FedUpUSA

Archive for July 6th, 2010

Hallelujah! Obama is cheering the news of 1,500 permanent jobs. The only problem is those jobs are going to cost taxpayers $1,333,333 each.

Please consider Obama awards $2B for solar power, hails new jobs

The government is handing out nearly $2 billion for new solar plants that President Barack Obama says will create thousands of jobs and increase the use of renewable energy sources.

“We’re going to keep competing aggressively to make sure the jobs and industries of the future are taking root right here in America,” Obama said.

The two companies that will receive the money from the president’s $862 billion economic stimulus are Abengoa Solar, which will build one of the world’s largest solar plants in Arizona, creating 1,600 construction jobs; and Abound Solar Manufacturing, which is building plants in Colorado and Indiana. The Obama administration says those projects will create more than 2,000 construction jobs and 1,500 permanent jobs.

Obama has said that to bring the nation’s economy back from the brink of a depression, it was necessary to add to the country’s debt in the short term.

Ignoring marginally attached workers, discouraged workers, and those working part-time who want a full-time job, there are approximately 14.6 million unemployed.

Counting 1,500 permanent jobs at $1,333,333 each, it would only cost $1.94666618 × 10¹³ ($19.47 trillion) to have full employment. That qualifies as aggressive in my book.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

By Karl Denninger

Wow, it took this long for the mainstream media to publish a piece like this?

Super-low interest rates also ensure that the big banks, fated to be wards of the government if the new financial reform becomes law, will have generous margins between their borrowing costs and lending revenues. This will enable them to further pad their balance sheets and correct the mistakes of yesteryear.

….

There’s a flip side, however. It only takes simple math to know that when interest rates are kept low, so are returns on savings and investment.

Read that last sentence again.

Part of the “strategy”, if you will, is to drive money into things that are more dangerous. 

But there are plenty of people out there – indeed, perhaps most investors – who have absolutely no business being in anything with material amounts of risk.

This is the age-old cry of the people about “inflation”, yet those who argue over inflation forget that during times of inflation there’s lots of money to be made in safe investments.  13% 30 year Treasury bonds anyone?  There was a couple of year period where you could have bought 30 year Treasury instruments at yields from 13-15%.  Some people looked at that as a sucker’s game, as the United States was about to implode in a hyperinflationary disaster.

To the contrary; buying those bonds was literally the trade of a lifetime – zero risk and over the life of the bond it returned that nice safe 13% for the entire 30 years.  Indeed, some are maturing just now.

Even better, if you cashed them early the capital gains in 1995, for example, were enormous.  That position rolled into common stocks in 1995 and sold out in late 1999 would have literally made you stinking filthy rich.

But now there’s a problem.  Pension funds and other “fixed income” investors have gotten fat and stupid.  Bubble-blowing has led them setting entirely-unreasonable expectations, like 7 or 8% annualized compounded returns.

Yet there is nowhere in the Treasury complex you could earn that since 1995 – ergo, you had to take the risk of loss or adjust down your coupon expectations.

The problem with the latter is that it leaves pension funds radically underfunded, and in the out year it means they will go bankrupt. 

Not might – will.

So now you have a nasty quandry: There is no place for pension funds to meet expectations with anything that’s safe, and yet at the same time ZIRP and its cousins has led Congress to believe it can spend literally without limit, since the cost of financing an infinite deficit at zero interest, assuming you never intend to pay off the principal, is in fact zero!

There are a handful of very dangerous jackasses running around out there who believe “deficits don’t matter”, or even worse, “government can print up and spend anything it wants as it doesn’t play by the same rules; it not only can’t go bankrupt but by spending more and more it lifts the economy.”

In a word:

Reality is that such nonsense is simply more Ponzi Economics.  It is the belief that one can find a free lunch – that there’s some magical rainbow at the butt end of a unicorn that emits pretty-colored candies.

The truth is that it is unbelievably corrosive to think that we can inflate out of this, whether with printed money or with borrowed. 

If one actually “prints” then the immediate response in the marketplace is to shut down all lending of capital.  Why?  Because the person with capital has no means of assessing the damage to their purchasing power.  Remember, interest is what’s charged for the time value of money, the risk of default and the risk of dilution of your purchasing power by either naked shorting of the currency or outright unbacked emission.

The “deal” that all debt-backed currency systems make is that unbacked emission won’t happen.  Naked shorting (which is what issuing unsecured credit is against a currency) is bad enough; unbacked emission is ruinous to those who have lent capital on fixed terms.

There is no free lunch; destroying those who have term obligations such as pension funds simply means that the government now has more people coming to it with hand outstretched for a bailout.  But the ability to fund that bailout is not unlimited, Dick Cheney “deficits don’t matter” crooning aside.

