Mish's Global Economic Trend Analysis

Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote

noreply@blogger.com (Mike Mish Shedlock) — Thu, 09 Feb 2012 21:40:00 +0000

Germany's "Official Denial"

If you seek confirmation that Germany is actively trying to force Greece out of the Eurozone, strong evidence appears in the form of an "Official Denial"

Please consider Merkel Says Won't Force Greece Out of Euro

German Chancellor Angela Merkel said on Tuesday she did not want to see Greece being forced out of the euro, warning that this would have "unforeseeable consequences."

"I will have no part in forcing Greece out of the euro," she said in response to a question from a Greek student at a meeting with young people in a Berlin museum.

"We don't do it to make things difficult for people, what would be our interest in doing that? But we want to reach a point where Greece can, with European help, live off its resources," said Merkel.

"Nobody wants to force reforms on them from outside," she said.

"Official Denial" Theory

For a discussion of the "official denial" theory, please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

Cede Budget Sovereignty Roadblock

Right in line with "official denial" theory, Germany started placing as many roadblocks as possible on Greece.

On January 27, Merkel demanded Greece to Cede Sovereignty to Eurozone "Budget Commissioner".

Unfortunately for Germany, French president Nicolas Sarkozy shot down the idea. However, Germany would not let it drop and two days ago Merkel floated a similar idea disguised as a Spaghetti-O.

Spaghetti-O Roadblock

For details of the Spaghetti-O loop proposal, please see New Merkozy Proposal "I will Give You Money If You Give It Right Back"; Mathematical Scam to Prevent CDS Triggers

Schäuble Starts Salami Tactics

In addition to the Spaghetti-O loop, Eurointelligence discusses the "Salami Roadblock".

According to Financial Times Deutschland, Wolfgang Schäuble now wants the Bundestag to vote only on a fraction of €30bn out of the total cost of the second Greek rescue package of €130bn. He is supported by the finance ministers of the Netherlands and Finland who met as part of the secret meeting AAA-rated ministers. The reason for this unexpected move is that the coalition has reason to fear that the general exasperation about the lack of progress in Greece made it uncertain that it would be unable to get the necessary parliamentary for the whole package. Also the coalition wants to keep up maximum pressure on Greece. In Brussels the Berlin, the move was greeted with surprise and irritation, the paper reports.

Finance Minister Wolfgang Schäuble Calls For Vote
Courtesy of Google Translate, please consider Finance Minister Wolfgang Schäuble Calls For Vote

Greece is waiting for € 100 billion - but in the coming days, the federal government wants to release a maximum of 30 billion. This announcement Schäuble irritates the Euro Group.

The federal government wants to delay the comprehensive aid package for Greece. Finance Minister Wolfgang Schäuble (CDU) announced in the coming days initially provide only 30 billion euros to cover for banks, which suffered a cut debt. The release of an additional € 100 billion envisaged for the salvation of Greece to the Bundestag will not until further submitted to a vote.
Greece should get even more money?

Thus, Germany could once again gain time - either to wrest Greece in the meantime, further cost-cutting efforts, or even prepare a subsequent bankruptcy

Greek Deal Done?

Earlier today we heard Greece accepted a deal. Not so fast. The Washington Post reports German FinMin: Greek deal on spending cuts appears to not yet fulfill bailout conditions

That title was the entirety of the article.

IMF Says No Deal

Zero Hedge reports Greek Deal Done? Not So Fast Says IMF

IMF SAYS IT'S NOT FORCING AUSTERITY ON GREECE AS TALKS CONTINUE - BBG
RICE SAYS IMF "WELL AWARE HOW DIFFICULT' IT IS FOR GREECE - BBG
IMF'S RICE SAYS IMF MINDFUL OF `HARDSHIPS' IN GREEK PROGRAM - BBG
RICE DECLINES TO SAY WHAT IMF SHARE OF NEXT GREEK LOAN WILL BE - BBG
IMF SAYS 'PRIOR ACTIONS' LIKELY TO BE REQUIRED BEFORE FUND OK OF NEW GREEK LOAN PROGRAM - DOW JONES

Read that first bullet point carefully. We now have an official denial from the IMF. However, it is of secondary importance because it pertains to austerity measures and not a eurozone exit.

Also read the last bullet point closely. Now the IMF is placing roadblocks.

Zerohedge jumps to conclusions regarding the last bullet point "By the way, dear US taxpayer, the IMF - that's you."

My take: Congress is not going to allocate any money for this boondoogle.

Greece Forcefully Seeking to Dump Greece

In spite of denials, it is quite obvious Germany wants Greece out of the Eurozone. However, France and other countries do not. The IMF appears to be siding with Germany, and that is a big change.

If there is a deal, don't expect it to last. Greek elections are coming up, and even if they halt those elections (quite likely if a deal is reached), Germany will simply place more and more demands on Greece as soon as Greece misses budget targets (almost immediately).

Why These Games?

Germany seeks to absolve itself of any guilt for what happens to Greece. It wants Greece to make the exit choice, while placing as many roadblocks as possible to force Greece to do just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan Machine Orders Drop 7.1%, Exports Down 3 Consecutive Months; Predicted Growth or Predicted Mirage?

noreply@blogger.com (Mike Mish Shedlock) — Thu, 09 Feb 2012 17:49:00 +0000

Bloomberg reports Japan Machine Orders Fall More-Than-Estimated 7.1% as Yen Climbs

Japan’s machinery orders fell at the fastest pace in three months in December as a faltering global economy and gains by the yen dimmed the outlook for exporters.

Bookings, an indicator of capital spending, decreased 7.1 percent from the previous month, the Cabinet Office said in Tokyo today, after surging 15 percent in November. The median estimate of 29 economists surveyed by Bloomberg News was for a 5 percent decline.

Japan’s exports fell for three straight months through December as European leaders grappled with the debt crisis that is driving the euro region into a recession. Spending may rebound as earthquake reconstruction work kicks in and today’s report showed companies forecasting a 2.3 percent increase in orders this quarter.

Japan’s lower house of parliament on Feb. 3 approved Prime Minister Yoshihiko Noda’s 2.5 trillion yen ($32 billion) recovery package from the earthquake and tsunami, the fourth supplementary budget since the disaster. The government forecast in December that Japan’s economy will grow 2.2 percent in the year starting April after a projected 0.1 percent contraction this fiscal year.

The International Monetary Fund estimates that Japan’s economy will grow 1.7 percent this year, compared with a likely 1.8 percent expansion for the U.S. and an estimated 0.5 percent contraction for the euro area.

Predicted Growth or Predicted Mirage?

Spend enough money and you can get GDP to rise. But what about that deficit to the tune of 230% of GDP?

To solve the deficit problem, Japan proposes massive tax hikes. What would tax hikes do for consumer spending? If Japan does pass tax hikes, it could strengthen the Yen. What would a strengthening the Yen do to exports?

Simply put, the estimated growth is a mirage, if it happens at all, and increased government spending is going to cause other problems.

For further discussion, please see Japan Faces Moment of Truth: First Annual Trade Deficit Since 1980; New Trend or Simply the Tsunami Effect?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit

noreply@blogger.com (Mike Mish Shedlock) — Thu, 09 Feb 2012 07:26:00 +0000

Joe Weisenthal writing for Business Insider reports Consumer Credit Demolishes Expectations, Grows $19 Billion.

It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit

Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists.

This chart from Reuters' Soctty Barber basically tells it all.

