FedUpUSA

Archive for August, 2010

When they hear the word deficit, most Americans immediately think of the U.S. government budget deficit which is rapidly spiralling out of control.  But that is not the only deficit which is ripping the U.S. economy to shreds.  In fact, many economists commonly speak of the “twin deficits” that are destroying the U.S. financial system.  So what is the “other deficit” that they are referring to?  It is the trade deficit.  Every single month, we buy much more stuff from the rest of the world than they buy from us.  That means that every single month there is a massive outflow of wealth from the United States.  Every single day, America becomes just a little bit poorer as Americans continue to run out and fill up their shopping carts with cheap plastic crap from China and dozens of other emerging economies.  Not that trade is a bad thing.  Trade can actually be a very good thing.  But the gigantic trade imbalances that the United States has been running for years are absolutely bleeding us dry.  Unfortunately, our politicians have just stood idly by as each month we continue to transfer massive amounts of wealth out of the United States.

The U.S. Commerce Department recently announced that the U.S. trade deficit increased by 18.8 percent in June to $49.9 billion.  Most analysts had expected the figure to be somewhere around 41 to 43 billion dollars.

In the month of June, imports rose to approximately $200 billion while exports fell to about $150 billion.

So can we afford to have a net outflow of 50 billion dollars each and every month?

Of course not.

We had so much wealth as a nation that we could afford to do this for a while, but the reality is that if this keeps up the rest of the world will eventually drain us dry.

So just how dangerous is the trade deficit?  Well, world famous investor Warren Buffett once put it this way….

“The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”

But very few Americans talk about the trade deficit.

Why?

Number one, it is because our education system has become so dumbed down that most Americans (especially among the younger generations) do not even know what the trade deficit is.

Number two, most Americans are so obsessed with frivolous things such as American Idol, Dancing With The Stars, Lady Gaga and their favorite sports teams that they could care less about thinking about real issues.

But they should be thinking about foreign trade, because it is literally destroying the nation.

What we have done is we have allowed the monolithic predator corporations that dominate our economy to slowly but surely move their operations to countries such as China and India where labor costs less than a tenth of what it does here.  In the process, executives at those predator corporations are earning huge “performance bonuses” while millions of hard working middle class Americans are losing their jobs.

It is time to wake up.  Have you ever wondered why it is so hard to find a decent job out there right now?  Well, there is a good reason.  The giant predator corporations have decided that they don’t really need us anymore.

Once upon a time, great American companies provided great American jobs for great American workers.  We created the biggest middle class in the history of the world and great industrial cities like Detroit, Michigan were the envy of the world.

But have you been to Detroit lately?

One of the greatest cities in the United States has become a hellhole.  The mayor says that nearly half the people there are out of work.

So what happened?

Did the giant corporations who used to make stuff in Detroit stop making stuff?

No, they are still making lots of stuff.

They just aren’t making their stuff in Detroit anymore.

Now, the truth is that it is really easy to jump on Detroit.  It is a city that has been mismanaged for decades.  But Detroit is far from alone.

All throughout the “rust belt” you can find other Detroits.

At this point many of you may be thinking that people living in places like that should just move.

That may be good advice, but the truth is that what has happened to Detroit is going to be happening everywhere.  It is going to come to your own neighborhood soon enough.  The giant predator corporations are going to continue to try to outsource and offshore every job they can.

Your job may be next.

Perhaps you should start learning about the trade deficit.

Perhaps you should start asking your representatives about it.

Just look at what all of this “free trade” and “globalism” did to our trade deficit between 1991 and 2005…..

Are you troubled by that chart?

You should be.

The U.S. economy is bleeding and the top politicians from both political parties act as if they could really care less.

What do you think is going to happen if tens of billions of dollars continue to pour out of the United States month after month after month?

The economic prosperity that we have all been enjoying is not guaranteed to last forever.

The system of world trade that has developed over the past few decades has provided us with gigantic mountains of cheap plastic crap, but it is not a good system for America or for middle class American workers.

Someday we will look back in horror at how incredibly stupid it was to ship our manufacturing base, our jobs and our prosperity to China.   

But the American people have made their choices.  They allowed the politicians to convince them that NAFTA, GATT and the WTO would be wonderful things for Americans.