The danger is that nobody knows in advance exactly where the edge of that cliff lies.  Greece and Iceland found it the hard way and suffered ruinous damage to their economies.  Neither thought the cliff was near; both engaged in hinky accounting to try to hide exactly how bad the damage was, just like the pension funds, states and federal government are doing right here, right now, in The United States.

“Austerity” connotes starving in the streets among the public but in point of fact thrift – saving back 10 or 20% of one’s income and a government that spends less than what it takes in via taxes, paying down accumulated deficits, is not a dirty word at all.

Capital seeks return, and when you engage in austerity you free capital.  The combined earnings power of the nation is incredible; government can, at best, extract perhaps a fifth of it and redirect it, but in the process loses so much to internal costs, fraud and waste that it makes a poor allocator.

Growth comes from the productive use of credit – that is, credit taken for the purpose of expanding factories, machine shops and innovative businesses that invent things like transistors and microprocessors. 

Credit used for consumption – which includes virtually all credit taken by state and federal governments – is corrosive to to the financial health of the nation over time.  The negative impacts don’t appear right away, as it is the compound nature of interest that causes the problem.  In the short term such expenditures look great, as the pulled-forward demand causes more production to take place.

But the debt left behind still needs to be serviced, and even under the argument that government essentially creates that demand by issuing, the fact remains that the exponential nature of both growth and debt means that one cannot escape from the crush that comes from the use of credit for either consumptive or speculative purpose.

The Market-Ticker

Here is an email from “Taperwood” who has been tracking Craigslist classified ads for the Los Angeles and Seattle areas as a proxy for job openings and business demand.

Taperwood writes …

Hello Mish

The Friday Craigslist Los Angeles and Seattle job listings I track are down considerably over the past month.

From the lows of 2009, where they averaged 700-800 in LA and 500′s in Seattle, they spiked to over 1000 in LA and to 800 in Seattle starting around January/February 2010 until as recently as this May.

Then job listings started a gradual decline into the 900′s in LA and 700′s in Seattle. Last Friday, the numbers were barely 800 in LA and 580 in Seattle.

These numbers are getting uncomfortably close to the numbers of 2009.

Thanks Taperwood.

This informal indicator echoes the slowdown we saw in the June Services ISM released this morning.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

People quickly forget about the nearly 1,000 point “flash crash” brought on by glitches in the Wall Street casino machinery.  Still no sensible explanation has been given but today the stock market now stands below the flash crash moment.  The middle class is witnessing the largest wealth transfer in history take place and it is all happening because of the Wall Street infrastructure and the government’s lack of respect for the working class of the United States.  Even last month as we lost 125,000 workers the unemployment rate actually went down because over 500,000 Americans simply dropped out of the workforce.  In other words people simply threw their hands up in exhaustion and gave up.  The government is literally not counting tens of thousands of Americans.  What does this tell you about how much they value the middle class?

Let us break down some income data first:

47 percent of American households make less than $50,000 a year.  66 percent make less than $75,000.  This should give you a sense of the household income in the U.S.  Only 4.3 percent of U.S. households make more than $200,000.  Income for working and middle class Americans has remained stagnant for one agonizing decade.  What has occurred over this time is the artifacts of a middle class lifestyle like a decent home and a college education have been juiced with massive amounts of banking debt.  As banks have tried to put their hands on every aspect of American life, prices have zoomed up in every industry they have jumped into.  Look at housing and higher education for dramatic examples.  50 years ago most middle class Americans could afford a college education and a starter home without sacrificing every single penny to servicing debt.

Debt has engulfed our nation.  If we look at personal consumption as a percent of GDP we can start seeing where problems started:

Personal consumption makes up over 70 percent of our GDP.  Banks love using this figure to beat on middle class Americans to blame them for the problems in the current recession.  Keep in mind that the above chart also includes giant increases in health care costs and also, large piles of cash going to service debt that banks are so happy to take.  Yet the above point of the chart does hold steady.  That is, we have gone from producing to spending too much as a nation.  It is fun while things are good but is definitely unsustainable.  And don’t think this spending came from actual savings:

The drop in personal savings is incredible.  As we went negative for a short period of time, banks were capitalizing by allowing people to spend more money than they actually had.  If we look at the trillions of dollars given out to banks that made poor bets in the last decade, we’ll see that they are also the largest players in the credit card game:

Source:  Reuters

The above chart is basically the too big to fail.  They have fed massive amounts of credit cards into the system with little due diligence since they knew in the end, taxpayers would bail them out.  Now that things have gotten bad (not for too big to fail banks since they have gotten the ultimate gold plated bailouts) they are now crunching down on the middle class.  High interest charges, onerous fees, and other trickery are merely ways of sucking real wealth from those who work to a class that is largely unproductive and has led us into this economic predicament.  The government has worked hand in hand with the banks here.