The data on which that chart was produced was the Consumer Credit - G.19 government report.

Demolishing the Revolving Credit Side of the Story

Lance Roberts of Streettalk Live demolishes the revolving credit side of Weisenthal 's story (a $4 billion December rise) in an excellent perspective Consumer Credit and the American Conundrum.

Demolishing the Non-Revolving Credit Side of the Story

My job is to demolish the non-revolving side of Weisenthal's story, and it's an exceptionally easy task to do.

Non-Revolving credit rose $11.8 billion in December. However, $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked).

Here are some charts I put together stripping out federal government loans.

Non-Revolving Loans Minus Government Loans

Non-Revolving Loans Minus Government Loans Detail

True Bounce in Percentage Terms

Note that the year-over-year "bounce" has not even gotten back to the zero-line in spite of exceptionally easy comparisons.

Middle-Aged Borrowers Pile on Student Debt

Reuters reports Middle-Aged Borrowers Pile on Student Debt

Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma (CreditKarma.com). That group saw its school debt burden increase by a staggering 47 percent, according to the analysis.

The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon.

Negative Payback on Retraining

The benefit of going back to school at age 49 is likely negative.

My friend "BC" comments:

The payoff for 40- and 50-somethings taking on debt to change occupations or trying to find jobs in "health care" or "education" and compete with Millennials trying to secure similar positions is low or negative.

Statistically, the benefit to "education" occurs between ages 14 and 22, where one goes to high school and university. Obtaining an MBA, law degree, or another graduate degree after age 26-28 historically has not resulted in a net benefit in terms of job/career prospects or wage/salary income; and this has become particularly the case since the late '90s.

In other words, the vast majority of people running up debt at universities, community colleges, and for-profit technical schools are wasting their time and money, as well as directing scarce resources to the "health care" and "education" sectors that don't need more misallocation further driving up costs.

Needless to say, there is no precedent in US history for middle-aged unemployed, underemployed, or unemployable Americans running up debt in an economy that has not created a net new private sector full-time job per capita in at least 10 years.

Fewer Nonfarm Employees Now Than December 2000

Here is one key chart (of many) from Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics?

Total Nonfarm Employees

There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth?

Retraining Scam

Job retraining is scam perpetrated by for-profit universities, fueled by statements from Obama regarding re-training people for new jobs.

Brick-layers are told they can be "chefs", take $10,000 courses and the universities call it a "success" if they land a job "in their field" at McDonald's. Unemployed roofers are led to believe they can become Java programmers, and they waste collective $billions trying. Meanwhile out of work Java programmers are told to take up a trade like roofing or auto mechanics.

The cost of education keeps rising because Obama (like Bush before him), keeps adding to the student loan program when the entire student loan scam really needs to be shut down.

Why Does the Scam Roll On and On?

No politician wants to stand up and tell the truth: Retraining is a waste of money and the odds of launching a new career in other than a low-paying job requiring few skills is simply not likely.
For-Profit universities pad politicians' pockets

One can always find success stories, but in aggregate, retraining middle-aged workers is a net waste of money.

To Paraphrase Joe Weisenthal

Now, to paraphrase Joe Weisenthal: "It's hard to think that the economy is NOT going back into a recession with numbers like these." The difference in viewpoint is understanding what the underlying numbers really represent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Will Le Pen Be on the Ballot Against Sarkozy and Hollande? Does it Matter?

noreply@blogger.com (Mike Mish Shedlock) — Thu, 09 Feb 2012 00:30:00 +0000

Not many people realize this but in spite of polling anywhere between 16% and 22% in recent election polls, Marine Le Pen might not be included on the French presidential ballot. The reason is Le Pen needs 500 signatures by elected officials supporting her campaign. Le Pen says she only has 350.

I had been aware of this for some time but figured she could scrape up 500 signatures from a pool of 47,000 or so bureaucrats eligible to sign. Perhaps not.

Please consider Le Pen attacks all sides over 'pathetic' poll

Far-right Front National leader Marine Le Pen slammed a poll in a Sunday newspaper that asked people how they would vote if she was not on the ballot paper.

The prospect could be a reality if Le Pen fails to get 500 elected officials to sponsor her candidacy.

Under French law, any presidential candidate needs 500 signatures from elected representatives in at least 30 different departments across the country or in France's overseas territories.

Le Pen told RTL radio on Thursday that she was still 150 short of the target number and risked being excluded from the vote on April 22nd.

A Sunday newspaper, Journal du Dimanche, published an opinion poll at the weekend showing that the fortunes of current president Nicolas Sarkozy improve markedly without Le Pen in the picture.

In that case, Sarkozy and his Socialist rival François Hollande would each get 33 percent of the vote.

Current polls give the president around 24 percent compared to Hollande's 30 percent. Le Pen is just behind on around 20 percent, threatening to overtake the president and secure a place in the final two-way runoff on May 6th.

Le Pen told a meeting in Toulouse on Sunday that the scenario in the poll was "the dream of the political class."

"If I'm not there will you vote for Nicolas Sarkozy, for François Hollande?" she said, as the audience booed and whistled.

"There is your response to their pathetic opinion polls and pathetic manipulations," she said.

Does it Matter?

The answer is not straight forward. It depends on the meaning of "matter".

Le Pen was not going to win. If she is off the ballot, More first-round votes will go to Nicolas Sarkozy than François Hollande.

However, in the second round of voting (recall French elections are two-stage with the top two candidates competing in a runoff), Polls show Hollande beating Sarkozy by 58% to 42% margin. Even if she bumped off Sarkozy, she would not win. Nor will Sarkozy win.

Thus from a candidate point of view, one might say it does not matter.

However, the process is certainly a defeat of democracy. Nothing is served by a process of keeping her off the ballot. Indeed, if she is as bad as Sarkozy claims, then voters should recognize that as well.

The 36,000 mayors and 11,000 other bureaucrats eligible to vote have to do so publicly. Le Pen has a challenge into the French Supreme Court on the secret ballot issue. That case will be heard on February 22 as noted by Reuters in French far right say big parties muzzling democracy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bernanke Finally Says Something That Seems to Make Sense "8.3% Unemployment Understates Labor Weakness"; Critique of Bernanke's 2014 Pledge; Perfectly Useless Projections

noreply@blogger.com (Mike Mish Shedlock) — Wed, 08 Feb 2012 18:19:00 +0000

I nearly always disagree with Bernanke on monetary and fiscal policy. Specifically, the Fed ought not have a monetary policy for the simple reason the Fed should not exist.

Indeed, the Bernanke Fed and the Greenspan Fed have both proven beyond a shadow of a doubt they do not know what they are doing, where the economy is headed, or anything else of relevance in setting monetary policy.

However, on rare occasions, Bernanke can say a few snippets that seem to make complete sense. For example, Bernanke Says 8.3% Unemployment Understates Labor Weakness.

Federal Reserve Chairman Ben S. Bernanke said the 8.3 percent rate of unemployment in January understates weakness in the U.S. labor market.

“It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said today in response to questions at a hearing before the Senate Budget Committee in Washington. “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or in part- time jobs.

“The 8.3 percent no doubt understates the weakness of the labor market in some broad sense,” Bernanke said today, while noting that some job indicators are improving.

Fed officials last month estimated that the world’s largest economy will grow 2.2 percent to 2.7 percent this year, according to the central tendency estimate, while the unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter.

