said.And if humankind continues to use natural resources and produce waste at the current rate, "we will require the resources of two planets to meet our demands by the early 2030s," a gluttonous level of ecological spending that may cause major ecosystem collapse, it said.

COP15 failure and Peak Oil success: Why exaggerate Global Warming? - Since late summer, several OECD country leaders in the G20 group have stridently backed their proposals for radical cuts in global CO2 emissions, by waving the spectre of 'catastrophic climate change' if we do not achieve rapid, massive cuts in CO2 on a worldwide and uniform basis. OECD leaders go far out of their way to never, ever mention Peak Oil. This in fact is the biggest real world driver for worldwide Energy Transition away from CO2 emitting fossil fuels. Due to limited world oil reserves and production capacity, moving away from fossil fuels is necessary, whether or not there is climate change or global warming. Complicating this, world pipeline and LNG gas supplies are now entering a period of large or massive increase, depending on country and region, perhaps able to last 5 years or more. While oil can get very expensive, natural gas will likely remain cheap, and international traded coal will likely remain low cost on delivered energy terms.

Climate Change vs. Deficit Reduction? - Next February, President Obama will unveil his 2011 budget. Over the past few days, the news media have begun to speculate about  some of the steps that he might propose in order to tame our growing deficits. Over at Politico, Mike Allen and Jim Vandehei suggest that one policy casualty ought to be the effort to combat climate change. My recommendation to the President is quite different from that in the article. If the President is committed to both climate change legislation and reducing the deficit, he should tell Congress to levy a carbon tax or designate a large fraction of the carbon allowances for deficit reduction.

Price of global warming cuts may stop deal at U.N. meeting - "Everything we do is tied to energy and climate," says climate economist Graciela Chichilnisky of Columbia University. "Not just the electric bill – that's a minuscule part of it. Not just the food bill. Everything." Come Dec. 7-18, representatives of 192 nations are set to meet in Copenhagen at the United Nations Climate Change Conference. It's by far the most significant attempt at changing the course of global warming since world leaders met in 1997 in Japan to craft the Kyoto Protocol, which aimed 37 industrialized nations at cutting emissions of six greenhouse gases (such as the carbon dioxide emitted from burning coal, oil and natural gas, aka fossil fuels) by 5.2% from 1990 levels. It was never ratified by the U.S. Senate and expires in 2012.But despite predictions that time is running out to corral greenhouse gases, expectations already have been dashed that the Copenhagen sessions will produce a successful replacement for the Kyoto Protocol.

Climate Change—Some Simple (and Quite Convenient) Truths - IMFdirect - Climate change is an “externality” problem. Individuals, firms, and, yes, governments, do not take full account of the harm that others suffer when they emit greenhouse gases. So they emit too much. And the best way to stop them doing this is to charge them a price for the carbon content of what they emit: a “carbon price.”Admittedly, climate change is a particularly complicated externality. Since the damage will fall largely on future generations, the proper price depends very much on how we value their well-being relative to ours. The importance of such long-lived investments as power-stations, and the heavy sunk costs of investing in new technologies, mean that the carbon prices people expect in the future are even more important than the price now. And the fact that the world’s supply of fossil fuels is ultimately fixed means that the effect of carbon prices on total emissions is not as clear cut as it may seem

How much greenhouse gas emission abatement is enough? - voxeu - Climate change will have widespread negative effects of uncertain magnitude. But this column argues that climate change is not humanity’s biggest challenge and needs to be solved without impeding economic development. It calls for a measured policy of greenhouse gas emission reduction

Al Jazeera - China unveils emission cut targets - China will cut emissions of so-called greenhouse gases per unit of gross domestic product by up to 45 per cent over the next decade, officials have announced.In a statement on Thursday, China's state council said the drive to improve efficiency was a "voluntary action" which would make "a major contribution to the global effort in tackling climate change".The announcement marks the first time China has set specific targets for cutting carbon emissions, seen as a major cause of global warming. The announcement came shortly after China's foreign ministry said that Wen Jiabao, the Chinese premier, would travel to Copenhagen next month to attend the UN-backed global summit on climate change.