Credit card debt eats up a large portion of annual household income for millions:

Much of what we consider to be middle class living has been kept on life support by banking debt.  Yet no system can go on forever with too much debt and too little production.  Banks have become a dangerously large part of our economy.  That is why so much focus is given to Wall Street and the banking sector.  It is a largely idle industry that merely attempts to suck off the wealth creation of actual real work.  The housing bubble was the pinnacle of banking neurosis.  The idea that you can simply repackage toxic mortgages into “sophisticated” debt products and sell them off as diamonds to unsuspecting fools is appalling.  Yet in most cases, all this was legal because our Senators write the laws that should be protecting us.  Instead, they have allowed Wall Street to control every aspect of finance and now here we are with 40 million Americans on food assistance and a close to 17 percent unemployment and underemployment rate.  Yet things are getting better for the middle class?

The current system is not capitalism but a form of state sponsored cronyism for banks.  Most of us can understand that if you have a good product then by all means make a profit.  This is the essence of any small business and their survival.  But the banking system operates under perverse rules.  They created inordinate amounts of debt products that serve no purpose and assured destruction of those taking on the product.  Think of option ARMs that actually grew the balance of the mortgage!  Horrible products that have destroyed large portions of the real economy and have pushed many off the middle class path.  How many foreclosures could have been avoided over the past decade with more prudent banking?  Yet this isn’t what the system wants.  Banks wouldn’t mind if all you did was work and had to open your beat up leather wallet and pull out 99.99 percent of your net pay to service your debt.  In fact, this is probably their ultimate wish.

Where do people spend their money?

Source:  BLS

Housing by far is the largest line item above.  Yet categories like medical care and education are growing at rates that outpace the overall rate of inflation.  Ironically these are areas that are favorites of Wall Street.  As long as you can slap a loan onto something, the big investment banks will be there drooling over every penny they can tack on.

There was a time when paying off your mortgage was a good thing.  We have a good number of Americans who own their home mortgage free:

Over 30 percent of homeowners in the U.S. own a home with no mortgage.  Yet these are typically people from an era that allowed them to pay down their mortgage even with a modest income.  How likely is it that someone in say a state like California who bought a home at $500,000 with a $70,000 income is going to pay off that home?  They’re not going to do it so that is why in the chart above you see distress levels off the charts.

Even if we look at current metrics for 3 of the largest states, we find that debt is not necessarily a good thing:

California and Florida both had major home price appreciation and relied heavily on the housing bubble.  Both areas have seen bubbles pop.  The difference however is that Florida prices have come down to more reasonable levels.  California prices are still too high.  A reasonable metric is 3 times annual household income for home prices (both Texas and Florida are close to that range).  California is still out of that range.  So why are economic problems still deep?  Because current income data will be lower when Census data comes out in September and that is not reflected above.

The ability for Wall Street to turn many things into a commodity has allowed them to gamble and speculate on the well being of middle class Americans.  Housing prices would not have gone into a massive bubble without banks pushing other people’s money out the door.  Wall Street is good at taking risk when their money is not at stake.  They are fine taking the biggest risk since they know the U.S. taxpayer will be on the hook eventually for their irresponsible decisions with a large safety new.  Do you think banks would have loaned out of their own treasury like they did if it was their money on the table?  Of course not.  Yet if something isn’t changed then middle class Americans are going to find it harder and harder to stay afloat while debt starts coming down over them like a tsunami.

It is time to break the chains from the Wall Street banks.  Split them up.  There is no need to have commercial and investment banking comingled.  The banking needs for most Americans are simple.  Why mix it up with banks that now operate like hedge funds and take needless risk?  If there is no change, people are going to start seeing more and more of their paycheck going to servicing debt and guess who ends up with that money in the end?

My Budget360

Too bad our government oligarchs are so far removed from the plight of the common man, they neither see this nor would they care if they did.  The following is from the AR15 Forum. 

Well the SHTF for me. This Independence Day I find myself contemplating just how far this nation has fallen.

After years of success owning my own small business, the shit has finally hit the fan for me and I’m infuriated. I’m sharing this as a warning because it reflects the larger problems in this country.
Here’s how this went down:

It’s 2008; I’ve doing business with our local branch of LaSalle Bank for years and my company and credit rating are top notch. LaSalle is part of the community and treated us well. Both myself and many of my clients have their operational credit lines with this bank. In 2007 Bank of America buys out my bank; and in 2009 they assume control over my branch. BOA fires everyone I had a working relationship with, assigns me a new account manager that’s not even in my state, the new account manager immediately audits the small business loans. We pass audit, but several clients do not and are put out of business by BOA. This causes the local small business community to loose money off the unpaid accounts receivable from the bankrupt companies; making our books record losses. BOA got their money of course.