Disagreements Already

I agree with most of the above analysis, but the more Bernanke or the Fed talks, the quicker a disagreement is bound to arise. The problem above is the Fed's growth projection. The Fed could be right, I just highly doubt it.

Let's put it this way, Bernanke has been seriously wrong so many times on economic projections that perhaps by accident he finally gets one correct.

"8.3% Unemployment Understates Labor Weakness"

Some things are so obvious even Bernanke seems to understand. His labor weakness statement is one of them.

I said similar things on Monday, with far more details and reasons, in Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics?

Please click on link for a series of charts showing just how weak the recovery has been and just how understated the unemployment rate is.

Critique of Bernanke's Pledge to Hold Rates to Zero Through 2014

The strange thing here is that although Bernanke seems to understand the likeliness of further economic weakness, most analysts and writers are tooting the horns of an economic recovery, while chastising Bernanke for promising to hold rates low until 2014, as if the decline in unemployment rate is meaningful.

I disagree with the Fed's rate decision for a different fundamental reason: a bunch of academics chasing their tails cannot effectively set interest rates (only the market can). That simple fact has been proven is spades.

Analysis of Bernanke's "Labor Weakness" Statements

Unfortunately, Bernanke's statements offer surprising little economic insight.

For example, please consider the Fed's estimate that the "unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter".

Perfectly Useless Projection

Let's assume Bernanke is correct. Is that a meaningful projection?

The short answer is the projection, even if totally accurate, is perfectly useless. Let's analyze "why? in light of Bernanke's estimate that it takes 125,000 jobs a month to keep up with demographics (birthrate plus immigration).

Three Cases In Which Unemployment Rate Stays Flat

Is the Fed projecting 125,000 per month in line with expected demographics?
Is the Fed expecting 200,000 jobs a month with a rising participation rate that holds the unemployment rate steady?
Is the Fed expecting 50,000 jobs a month with a falling participation rate that holds the unemployment rate steady?

It would be more useful (assuming there is any use to Bernanke's statements which is certainly debatable) to know just what he is thinking because those three scenarios are vastly different in terms of economic significance, even though they all project the same 8.2 percent to 8.5 percent unemployment rate prediction.

In other words, the Fed's projection, even if accurate, is totally useless, not that anyone should be paying any attention to what he says in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spotlight China: Electricity Consumption Drops Sharply; Central Bank Vows Housing Support; Oil Imports From Iran Fall Again; Asia Real-Estate Bull Turns Bearish

noreply@blogger.com (Mike Mish Shedlock) — Wed, 08 Feb 2012 08:54:00 +0000

Inquiring minds are tired of the spotlight on Greece (believe me I am as sick as anyone of Groundhog Day).

Given the world will not end when Greece defaults, whether in March of this year or next, let's turn our attention to a country far more significant.

Chinese Electricity Consumption Fell Massively In January

Business Insider reports Chinese Electricity Consumption Fell Massively In January, And The Chinese New Year Doesn't Explain It

Ultra-brief note here from Nomura's Zhiwei Zhang :

According to the China Securities Journal, China's electricity consumption in January fell by 7.5%. We estimate this may be the first decline since 2002 (excluding the financial crisis period in 2008-09), indicating industrial production may have slowed sharply in January.

They don't have any more answers here at the moment, except they say that if you're thinking it has something to do with the New Year, then you are incorrect.

For now it's just one of those things that make you go hmm...

China Pressures Iran On Oil Prices

China has stepped up the pressure on Iran in the face of Europe's oil embargo. Business World reports China's Oil Imports From Iran Reduced Again

China will reduce its crude oil imports from Iran for a third month, sources said today, as the two remain divided over payment and price terms, although they plan to meet again for talks as early as this week.

China is the top buyer of Iranian oil and also the fastest expanding major oil importer, putting it in a strong position to negotiate for better terms after it more than halved imports for both January and February.

The reductions for March-loading supplies will be largely the same, if not deeper, than the previous two months, industry officials with direct knowledge of the supply situation told Reuters.

China, which buys around 20 percent of Iran's total crude exports, cut its January and February purchases by about 285,000 bpd, just over one half of the total average daily amount it imported in 2011.

China Central Bank Vows Housing Support

In a sure sign that property prices in China are crashing faster than the Chinese government wants, China Central Bank Vows Housing Support

China’s central bank pledged support for first-home buyers as a crackdown on real-estate speculation threatens to trigger a property slump in the world’s second- biggest economy.

Officials will increase support for construction of affordable housing and ensure that “loan demand from first-home families” is met, the People’s Bank of China said on its website yesterday evening.

Policy makers aim to limit public discontent by making housing more affordable, with Vice Premier Li Keqiang, a possible contender to be the next premier, describing the distribution of low-cost homes as a key test of government credibility. At the same time, the ruling Communist Party aims to avoid the economic “hard landing” that Fitch Ratings said yesterday is a key global risk.

“The government doesn’t want to see home transactions slide too fast -- that may hurt economic growth,” said Lu Ting, a Hong Kong-based economist at Bank of America Corp.

Too Late to Prevent a Hard Landing

Given the massive size of China's property bubble, it's far too late to prevent a crash landing. The only way to prevent crashes is to not let bubbles get so big in the first place.

Asia Real-Estate Bull Turns Bearish

MarketWatch reports Asia Real-Estate Bull Turns Bearish

Asia’s gradually cooling property markets aren’t the great buys they once were, according to one expert in the region, who says better bargains can be found in the depressed markets in the West.

Tim Murphy, the Hong Kong-based chief executive officer of property advisory group IP Global, says he’s telling his clients to look more towards New York and San Francisco for deals, although London also ranks well in terms of rental yield in some projects.

Back home in Asia, the only market he likes is Malaysia, where average prices in its big cities are about one-tenth of those in Hong Kong, while its commodity-backed economy should outperform its export-dependent regional rivals.

What’s changed? Murphy says the ongoing debate in Asia during the current soft patch is being driven by inflation concerns that were absent during previous periods of economic weakness.

Specifically, he sees a “role reversal” from the regional crisis that unfolded in 1997, as fresh barriers to foreign investment and speculative activity are now enacted across many parts of Asia, while hard-hit cities in the West are offering tax breaks and other concessions as incentives to invest.

Today, governments around the region, and particularly in China, are wary that too much liquidity could stoke a U.S.-style housing bubble and inflict long-term damage upon the economy, he said.

“Singapore and Hong Kong are two of the freest economies in the world, yet you pay more in stamp duties [real-estate transaction taxes] now than you would in London, because they are very worried about the markets continuing to overheat,” Murphy said.

Infomercial for Property-Advisory Firm IP Global

As much as I agree with the headline message, I have to comment the same message could have and should have been said years ago. Given the illiquid nature of real estate, one cannot sell on a dime when the market turns.

"We see what’s happening as a great chance for Asians to buy overseas at the moment,” Murphy said, adding that in December he opened an office in Shanghai to tap the growing interest among China’s newly wealthy for overseas homes.

Given the entire two-page article was about Murphy and his firm, I have to ask "Was that an news story by MarketWatch or an infomercial for Tim Murphy?"

Regardless, anyone who bought in China in the last couple years and has not sold yet is now likely trapped.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Postponed Due to "Political Suicide"; Flag of Germany Burned, Could This be a Trigger?

noreply@blogger.com (Mike Mish Shedlock) — Wed, 08 Feb 2012 02:41:00 +0000

Greece bailout talks that were postponed on Friday to Saturday, then Saturday to Sunday, then Sunday to Monday, then Monday to Tuesday. They have been postponed again, this time for a reason that makes perfect sense "Political Suicide".