China Pledges to Keep Its Per Capita Greenhouse Gas Emissions at Less One-Third U.S. Levels, but the NYT Is Not Satisfied - Any article that is trying to honestly discuss China's contribution to restricting greenhouse gas emissions would point out that China current emits about one quarter as much per person as the United States. This NYT article flunks the test, failing to convey the most basic information to readers.

Faltering Climate Deal Prodded by U.S., China Pledges (Bloomberg) -- Pledges by China and the U.S. to set numerical targets for their greenhouse-gas emissions through 2020 may reignite stalled progress for a global climate agreement at negotiations next month in Copenhagen. China’s cabinet yesterday said it will cut output of carbon dioxide per unit of gross domestic product by 40 percent to 45 percent from 2005. A day earlier, the U.S. said it will propose a direct CO2 reduction in the same period of about 17 percent, provided that dovetails with a new domestic climate law. The announcements mean the biggest emitters of industrial pollutants blamed for climate change have finally spelled out their intentions to limit discharges, driving forward the United Nations-led talks in the Danish capital that run Dec. 7-18.

25 per cent CO2 cut needed to save Great Barrier Reef - THE Great Barrier Reef has only a 50 per cent chance of survival if global CO2 emissions are not reduced at least 25 per cent by 2020, a coalition of Australia's top reef and climate scientists said today.The 13 scientists said even deeper cuts of up to 90 per cent by 2050 would necessary if the reef was to survive future coral bleaching and coral death caused by rising ocean temperatures. "We've seen the evidence with our own eyes. Climate change is already impacting the Great Barrier Reef," Terry Hughes, director of the ARC Centre of Excellence for Coral Reef Studies at James Cook University, said in a briefing to MPs. Australia is one of the world's biggest CO2 emitters per capita, but has only pledged to cut its emissions by five per cent from 2000 levels by 2020.

Greenhouse gases reach highest levels, meteorologists warn (Xinhua) -- Greenhouse gases have reached their highest levels since pre-industrial times, meteorologists warned on Monday. The World Meteorological Organization (WMO) announced that 2008 saw the largest increase in greenhouse gases since 1998 during a press conference in Geneva. The WMO Greenhouse Gas Bulletin shows that as of 2008, ratios of carbon dioxide, methane and nitrous oxide increased by 38 percent, 157 percent and 19 percent, respectively, since pre-industrial times before 1750.

The Associated Press: CO2 curve ticks upward as key climate talks loom - MAUNA LOA OBSERVATORY, Hawaii — The readings at this 2-mile-high station show an upward curve as the world counts down to climate talks: Global warming gases have built up to record levels in the atmosphere, from emissions that match scientists' worst-case scenarios.Carbon dioxide concentrations this fall are hovering at around 385 parts per million, on their way to a near-certain record high above 390 in the first half of next year, at the annual peak."For the past million years we've never seen 390. You have to wonder what that's going to do," said physicist John Barnes, the observatory director.One leading atmospheric scientist, Stephen Schneider, sees "coin-flip odds for serious outcomes for our planet."

Is global warming unstoppable? - In a provocative new study, a University of Utah scientist argues that rising carbon dioxide emissions - the major cause of global warming - cannot be stabilized unless the world's economy collapses or society builds the equivalent of one new nuclear power plant each day.
"It looks unlikely that there will be any substantial near-term departure from recently observed acceleration in carbon dioxide emission rates," says the new paper by Tim Garrett, an associate professor of atmospheric sciences.

Global temperatures will rise 6C by end of century, say scientists - The Guardian - Global temperatures are on a path to rise by an average of 6C by the end of the century as CO2 emissions increase and the Earth's natural ability to absorb the gas declines, according to a major new study.Scientists said that CO2 emissions have risen by 29% in the past decade alone and called for urgent action by leaders at the UN climate talks in Copenhagen to agree drastic emissions cuts in order to avoid dangerous climate change. The new study is the most comprehensive analysis to date of how economic changes and shifts in the way people have used the land in the past five decades have affected the concentration of CO2 in the atmosphere.