BOA after buying major banks like mine, claims to be too big to fail. Obama’s TARP 2, was designed to increase bank lending but instead had the opposite effect. The government cash allowed BOA call in their outstanding debts in order to consolidate their wealth. We were immediately re-audited. The bank pulled our credit line without negotiation or option to appeal, even though we had never been a day late in payments and had flawless credit scores. BOA gave us two shitty options:

1.Either pay back the entire outstanding balance immediately in a lump sum.
2.Pay it back monthly with interest on short repayment schedule.

The economy is quite slow at this point, and we lost a lot of money on the clients that BOA bankrupted the year earlier, and without the credit line we were no longer able to extend credit terms to our customers, greatly limiting our ability to close new jobs or advertize. Payback with interest was not an option, we simply couldn’t afford it. So we negotiated a lump-sum repayment. BOA knew exactly how much cash we had on hand both business and personally due to the audit, and they demanded it all, which turned out to be 60% of the total amount owed; BOA took it and ran.

We survived, just barely. But now the IRS is moving in for the coup de grâce.
The IRS claims the difference between the money BOA took from us (which was all of it) and what was owed is PROFIT, and now they are demanding their cut. The government is now going to bankrupt me.

This 4th of July I’m reflecting on how a free nation turned into an organized crime ring designed to suck every last dollar out of the self-employed. I’m starting to believe that this is an actual strategy that is designed to enslave the American public into complete dependence on the government and the corporations that fund their political ambitions.

15 years of work, savings, and effort all gone. Land of the free my ass…

I cannot repay my debts as now 147% of my income goes to taxes. My failure is going to cause other businesses to fail, and the cycle continues.

By Damon Vrabel

The gap between the truth vs. the lies that pass for truth in the media has never been so wide. But living a lie is very destructive, so it’s important to cross this gap. Today I want to clear up one of the most important lies reinforced by the media–the idea that we have sovereign countries.

No doubt most of you have heard of the sovereign debt crisis that so many countries are facing. We hear endless economists, reporters, and billionaire hedge fund raiders talk about it. But the phrase they use is fictitious. It is a fabrication of the Ivy League, Wall Street, and erudite periodicals like the Financial Times of London. Sovereign debt is an impossibility. It cannot exist.

It seems ridiculous to point this out, but sovereign debt implies sovereignty. Right? Well, if countries are sovereign, then how could they be required to be in debt to private banking institutions? How could they be so easily attacked by the likes of George Soros, JP Morgan Chase, and Goldman Sachs? Why would they be subjugated to the whims of auctions and traders?

A true sovereign is in debt to nobody and is not traded in the public markets. For example, how would George Soros attack, say, the British royal family? It’s not possible. They are sovereign. Their stock isn’t traded on the NYSE. He can’t orchestrate a naked short sell strategy to destroy their credit and force them to restructure their assets. But he can do that to most of the other 6.7 billion people of the world by designing attack strategies against the companies they work for and the governments they depend on.

The fact is that most countries are not sovereign (the few that are are being attacked by CIA/MI6/Mossad or the military). Instead they are administrative districts or customers of the global banking establishment whose power has grown steadily over time based on the math of the bond market, currently ruled by the US dollar, and the expansionary nature of fractional lending. Their cult of economists from places like Harvard, Chicago, and the London School have steadily eroded national sovereignty by forcing debt-based, floating currencies on countries. So let’s start being honest and stop describing their debt instruments as sovereign.

We long ago lost the free market envisioned by Adam Smith in the “Wealth of Nations.” Such a world would require sovereign currencies, i.e. currencies that are well-regulated rather than floating, and an asset rather than an interest-bearing debt. Only then could there be a “wealth of nations.” But now we have nothing but the “debt of nations.” The exponential math of debt by definition meant that countries would only lose their wealth over time and become increasingly indebted to the global central banking network.

So thanks to debt-based, free-floating currencies, the “wealth of nations” transitioned to the “debt of nations” which is now transitioning to the “death of nations.” The new world economic order with one currency, one banking system, one government, and one integrated corporate empire is on the horizon. Perhaps that’s a good thing, but if it were, why would the establishment concoct oxymorons like “sovereign debt” instead of telling the truth? That’s my only goal here–I think people can be trusted with the truth. Lies harm not only the population hearing them, but also the powerful people telling them.

Those powers have the best salesmen in the world, so why don’t they just sell the population on the truth? Apparently they don’t think you’d like it. Well now you have it. And it’s coming unless countries follow Iceland’s lead and recover their sovereignty. The choice is ours.

CSPER