The New Work Times reports Greece Puts Off Decision on Austerity Measures Amid a Strike Protesting Them

As thousands of Greeks walked off the job in a general strike on Tuesday to protest stringent new austerity measures, there was a growing sense that the country was reaching a critical point in its efforts to survive the debt crisis.

Greek political leaders postponed for yet another day a decision on an austerity package — including 20-percent cuts to base pay for workers in private companies and a loosening of public sector job protections — in exchange for the billions in loans Athens needs to prevent a default in March. With elections looming as soon as April, the parties fear that they are essentially being told to commit political suicide to save the country.

If that indeed is the case, analysts here say, it is not clear what will replace them, making Greece a potential laboratory for a volatile mix of austerity, populism and social unrest.

Not that the old order, widely derided as corrupt and inefficient, is likely to be deeply mourned.

For most Greek voters, the two larger parties participating in the fragile tripartite coalition of Prime Minister Lucas Papademos — the Socialist Party and the center-right New Democracy — were already drained of political capital before the debt crisis by decades of self-interest and corruption. That has now been capped by two years of unrelenting austerity that has hurt most Greeks but has ultimately failed to revive the system, or even change it in any significant way.

With unemployment at 19 percent, businesses closing, credit scarce and the proposed new wage cuts expected to further decimate the shrinking middle class, the hard left and extreme right are rising.

With Greek popular anger at the country’s foreign lenders rising — a German flag was burned in front of Parliament at a demonstration on Tuesday — the Socialists and New Democracy are treading a fine line: They want to push back against the troika enough to regain some political capital — and keep more Greeks from falling into poverty — but not push hard enough to precipitate a default.

If the Greek political leaders do not agree to accept the new austerity measures in the coming days, Greece will run out of time to complete a broader deal for the voluntary write-down of Greek debt before a bond comes due on March 20. If Greece cannot pay the bond, it will default, which could result in its leaving the euro zone, among other ill effects.

Most Greeks say they have lost what little faith they had in the political system. “None of the parties we’ve been voting for have anything to offer,” said Vassiliki Karanasou, 42, an employee in a biscuit factory north of Athens who was participating in a demonstration outside Parliament on Tuesday.

Eventually, Will Come a Time

I keep repeating Eventually, Will Come a Time When

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Flag-Burning Trigger

For Greece, "eventually" may be at hand. The only thing missing is a party leader willing to stand up and tell Germany to go to hell.

That is not a comment on the desirability of telling Germany to go to hell, rather a comment that is likely to happen. However, the austerity measures imposed by Germany and the Troika cannot possibly work, even though the worker reforms are badly needed.

What is causing the revolt? The sad irony of this mess is the flag-burning and latest strike is over the one thing that is needed: work rule reform.

The flag-burning incident could easily be a trigger.

All sides handled this very poorly straight from the get-go. Greece would have been better off defaulting 2 years ago and the EMU and ECB much better off to simply let it happen. Now Greece is totally and completely trashed, having agreed to austerity measures that cannot work and resisting work rule changes that can work, but only years down the road.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Banks Paying as Much as $35,000 Cash to Homeowners in Short Sales; Why and How Many?

noreply@blogger.com (Mike Mish Shedlock) — Tue, 07 Feb 2012 18:53:00 +0000

In a short sale, banks forgive the difference between what is owed and the sale price of the house. Recently, however, banks have started giving cash back to the sellers. So far, the programs are a drop in the bucket. There are millions of pent-up foreclosures and JP Morgan is doing 5,000 short sales a month, hardly enough to make a dent.

Still, "short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic."

Please consider Banks Paying Cash to Homeowners to Avoid Foreclosures

Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.

Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.

“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. (JPM) said in the Aug. 17 letter obtained by Bloomberg News.

Tom Kelly, a JPMorgan spokesman, declined to comment on the company’s incentives.

“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” he said in an e-mail.

Lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property, according to RealtyTrac. In New York, a state that requires court approval for repossessions, it takes about four years to foreclose on a home and then resell it, the company said.

Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales.

What's Really Going on Here?

If the answer is "it's faster, quicker, cheaper" than foreclosures, then why don't we see more of them, lots more of them?

Could it be these are the real problem loans with clouded titles, questionable practices by lenders, or huge numbers of written complaints by borrowers? Add to that a dearth of willing new borrowers and I think you have the answer.

Addendum:

Reader Bruce comments ...

Hello Mish

The only solution, is as you have said, to speed up the process. Unfortunately, this begs the question, how much more insolvency can the banks sweep under the carpet?

All the best Mish! fight the good fight!

Not to mention the fact that politicians are against foreclosures and have delayed, at great cost, stepping up the foreclosure process.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rise of the High Frequency Trading Robots

noreply@blogger.com (Mike Mish Shedlock) — Tue, 07 Feb 2012 17:56:00 +0000

I do not know enough about algorithm-driven High Frequency Trading to comment intelligently other than to say 100% without a doubt that someone is making a huge pile of cash from HFT or it would not be done.

You can watch an animated GIF that chronicles the rise of the HFT Algo Machines from January 2007 through January 2012 by clicking on the link.

The GIF starts out slow and boring, but watch the progression through the end.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

New Merkozy Proposal "I will Give You Money If You Give It Right Back"; Mathematical Scam to Prevent CDS Triggers

noreply@blogger.com (Mike Mish Shedlock) — Tue, 07 Feb 2012 07:59:00 +0000

The Merkel proposal for Greece to cede budget sovereignty to a European commissioner has finally been trashed. In its place is a Spaghetti-O loop proposal to give Greece money only if Greece earmarks the funds to immediately pay back bondholders.

Please consider Greece bail-out funds could be split

European officials are insisting any new Greek bail-out programme specifically earmark funds to pay off remaining holders of Greek debt, giving lenders the freedom to withhold aid to Athens without risking a messy default that could reignite panic in financial markets.

Under a new Franco-German plan that senior European officials said is likely to be included in a new Greek rescue, eurozone officials would create an escrow account to accept new bail-out funding instead of paying it all directly to Athens as in the past.

The new fund would then ensure bondholders are paid off, while additional cash to run the Greek government could still be withheld if Athens did not live up to tough new reform demands.

Eurozone officials said they believed the escrow account would give European Union and International Monetary Fund lenders strong control over Greece’s use of bail-out funds without stripping Athens of its budgetary sovereignty

“This is a better idea than the proposal of a debt commissar,” said the senior French official. “It is more acceptable.”

Although the idea originated in Berlin, Nicolas Sarkozy, the French president, embraced it during a news conference with his German counterpart, Angela Merkel, following a joint cabinet meeting between the two governments in Paris. Ms Merkel also signalled her support, saying it would ensure “this money will be reliably accessible”.

Mathematical Nonsense

They give money to an intermediary
The intermediary gives it right back

The proposal is of course mathematical nonsense, at least in regards to the portion of money going straight back to the bondholders (most of it).

In regards to the portion that goes to Greece, I still have to wonder.

Creditors either give Greece the money or don't. Once again, there is little reason for the middleman unless they want the IMF to be the judge as to whether or not Greece is living up to the agreements.

Essentially, the EMU is taking 130 billion out of their wallet, putting 110 billion (or whatever) right back in their wallet and calling it 130 billion in "new funding".