The Copenhagen Diagnosis - Climate change accelerating beyond expectations, urgent emissions reductions required, say leading scientists - Global ice-sheets are melting at an increased rate; Arctic sea-ice is disappearing much faster than recently projected, and future sea-level rise is now expected to be much higher than previously forecast, according to a new global scientific synthesis prepared by some of the world’s top climate scientists. In a special report called ‘The Copenhagen Diagnosis’, the 26 researchers, most of whom are authors of published IPCC reports, conclude that several important aspects of climate change are occurring at the high end or even beyond the expectations of only a few years ago. The report also notes that global warming continues to track early IPCC projections based on greenhouse gas increases. Without significant mitigation, the report says global mean warming could reach as high as 7 degrees Celsius by 2100.  PDF (90 KB)

Poll: Belief there is global warming drops - The percentage of Americans believing global warming is occurring dropped from 80 percent to 72 percent in the last year, a Washington Post poll indicates. The Washington Post-ABC News poll's findings released Wednesday also show 55 percent of respondents said they think the United States should curtail its carbon output. The increased disbelief about climate change was driven largely by a shift among Republicans, the poll said. Still, the poll showed a majority of respondents, 53 percent to 42 percent, support legislation to cap emissions and trade pollution allowances.

Grim reaper's role in climate change denial There is no point in denying it: we're losing. Climate change denial is spreading like a contagious disease. It exists in a sphere that cannot be reached by evidence or reasoned argument; any attempt to draw attention to scientific findings is greeted with furious invective. This sphere is expanding with astonishing speed.A survey last month by the Pew Research Centre suggests that the proportion of Americans who believe there is solid evidence that the world has been warming over the past few decades has fallen from 71 per cent to 57 per cent in just 18 months.

Climate change sceptics and lobbyists put world at risk, says top adviser - The Guardian - Climate change sceptics and fossil fuel companies that have lobbied against action on greenhouse gas emissions have squandered the world's chance to avoid dangerous global warming, a key adviser to the government has said.Professor Bob Watson, chief scientist at the Department for Environment and Rural Affairs, said a decade of inaction on climate change meant it was now virtually impossible to limit global temperature rise to 2C. He said the delay meant the world would now do well to stabilise warming between 3C and 4C.His comments come ahead of key UN negotiations on a new global climate treaty in Copenhagen next month that the UK government insists should still aim for a 2C goal, despite doubts over whether a meaningful deal can be sealed.

World’s largest ice sheet melting faster than expected - The world's largest ice sheet has started to melt along its coastal fringes, raising fears that global sea levels will rise faster than scientists expected.The East Antarctic ice sheet, which makes up three-quarters of the continent's 14,000 sq km, is losing around 57bn tonnes of ice a year into surrounding waters, according to a satellite survey of the region. Scientists had thought the ice sheet was reasonably stable, but measurements taken from Nasa's gravity recovery and climate experiment (Grace) show that it started to lose ice steadily from 2006. The measurements suggest the polar continent could soon contribute more to global sea level rises than Greenland, which is shedding more than 250bn tonnes of ice a year, adding 0.7mm to annual sea level rises.

Climate change to hit water-scarce Arab world hard (Reuters) - Climate change is likely to hit the water-starved Arab world harder than many other parts of the globe and threatens to slash agricultural output in the area, U.N. and Arab League officials said.Arab governments have shown more awareness of the issue but need to cooperate further to improve research and policies to protect vulnerable groups, including women who could bear the burden of adapting to increased water scarcity, they said."Climate change will be critical for the Arab world because this region in particular already suffers from poverty, widespread aridity, water scarcity and social marginalization," said Sima Bahous, Deputy Secretary General for Social Development in the Arab League

CLIMATE: ARAB WORLD MOST VULNERABLE TO CHANGE, ARAB LEAGUE - CAIRO - Arab League Secretary General, Amr Moussa, said that the Arab region is not exempt from the repercussions of the global climate change, warning that it will be the most vulnerable area as a result of this change. This came during the regional ceremony to launch the State of World Population 2009 entitled 'Facing a Changing World: Women, Population and Climate', Mena news agency reported. Reports show that the Arab region is the most vulnerable to the impact of the climate change, Moussa stressed. Climate change will affect the food production and is likely to cause the spread of infectious diseases, including malaria, bilharzia, and lung diseases. Human migration undoubtedly will be one of the most significant consequences of climate change, which also account for water scarcity especially.