They didn’t listen to the warnings about what would ultimately happen to our jobs and our economy.

They didn’t take the time to get educated about foreign trade and the exploding trade deficit.

So now we all get to pay the price.

The Economic Collapse

Aaron Task has a nice interview with former bank regulator William Black on our “Really Stupid Strategy” to Hide Bank Losses

109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine’s Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, “well above the $15.33 billion prepaid assessments for all of 2010.”

The situation is likely even worse than the FDIC portrays, says William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City.

“The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn’t have remotely enough funds to pay for it,” he says.

William Black with Aaron Task Video

Partial Transcript

AAron Task: Should we be surprise there are not more bank failures?

William Black: Not Surprised,we should be upset there are not more bank failures. The industry has used its political muscle to get Congress to extort the financial accounting standards board to gimmick the accounting rules so that banks do not have to recognize their losses.

Aarron Task: In practical terms, what does the gutting of that rule mean for the banks?

William Black: Capital is defined as assets minus liabilities. If I get to keep my assets at inflated bubble values that have nothing to do with their real value, then my reported capital will be greatly inflated. When I am insolvent I still report that I have lots of capital.

Aaron Task: You are saying the FDIC is intentionally keeping foreclosures down because it knows it does not have enough money to pay off depositors who are insured by the FDIC?

William Black: That is correct and that is going to make ultimate losses grow. It also means we are following a Japanese type strategy of hiding the losses and we know what that produces – a lost decade, which is now two lost decades. Your listeners and viewers if they are stock types, look at the Nikkei. It lost 75% in nominal terms and has stayed that way for 20 years. I real terms it lost 85% of its value. This is a really stupid strategy. And it’s ours.

Aaron Task: You can just keep kicking this down the road and have stagnant economic growth?
William Black: Geithner’s original estimate was $2 trillion and of course things got much worse that their original estimates. The IMF estimates were in the $3 trillion range. So, there are trillions of dollars of unrecognized losses under these guy’s scenarios. There is a huge slug, far more than they can pay for. What they are doing instead is these stupid subsidies for the biggest banks, with essentially no political oversight. It works, for the banks but it’s really bad for the economy. It diverts moey from small businesses, large businesses, and entrepreneurs.

Aaron Task: What does it say to you that Tim Geithner and Larry Summers are still on the job?
William Black: Well I said it from the beginning, Geithner and Summers were selected and promoted, and the same is true with Bernanke, because they are willing to be wrong and have a consistent track record of being wrong. That’s useful for senior politicians but disastrous for the country.

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

Most Americans realize that having a job is a prerequisite to gaining entrance into the middle class.  If you work hard enough, chances are you would have access to some of the things promised to the middle class; access to affordable housing, a good education, and the ability for some sort of retirement.  That ideal has been thrown out the window over the last few decades while the expansion of banking has created a cycle of boom and bust bubbles.  The American labor force has been weakened from every angle while banking profits have soared beyond the rate of inflation (or any other measure for that matter).  In fact, over the past decade average Americans are doing much worse adjusted for inflation.  The defined contribution plan or pensions has given way to 401k/403b plans that push people into gambling on the casino known as Wall Street.  Job protection is weaker than we have seen since the end of the Great Depression.  Yet we are told that the economy is good without a solid job market?

If you want to put this into perspective take a look at this chart:

Source:  Minneapolis Fed

This is as bad of a recession as we have had in our generation.  The employment market has been broken down piece by piece.  If you think of the 1990s and the technology boom, the employment market seemed to be bustling and growing at a rapid pace.  That is, until companies realized they could offshore jobs and pay overseas workers one-fifth or less for the same kind of work.  Then the decade of 2000 came along and everyone was making money gambling in the housing market.  The unemployment rate fell to record lows as everyone that wanted a job pretty much had access to one (even though wages were stagnant debt masked this major problem).  When that bubble burst, typical American workers were thrown under the bus for the sacrifice of the banking sector once again.  Ultimately that is the problem.  From the start of the recession back in late 2007 the entire focus has been on protecting banks and keeping home prices inflated to keep banks propped up.  Home prices fell while bigger banks consolidated power and became more powerful.  What should have occurred was a focus on creating jobs to ensure a vibrant middle class in the U.S.  That question never appeared anywhere for policy discussion.