The only thing that can be construed of as "new funding" is the additional amount that actually goes to Greece.

Why the Mathematical Farce?

I suspect the answer is to make it appear as if Greece is paying back debts, when it isn't.

Weren't dotcom and mortgage frauds based on the same methodology? In the case of dotcoms, intracompany arrangements were made to make it appear there were actual revenue flows when there weren't. In the case of housing, such maneuvers could be used to make it appear someone was making payments on their mortgage when they really weren't.

This setup is either mathematical ignorance or a scam to prevent triggering of credit default swaps. I lean towards the latter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics?

noreply@blogger.com (Mike Mish Shedlock) — Mon, 06 Feb 2012 21:57:00 +0000

Along with many others, I am pondering the latest employment numbers. Strong opinions are the norm.

Many are steadfast in their interpretations, some critically so, especially Bondad who blasted Zero Hedge in a scathing attack "No Rick Santelli and Zero Hedge, One Million People Did Not Drop Out of the Labor Force Last Month"

Does Bondad Have a Point?

The short answer is yes. I wonder if I escaped attack because of a statement in my post Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000 as follows:

Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low.

Emphasis in red as written, not added.

I could have, and should have expounded on the first sentence, even though I stick with what I said in the second sentence.

Bondad is generally a good guy and he also has the coolest dog in blogosphere, even though we fundamentally differ on politics.

Meet Bondad's Dog "Weimar"

Zero Hedge replied in Explaining Yesterday's Seasonally Adjusted Nonfarm Payroll "Beat"

Does Zero Hedge have a point?

Yes, even though he is scrambling hard to make it.

Been there. Done that. It happens. No one is perfect, certainly not me.

Trim Tabs has Firm Opinion Too

BLS Data Skewed?

Based on federal income tax receipts Trim Tabs asks Is BLS Data Skewed?

Our estimate of a slowly growing economy is based primarily upon daily income tax collections. Either there is something massively changed in the income tax collection world, or there is something very suspicious about today’s Bureau of Labor Statistics hugely positive number. We continue to check and recheck our analysis of income tax collections. We are aware that another service believes that incomes are growing faster than we do. So far we have not found any errors or discrepancies in our work, but if we do, we will let you know.

I keep repeating that the BLS refuses to use the data embedded in income tax collections to be able to report real time jobs and wages. Why does it refuse? Could the reason it refuses to use real time data on jobs and incomes be because perhaps this jobs number is politically motivated? The entire world is looking at US job creation as a proxy on how well Obama is doing? Could the Obama administration be pressuring its economist employees to create the best possible new jobs number?

Obamanomics?

Readers should know by now that I discount most conspiracy theories. It's not that I believe conspiracies don't happen, but rather those that do are quickly exposed. Paulson used a bazooka right out in the open to force Bank of America to merge with Merrill Lynch. Geithner and others are guilty as well. It was all very visible and quickly reported.

Is the BLS purposely manipulating numbers to benefit Obama? I rather doubt it. Someone would know and yap.

Yet, I have no explanation for payroll tax data. Some things do not add up, and it's best to look at things from more than one angle.

So let's take a closer scrutiny of the data to see what's happening.

The Case for Headline Payroll +243,000

Let's start off with the absolute best case anyone can make for the bullish jobs case.

The above chart is condensed from the January 2012 Non-Manufacturing ISM Report On Business®

ISM Questions and Answers

Was I surprised by the services ISM? Yes, I was.
Does it help explain the headline job number? Yes, it does.
Does it explain the unemployment rate? No, it doesn't.

There are still questions about seasonal adjustments, confirming data, etc. but those are relatively good ISM numbers.

Let's turn our attention to the unemployment rate.

Civilian Labor Force

The BLS labor force numbers seem suspect. The labor force is less now than when the recession ended 2.5 years ago.

Current Labor Force: 154,395,000.
June 2009 Labor Force: 154,730,000.

Based on trends, the labor force ought to be close to 160,000,000.

Boomer demographics can explain part of the "trendline failure", but not all of it. The US is adding work-aged population every year, just at a decreasing rate. In other words, the labor force should be rising, even if at a reduced rate (at least in theory).

What Rate?

In 2000, it took about 150,000 jobs a month to keep up with birthrate and immigration, Recently Bernanke stated the number is 125,000 jobs. Could it be lower? Certainly, but the number is not zero.

Total Nonfarm Employees

There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth?

Civilian Employment

Civilian employment is currently 141,637,000.
In May of 2005 civilian employment was 141,609,000.

Civilian Unemployment Rate

The recession ended in June of 2009. The labor force was 154,730,000. The Labor force is now 154,395,000. Is this credible? If it's not credible, then neither is the unemployment rate!

Unemployment Rate What If?

Labor Force 155,000,000 8.6%
Labor Force 156,000,000 9.2%
Labor Force 157,000,000 9.8%
Labor Force 158,000,000 10.4%
Labor Force 159,000,000 10.9%
Labor Force 160,000,000 11.5%

At a very modest labor force growth to 157 million (a mere 90,800 a month since the recession ended), the unemployment rate would be 9.8%.

Using Bernanke's estimate of 125,000 jobs a month, the labor force would be 158,480,000 and the unemployment rate would be 10.6%. Growing at the trend, the unemployment rate would be 11.5%.

Has Time Rewritten Every Lie?

To paraphrase Barbara Streisand) "Can it be all so simple then, or has time rewritten every lie?"

Are You "Really" Unemployed?

Link if video does not play: The Unemployment Game Show: Are You "Really" Unemployed?

Please play the video. It's hilarious.

In regards to the wild jump in "those not in the labor force" in relation to growth in overall population, the BLS notes "the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population."

Forced Retirement

The BLS argument may sound plausible but I do not buy it. Persons 55-62 will still generally be looking for a job. Even many older than 65 will still be looking for a job because they cannot afford to retire.

Instead, I propose a combination of three factors.

For reasons noted in the "are you unemployed?" video, people stopped looking for jobs and are not counted in the labor force. Yes, this is on purpose but it predates Obama.
Many people have exhausted 100 weeks of unemployment benefits and have no income coming in at all. Some in that category retired and are now gone from the labor force, skimping by on social security benefits.
Still others took part-time work and thus are considered employed.

Gallup Chimes In

Gallup reports that unemployment is 8.6% not seasonally-adjusted. That is close to the BLS number, but Gallup is based on those 18 and older while the BLS is 16 and older.

Otherwise, the sampling metrics are similar. The biggest difference appears in the actual count of underemployment (unemployed + those wanting a full-time job but only finding part-time work).

Please consider a pair of charts from the Gallup report U.S. Unemployment Up, to 8.6% in January

Percentage of US Workers in Part-Time Jobs, Wanting Full-Time Employment

Underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, surged to 18.7% in January. This is a worsening from the 18.3% of December but is still below the 19.0% of a year ago.

Total Underemployment

BLS Alternative Measures

click on chart for sharper image

The BLS "alternative" measure of underemployment is 16.2% (not seasonally adjusted) compared with 18.7% as surveyed by Gallup. As noted above, Gallup does not include results of those aged 16 and 17 while the BLS does (otherwise Gallup's numbers would be higher still).

Which set of numbers tells the better story? Here's a hint "It's not the BLS".

I will stick with what I have said on many occasions "People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low."