How 16 ships create as much pollution as all the cars in the world - Last week it was revealed that 54 oil tankers are anchored off the coast of Britain, refusing to unload their fuel until prices have risen. But that is not the only scandal in the shipping world. Today award-winning science writer Fred Pearce – environmental consultant to New Scientist and author of Confessions Of An Eco Sinner – reveals that the super-ships that keep the West in everything from Christmas gifts to computers pump out killer chemicals linked to thousands of deaths because of the filthy fuel they use. We've all noticed it. The filthy black smoke kicked out by funnels on cross-Channel ferries, cruise liners, container ships, oil tankers and even tugboats. It looks foul, and leaves a brown haze across ports and shipping lanes. But what hasn’t been clear until now is that it is also a major killer, probably causing thousands of deaths in Britain alone.

Chemicals In Water Alter Gender Of Fish -  Something strange is happening to the fish in America's rivers, lakes and ponds. Chemical pollution seems to be disrupting their hormones, blurring the line between male and female.  And as CBS News national correspondent Dean Reynolds reports, those fish swim where millions get their drinking water.  "It is an abnormality," she said. "In bass we would not expect to see eggs in a male."  Abnormal - but increasingly common. In the upper Mississippi River where Loren Waalkens fishes, more than 70 percent of the male smallmouth bass had female characteristics.  In South Carolina's Peedee River, the ratio was even higher - 9 out of 10.  And in one section of the Potomac River near Washington, every smallmouth bass had the same condition.

On The Road, Signs Of The Apocalypse Hit Home - To create the post-apocalyptic world of The Road – the new film based on the Pulitzer Prize-winning novel by Cormac McCarthy in which an undefined cataclysm has incinerated most life on Earth – director John Hillcoat didn't have to use computer-generated imagery. He simply pointed his camera at landscapes that man or nature had already blasted. “We did an extensive tour of apocalyptic America,” Hillcoat said.

An Evolve-By Date - Whenever we do evolution experiments in the laboratory or on the farm, we can cause pronounced and rapid change in the traits we are interested in — we can evolve bigger horses, smaller dogs, cows that make more milk, viruses that thrive at higher temperatures and so on. In the laboratory, in other words, evolution has huge potential. But if it has that much potential — how come organisms keep going extinct in nature? In other words, why does evolution keep failing? The question matters as never before. We humans are busily changing the environment for most of the beings on the planet, and often, we are doing so very fast. To know what effect this will have, we badly need to know how readily different creatures can evolve to deal with changes to their environment. For if we’re not careful, many groups will soon be faced with an evolve-by date

ALL YOU ZOMBIES -  We had the power to influence history in a positive manner. Appropriate preparation could have lessened the impact of the long cold hard days ahead. Some winters are bitter and deadly. Others are mild and harmless. Since most Americans, including our leaders, think linearly they never see the turning of the seasons of history until it is too late. We are currently in the midst of a Fourth Turning, and most people have no clue. With a National Debt projected to reach $25 trillion by 2019, a government that has promised Boomers $100 trillion more than it can deliver, the end of the cheap oil age, looming resource wars, and nuclear proliferation, it is hard to fathom a happy ending to this Crisis. We appear to be hurtling towards the abyss and no one in charge seems capable of averting disaster.


Dusty said...

Rjs, attempting to read this all in one day..and absorb it is beyond my abilities.

But you have a helluva lot of great information in each post. ;)

rjs said...

each post does represent a week of aggregating...i mustve done something really bad to get stuck with this job...
there is something of an order; i usually start with the Fed and macro issues; then banks & banksters, then the main street economy and health care issues; & near the end world trade, chinese economy, energy and environment, and peak oil...
earliest posts were just the links; now ive tried for a summary paragraph of each so you can usually just scroll thru without a lot of clicking...
every sunday morning i email a less wonkish eclectic collection of leftovers from this to less than a dozen friends who are stuck with me...if you want a copy of this weeks, contact me

SantaCat said...

Ho Ho Ho! Merry Christmas to all you cool cats and pretty kitties! And have a purrrfect New Year!