Here is another perspective on how bad the job market is:

With the latest jobs report we realize that employment growth is weak to non-existent in many sectors. The jobs that do come back are lower paying jobs in many cases.  A recent article talks about the difficulty of employers to hire people back at lower wages:

“(Slate) What gives? Employers these days seem taken aback when highly qualified, experienced people fail to rush to apply for the openings they post. The article supplies several possible explanations: For jobs that require specialized skills, there simply might not be enough qualified applicants; employees accustomed to working at higher-paying office jobs aren’t eager to take lower-paying jobs at truck stops and restaurants; some of the unemployed might prefer collecting a few hundred dollars per week in unemployment benefits, while they last, to working a job that pays $8 per hour.”

Though I agree with some aspects of the article, what they fail to focus on is lower level financial positions and construction work for example has been decimated in this massive housing bubble.  These jobs are not coming back.  Did many of those tech jobs ever come back after the tech boom and bust?  Of course not.  Many of these jobs won’t be coming back, at least anytime soon, because we have built way too many homes and have inventory for years to come.  So to expect that these better paying finance jobs (i.e., mortgage broker, personal banker, real estate agent, financial analyst) or construction jobs to come back might be premature.  The article goes on to focus on why some of the lower paying jobs sit empty:

“In theory, given the high level of unemployment, huge numbers of enthusiastic, qualified workers should be flocking to all the openings that are available, even if the wages aren’t fantastic. In this kind of climate, you should accept the offer you get and be happy with it. And for many jobs, that might make sense. Going from making $80,000 after being downsized from a local law firm to making $70,000 at one in the neighboring office building might be a bummer but would be manageable. Taking a 15 percent pay cut to stay on at the restaurant that just went bust might make sense. But the labor market isn’t a perfectly efficient one. Most companies, especially small ones, hire from local labor pools. And if you’re in an area where the population is stagnant, declining, or aging, the numbers may be working against you. If jobs require people to commute a great distance or to move themselves to another state, or to another hemisphere, employers may find they need to sweeten their offers.”

This is not realistic thinking.  The median household income in the U.S is $52,000 and has gone down further in this recession.  To think there will be $70,000 jobs that are plentiful in this market is not going to happen.  Unless you work on Wall Street, try going out there and demanding a higher wage and see what happens.  The fact of the matter remains that 4 out of 10 Americans work in low paying service sector jobs and this sector is growing.  The article basically confirms the continuing erosion of the middle class.  For manufacturing jobs, this has been going on since the 1970s:

We have grown by leaps and bounds with population but the actual number of nominal workers in manufacturing has fallen by half since the 1970s.  These were good paying jobs that provided access to the middle class.  The banking propaganda would lead you to believe that as long as you work in the service sector and give your money to some Wall Street broker that after 30 years, you too will have a little nest egg stashed away.  How has that turned out with the current casino?  Jobs in construction have also tanked in this recession:

You’ll notice after every recession above, construction jobs jump back in a v-shape when the recession ends.  We are nowhere close to that and given the glut of commercial real estate and residential real estate, it is likely to remain depressed for years to come.  Banks will continue to raid the taxpayer’s wallet and make sure they get their keep even though they are largely the most responsible party in this economic calamity.  When the propaganda hits from investment banks, just look at the facts and where the jobs are (or in this case, where they don’t exist).

My Budget360

Banks will get the biggest benefit from an Obama administration housing program designed to help unemployed homeowners escape foreclosure.

Housing experts expressed concern that banks, not homeowners, will be helped by the White House’s $3 billion funding infusion — $2 billion from the Treasury Department and another $1 billion from the Housing and Urban Development Department — going to those states hit hardest by the housing market crash and unemployment.

“Giving money to the banks isn’t what the government should be doing right now,” said Dean Baker, co-founder of the Center for Economic and Policy Research.

“I’m not a big fan; it’s ill-conceived,” he said.

The basic principle is to help struggling homeowners but with so many people underwater on their mortgages the new funding is unlikely to do much good, Baker said.