The reason is not a recount based on the 2010 census, nor is it purely demographics, nor is it Obamanomics. The reason is severe and sustained fundamental economic weakness, coupled with existing purposely-distorted definitions of what constitutes "unemployment".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Is Romney to Blame for Paying Low Taxes or is 72,536 Pages of Tax Code to Blame? What's the Real Solution? Thanks to AMT, Man Pays 102% Tax Rate

noreply@blogger.com (Mike Mish Shedlock) — Mon, 06 Feb 2012 19:08:00 +0000

I am not a fan of Mitt Romney. Thus I am not displaying bias when I say the ire over what Romney pays in taxes is misplaced.

Caroline Baum has an excellent article on Bloomberg today that points to real source of the problem: Never Mind the Tax Cheats -- Go After the Tax Code

Millionaires paying an effective 15 percent tax rate because their income is from investments? Blame the tax code. Carried interest, a form of income that accrues to hedge fund and private equity managers, taxed at the more favorable capital gains rate? The tax code's the culprit.

Yes, there are a lot of tax cheats out there who aren't playing by the rules. What Obama objects to -- Warren Buffett playing a lower effective tax rate than his secretary -- is ordained by the grotesque, 72,536-page tax code.

In researching a recent column, I went back to "The Flat Tax," published by economists and Hoover Institution fellows Robert Hall and Alvin Rabushka in 1985. They proposed a revenue-neutral flat tax of 19 percent. All income would be taxed once, and only once, at the same rate and as close to the source as possible. "Whenever different forms of income are taxed at different rates or different taxpayers face different rates," they write, "the public figures out how to take advantage of the differential."

Bingo. I'm no tax expert -- I have trouble gathering all the necessary information to take to the accountant once a year -- but I know enough to recognize that the tax code is the problem, not the folks who capitalize on its myriad of loopholes.

Whether it's a flat tax or a national retail sales tax, simpler is better: for each of us and for the economy overall. So the next time the president says he wants everyone to play by the rules, please tell him it's the rules that are broken -- not to mention the rule-makers.

Tax Law Keeps Piling Up

click on chart for sharper images

Image from Tax Law Pile Up

Are the Rules Broken or the Rule-Makers?

If one need collect taxes as close to the source as possible, the same can be said for the source of the problem. Congress cannot resist tinkering, with anything and everything.

The image above shows what 90 years of tinkering have done. Heck, from 1984 until now, 46,236 pages of tax code have been added.

There are breaks for mortgages, charitable deductions, hedge funds, the oil industry, home builders, and too many things to mention. Instead of fixing the problem at the source, Congress added an "Alternative Minimum Tax".

102% Tax rate?

New York Times reporter James Stewart says he was "dismayed" by his own tax rate as compared to Romney, so he invited readers to send e-mails disclosing their tax rates and circumstances. Stewart was "deluged with submissions".

One respondent, James Ross, a founder and managing member of Rossrock, a Manhattan-based private investment firm that focuses on commercial real estate and distressed commercial mortgages beat everyone hands down.

Let's pick up the story from there as reported by the NYT in At 102%, His Tax Rate Takes the Cake

“My entire taxable income, plus some, went to the payment of taxes,” Mr. Ross said. “This does not include real estate taxes, sales taxes and other taxes I paid for 2010.” When he told friends and family, they were “astounded,” he said.

That doesn’t mean Mr. Ross pays more in taxes than he earns. His total tax as a percentage of his adjusted gross income was 20 percent, which is much lower than mine.

That’s because Mr. Ross has so many itemized deductions. Since taxable income is what’s left after itemized deductions like mortgage interest, charitable contributions, and state and local taxes are subtracted, it will nearly always be smaller than adjusted gross income and demonstrates how someone can pay more than 100 percent of taxable income in tax. Mr. Ross must hope that his interest expense will pay off down the road and generate some capital gains.

How could Mr. Ross pay so much? I thought I was the victim of a perfect storm of punitive tax policies, but Mr. Ross’s situation is worse.

Like me, he lives and works in New York City, which all but guarantees a high tax rate. Nearly all of his income is earned income and thus fully taxable at top rates. (He said that’s not always the case, but given the recent dire condition of real estate, in 2010 he had few capital gains and his carried interest didn’t yield any income.) Unlike me, he can’t make any itemized deductions, which means his adjusted gross income exceeds $1 million, the level at which New York State eliminates all itemized deductions, except for 50 percent of the value of charitable contributions. Mr. Ross said he gave 11 percent of his adjusted gross income to charity.

That means Mr. Ross can’t deduct any interest expense on the money he borrows to finance his real estate investments, which is substantial, nor can he deduct any other expenses or other itemized deductions except for part of his charitable contributions. This means he pays an enormous amount in state and local taxes. Since those are among the deductions that are disallowed when computing the federal alternative minimum tax, Mr. Ross is in turn especially hard hit by the A.M.T.

Mr. Ross said he asked his accountant what he could do. “He said, ‘Fire everyone here and move to Florida,’ ” according to Mr. Ross. He employs 10 people in his New York office.

Seriously Inane Proposals

One extremely misguided soul proposed in a comment on my blog the other day that it would be "fair" if everyone paid the same percentage of their income for things.

Under this proposal, one would need to provide proof of income to buy anything. Then, those with $1 income would get everything for free because a percentage of $1 does not go far. Those who make a $million would pay $400 or whatever for a loaf of bread. Clearly this proposal is inane, yet such misguided ideas are likely behind the absurd complexity of the AMT.

Simple Solution

The simple solution is to scrap the tax code entirely and start all over, with a blank slate.

The only fair way to do things is for everyone to be treated equally. No breaks for homeowners, no alternative minimum tax, no graduated taxes just simple set of flat taxes.

Since we need to promote more savings, I would rather see a national sales tax as opposed to an income tax. Regressive? Nope. It does not have to be.

I propose no tax on food, medicine and medical supplies, shelter, and clothes. Since a huge percentage of income of the poor goes to food shelter and clothes, no one can scream "regressive".

Still, everyone would be treated equally, unlike say a mortgage deduction which only benefits homeowners. Everyone does eat, and need shelter.

How about a combination flat income tax and national sales tax, perhaps split 50-50 keeping the tax collection revenue neutral?

Those who "buy things" other than food, shelter, and clothes (notably the wealthy), would perforce pay a higher share yet everyone would be treated equally under the law.

Moreover, a sales tax is as close to the source as one can get. So is an income tax with no deductions.

What we cannot do is think 72,536 pages of tax code can be fixed. It can't. It's time to start all over with a blank slate and ideally 500 pages of tax code or less.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Huge Plunge In Petroleum and Gasoline Usage

noreply@blogger.com (Mike Mish Shedlock) — Mon, 06 Feb 2012 08:26:00 +0000

Inquiring minds are watching a plunge in Petroleum Distillates and Gasoline usage.

Reader Tim Wallace writes

Hello Mish

As I have been telling you recently, there is some unprecedented data coming out in petroleum distillates, and they slap me in the face and tell me we have some very bad economic trends going on, totally out of line with such things as the hopium market - I mean stock market.

This past week I actually had to reformat my graphs as the drop off peak exceeded my bottom number for reporting off peak - a drop of ALMOST 4,000,000 BARRELS PER DAY off the peak usage in our past for this week of the year.

I have added a new graph to my distillates report, a "Graph of Raw Data" to which I have added a polynomial trendline. You can easily see that the plunge is accelerating and more than rivals 2008/09 and in gasoline is greatly exceeding the rate.

An amazing thing to note is that in two out of the last three weeks gasoline usage has dropped below 8,000,000 barrels per day.

The last time usage fell that low was the week of September 21, 2001! And you know what that week was! Prior to that you have to go back to 1996 to have a time period truly consistently below 8,000. We have done it two out of the last three weeks.

The second graph once again shows the year on year change in usage of distillates. The Obama "stimulus" package and Fed monetary actions masked the underlying systemic problems.

The third and final graph shows the changes in usage off the peak year of 2007. Once again you can see the effect of the stimulus and how now we are heading below 2008/09 in an accelerating fashion.

Looking at these numbers I believe we are about to have a surge in unemployment - by the end of April latest, possibly as early as beginning of March.

Tim

Petroleum Distillates and Gasoline Usage in Barrels per Day

click on any chart for sharper image

Note that on a best curve fit, petroleum usage is back to 1997 level and gasoline usage is back to 2001 level. Moreover, as Wallace points out, two out of the last three weeks gasoline usage has dropped below 8,000,000 barrels per day.

Year-Over-Year Petroleum and Gasoline Usage (Compared to Peak Usage)

Note the trough of the recent recession, the rebound, and now a sudden plunge in gasoline and petroleum usage once again.

Decline from Peak Usage

A mild winter can explain part of the drop in petroleum usage (heating oil), but it does not explain the declines in gasoline usage or the overall trends.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Country Specific Blog Censorship by Google; Twitter Employs Censorship as Well; Echo Comments Not Working on Redirects

noreply@blogger.com (Mike Mish Shedlock) — Sun, 05 Feb 2012 22:53:00 +0000

Blog Redirects

Today I learned my blog is being redirected to another URL name in some countries. This is a new "feature" in Blogger that Google added beginning a few weeks back.

Instead of exposing a single "Blogger" to the world then censoring it to meet the requirements of local governments, Google decided to mirror content into country-specific domains then redirect users from foreign countries to the mirror associated with their country. If that country decides to censor something, it will somehow be noted on any page so the reader knows they're seeing a filtered view.

Readers can also try surfing to the original blog URL by appending /ncr (No Country Redirect) after the main name, such as

http://globaleconomicanalysis.blogspot.com/ncr

The above approach assumes a country doesn't filter on that pattern and block the request. For example: my blog is blocked in China so appending /ncr is unlikely to accomplish anything.

Google's Explanation

Why does my blog redirect to a country-specific URL?

Q: Why is this happening?
A: Migrating to localized domains will allow us to continue promoting free expression and responsible publishing while providing greater flexibility in complying with valid removal requests pursuant to local law. By utilizing ccTLDs, content removals can be managed on a per country basis, which will limit their impact to the smallest number of readers. Content removed due to a specific country’s law will only be removed from the relevant ccTLD.

Q: How will this change affect my blog?
A: Blog owners should not see any visible differences to their blog other than the URL redirecting to a ccTLD. URLs of custom domains will be unaffected.

Q: Will this affect search engine optimization on my blog?
A: After this change, crawlers will find Blogspot content on many different domains. Hosting duplicate content on different domains can affect search results, but we are making every effort to minimize any negative consequences of hosting Blogspot content on multiple domains.

The majority of content hosted on different domains will be unaffected by content removals, and therefore identical. For all such content, we will specify the blogspot.com version as the canonical version using rel=canonical. This will let crawlers know that although the URLs are different, the content is the same. When a post or blog in a country is affected by a content removal, the canonical URL will be set to that country’s ccTLD instead of the .com version. This will ensure that we aren’t marking different content with the same canonical tag.

Echo Comments Not Working on Redirects

I was unaware this was happening until today when readers in New Zealand and Australia informed me that comments were no longer working.

Sites With Lost Functionality So Far

The "key" within Echo's database that associates comments to a blog entry is the full blog URL (site name + post permanent URL).

Filtering off the language code alone is insufficient because for some reason Google changed the suffix for New Zealand from ".com" to ".co".

I will get an email into Google to see if they can implement a scheme to only add a suffix. Then I still need to get Echo to do something or alternatively write a Java script to strip off the language code.

Anyone using Echo with blogger is going to have these same issues.

Twitter Employs "Filtering" as Well

Tech Week Europe reports Google To Censor Blogger Sites On Country-By-Country Basis

Google follows Twitter’s lead and will use country-code top level domains to censor content as required.

Google has revealed that its Blogger service will now be able to block content on a country-by-country basis, just one week after Twitter announced that it would implementing a similar filtering strategy.

“Migrating to localised domains will allow us to continue promoting free expression and responsible publishing while providing greater flexibility in complying with valid removal requests pursuant to local law,” wrote Google on a help page. “By utilizing ccTLDs, content removals can be managed on a per country basis, which will limit their impact to the smallest number of readers. Content removed due to a specific country’s law will only be removed from the relevant ccTLD.”

Twitter’s decision to introduce this selective censorship attracted criticism from users last week, suggesting that the site was effectively aiding oppressive regimes squash freedom of speech. Google’s implementation has been lower key, and whilst critics will argue the same points, the company has emphasised that the measure will prevent blanket censorship of content whilst keeping them in line with the law.

The BBC reports that Google will initially roll out the changes to Australia, New Zealand and India, but plan to apply the measures globally.

More Tech Week "Tweet" Articles

Twitter Can Now Censor Tweets In Individual Countries

Twitter said that it must begin censoring tweets, if the company was going to continue to continue its international expansion. Twitter has been blocked by a number of governments, including China and the former Egyptian regime after it was used to ignite anti-government protests.

Twitter Faces Protest Over Censorship Move

Judge Rules Twitter Must Hand Over Account Data to Wikileaks Prosecutors

Big Brother is watching. However, it's too late to worry about 1984. The worry now is if the next stop is the Year 2525 where "Everything you think do and say is in the pill you took today".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Postponed Till "Tomorrow"; Juncker Issues ultimatum "Comply or Default"

noreply@blogger.com (Mike Mish Shedlock) — Sun, 05 Feb 2012 20:02:00 +0000

It's Groundhog Day once again as Greek crisis talks for debt deal pushed to Monday

Coalition backers held a five-hour meeting late Sunday with Prime Minister Lucas Papademos to hammer out a deal with debt inspectors representing eurozone countries and the International Monetary Fund — but again failed to reach an agreement.

Leaders of parties supporting the Greece's coalition government say crisis talks for massive new debt deals will continue Monday.

Juncker Issues ultimatum "Comply or Default"

The theater of the absurd continues for yet another day with Juncker's ultimatum: Comply or default

Jean-Claude Juncker, the head of the Eurogroup, warned Greece through an interview to a German magazine that it will either comply with its creditors’ requirements or default, as it should not expect any additional support from its peers.

Earlier, the head of the ruling coalition’s third partner, Giorgos Karatzaferis, stated in Thessaloniki that he would not tolerate any ultimatums.

"We need to examine whether the creditors' demands are in favor of growth for the sake of the Greek people, otherwise we will not get the support package. I am not going to sign up to that,» said the leader of Popular Orthodox Rally (LAOS).

This is beyond ridiculous. The EU and IMF Need to Stand Up and Announce "Too Late" Deal is OFF, then work with Greece to plan a return to the Drachma.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Groundhog Day: Allegedly "Only One Day Left" to Save Greece; LAOS Party Leader Rejects Ultimatum, Hands Out Drachma Coins to Fondly Recall Greece's Pre-Euro Days

noreply@blogger.com (Mike Mish Shedlock) — Sat, 04 Feb 2012 21:54:00 +0000

Greek default drama is much like the movie Groundhog Day. If you prefer a quote from Yogi Berra instead, then please consider It's déjà vu all over again.