“You need to make sure that someone benefits from the program other than banks,” he said.

Baker suggested that if the government is going to provide up to $50,000 in loans over the course of two years to those struggling homeowners that the money should be used for any of their needs, not just to pay the mortgage.

He said banks could offer a program that would allow homeowners to rent their home back from the bank at a lower monthly rate than their mortgage payment for up to five years, providing some security for those struggling to make monthly payments.

The arrangement would provide lenders with a real incentive to negotiate with homeowners because they don’t want to be landlords.

If the recently announced program is expected to work there has to be a reasonable expectation that at the end of the two-year program homeowners will have some equity in their property.

“If that’s not the case, then it’s not worth it,” he said.

He said he’d be “very surprised” if the vast majority of those who take advantage of the program don’t eventually lose their homes.

Foreclosures were up 4 percent in July with 325,229 filings, a nearly 10 percent increase over the same month in 2009, according to a report from RealtyTrac, a group that tracks foreclosure filings.

David Abromowitz, senior fellow at the Center for American Progress, said the main problem with the funding is that lenders will benefit without requiring any concessions or matching of the federal aid.

“My concern is what are we asking from lenders who are going to get the benefits source to pay those loans for 24 months,” he said.

Under the program, lenders don’t have to make principle reductions on loans or major modifications, he said. Lenders should also be required to make concessions and possibly even match funding.
“Banks also should be required to share in the burden being faced by homeowners,” he said.

Despite his reservations with the funding, he emphasized that with millions facing foreclosure, the fragile economy and a slowing economic recovery, “anything that slows or stops foreclosures is good.”

“It’s targeted well toward people facing a temporary situation when they can’t pay their mortgage because of unemployment,” he said.

Still, the challenge is difficult as federal officials try to find ways to get the economy to turn the corner and pick up pace.

“No one piece is going to turn the tide,” Abromowitz said. “But this certainly could help in the housing market.”

Under the federal program, Treasury will direct the $2 billion to the “Hardest Hit Fund” created earlier this year, while HUD will create a new “Emergency Homeowners Loan Program” that will provide zero-interest loans of up to $50,000 for two years. The funding will be divided up among 17 states and the District of Columbia.

The funding allocation announced last week is the third payout for the housing program, pushing the cost of the program to $4.1 billion.

Nevada, Arizona and Florida posted the worst foreclosure rates in July, with Nevada reporting the nation’s highest foreclosure rate for the 43rd straight month.

Five states accounted for more than 50 percent of national total — California, Florida, Illinois, Michigan and Arizona.

Four of those states will get part of $3 billion from the Treasury and Housing and Urban Development Department to help unemployed homeowners stave off foreclosure.

At $476 million, California gets the largest share while Florida will receive about $239 million, Illinois gets $166 million, Michigan $129 million and Nevada is set to receive $34 million under the program.

John Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute, said “the most important thing is the strengthening of the economy overall.”

“What’s happened so far hasn’t been very helpful,” he said about the administration’s past efforts.
The Obama administration had tried several different avenues to stem foreclosures but hasn’t made much headway.   About 530,000 homeowners, or more than 40 percent, have dropped out of the Making Home Affordable program.

“There’s an open question of whether this will work particularly well,” Weicher said.

He said maybe just getting money to people to help them make their mortgage payments may be more successful than other programs.

Republicans have argued that it puts taxpayer money at risk, and the special inspector general for the $700 billion Troubled Asset Relief Program is auditing the program.

“It’s troubling that just weeks after the SIGTARP assailed the administration for its lack of success and transparency in managing their signature mortgage-relief program, they have ignored the IG’s warnings and are committing even more money in a failed program that ultimately isn’t helping those who need it the most,” Rep. Darrell Issa (R-Calif.) told The Hill.

Issa, ranking member on the House Oversight and Government Reform Committee, said “if the administration were serious about helping the jobless keep their homes, they would be advancing policies that would create jobs and address the root causes of the housing crisis – Fannie Mae and Freddie Mac.”

The Hill

This probably qualifies as the best news I’ve heard in over a year.  I give it two 

CNBC is losing viewership practically on a daily basis, yet they have the key to turning that all around, if they’d only give Rick Santelli his own show….