Every day for weeks we have heard a "deal is close". Moreover, on multiple occasions at the end of the week we were informed Greece "had" to reach agreement over the weekend or Greece would default. Let's hope this time someone really means it.

Once again, Greece says faces 24-hour deadline to clinch rescue.

Greece has just one day left to strike a deal with impatient lenders and reluctant political party leaders on a 130 billion rescue plan before the country is pushed towards a chaotic default, its finance minister warned on Saturday.

In an apparent warning to Greek political leaders opposing key reforms, Finance Minister Evangelos Venizelos said the patience of European partners and the International Monetary Fund footing the bill for Greece's bailout was wearing thin.

Technocrat Prime Minister Lucas Papademos was due to continue talks with lenders on Saturday in a bid to clinch agreement before calling in the socialist, conservative and far-right party leaders in his coalition to seek their blessing.

That meeting of party chiefs, initially scheduled for Saturday, has now been put off until early Sunday afternoon, a government source said.

NOT BACKING DOWN

Athens' talks with its international lenders have stumbled over their demands, which include cutting labor costs by axing holiday bonuses and lowering the minimum wage - proposals vehemently opposed by Greek political party chiefs.

Greek officials have described the negotiations as tough, with the troika of European Central Bank, European Union and IMF lenders unwilling to yield an inch from their demands. Marathon negotiations ended without a deal on Friday.

"The troika is not backing down on wages, holiday bonuses and supplementary pensions," a Greek government official said.

"None of these issues have been resolved. They are all open and the onus is on political leaders."

The bond swap talks were now the easier part of the overall process to save Greece, Venizelos said earlier. Representatives for the banks and insurers were expected to continue talks in Athens over the weekend.

Increasingly frustrated with Athens' inability to enact the reforms needed to reshape the recession-hit Greek economy, foreign lenders have demanded proof of the country's commitment to spending cuts before doling out any more funds.

They have demanded extra spending cuts worth about 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defense and health spending.

They want all Greek political leaders - who are keen not to be linked directly with the painful reforms as they gear up for elections expected in April - to endorse the measures, irrespective of the outcome at the polls.

"Greek political leaders must offer their commitment to the program," said a source close to the lenders. "No more loans will be approved if they don't."

In the latest sign that coaxing political leaders into backing the reforms will be anything but easy, the leader of the far-right LAOS party, George Karatzaferis, rejected Venizelos' "ultimatum" to strike a deal by Sunday.

"We must go through every letter, every comma of the lenders' proposals and see whether they help the country and boost growth," he said at a Greek ceremony to celebrate the new year. "If the bailout doesn't suit us, we will not accept it."

At the traditional "pie-cutting" ceremony, Karatzaferis also gave away drachma coins to fondly recall Greece's pre-euro days -- a return to which many Greeks fear.

Please stop the madness. Bailouts to Greece cannot possibly work. Moreover, the world will not end on Monday if Greece exits the Euro, nor will the world end if Portugal and Spain do the same later this year or next.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Cost for Doing God's Work Declines from $13.2 Million to $9 Million

noreply@blogger.com (Mike Mish Shedlock) — Sat, 04 Feb 2012 10:45:00 +0000

Inquiring minds note a stunning drop in the price for doing God's Work. Last year Goldman Sachs CEO Lloyd Blankfein received a salary of a $600,000 as well as a stock bonus worth $12.6 million.

This year the base salary for doing God's work rose to $2 million, however, bonuses fell to a shockingly-low $7 million. The net effect is a decline from $13.2 million to $9 million.

That is a 30% reduction in the overall cost of doing God's work. Said Blankfein "Now I know how those in Greece feel".

For additional details, please see Goldman’s Blankfein Awarded $7 Million in Stock for ’11. Here is one key fact from the article.

The filings don’t include how much any of the executives have been awarded in cash bonuses. Blankfein received a $5.4 million cash bonus for 2010, his first since getting about $27 million in cash bonuses for each of 2007 and 2006.

Mercy!

How can the man survive a cut like that?

Inquiring minds just may be interested in the performance that merited $9 million (plus undisclosed cash compensation, if any).

GS 2011 Stock Market Performance

Said Blankfein when questioned about plunge in share price "This just goes to show you how difficult it is to do God's work. I earned every penny."

Mish note: the quotes of course are fictional, the rest of the story unfortunately is not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greek Leaders (All 3 Coalition Parties) Oppose New Austerity Measures; Words of the Day: "Hardball", Followed by "Meeting Cancelled" and the Always Popular "Meeting May be Scheduled Later in the Week"

noreply@blogger.com (Mike Mish Shedlock) — Sat, 04 Feb 2012 02:18:00 +0000

Shortly after Dutch finance minister, said "We want no further delays" came news of further delays. The reason: Greek political parties all refuse to go along with more austerity measures.

Please consider Greece’s leaders oppose new austerity measures

All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default.

Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue.

But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs.

In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent.

Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance.

“We want no further delays,” Jan Kees de Jager, the Dutch finance minister, said after the meeting.

The delays in Athens could give new momentum to officials in Germany, the Netherlands and Finland who have been agitating to abandon the cornerstone of the new bail-out – a €200bn bond swap in which private debt holders would accept losses of 50 per cent in the face value of their holdings. A full-scale default would allow Greece to write off all privately held debt.

The brinkmanship in Athens became so intense on Friday that a government spokesman was forced to deny reports that the acting technocratic prime minister, Lucas Papademos, was considering resigning if governing parties did not agree to the new measures.

Keyword of the Day is "Hardball"

In case you missed it here is the key phrase "EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent."

That was a pretty significant offer by Greece in the midst of an economic depression. There was no counter-offer, only a take-it-or-leave-it hardball.

For now, Greece said "Leave It" so you can add that to the words of the day as well. As I have said numerous times recently, Germany wants Greece out of the Eurozone. Those actions reinforce my opinion. Germany could easily have said a Greek wage freeze for three years and cut social security contributions by 10 per cent would suffice.

Minimum Wage

I am not a fan of minimum wage laws at all. However, let's ponder Germany's demand. A "25 per cent cut in the €750 minimum monthly wage" would take the minimum wage down to €562.5, roughly $739 a month.

Taxes

According to Wikipedia the following Greece Taxes apply.

Social Security Tax: 16%
VAT: as high as 23% (Category 2 goods 4.5%)
Income Tax: Progressive

I cannot find a precise description of Category 2, but eating out is category 1 and taxed at 23%. Minimum wage appears to avoid income tax.

The after SS-tax income at the proposed minimum wage is $621 a month or $7452 per year.

How far will a take-home pay of $7452 per year go?

Living Greece discusses Value-added tax (VAT) rates in Greece

Greece has the third highest rate of VAT in Europe
Second highest gas/petrol tax
Third highest tax on social insurance contributions
Fifth highest VAT on alcohol
Highest property tax
One of the worst corporate tax rates
Without the quality of living or competitiveness to match

Bear in mind that was from 2010.

On the assumption that everyone earning minimum wage is spending every penny of it, subtract another 10% to 20% in actual purchasing power.

Keep Talking Greece has a humorous (to those not from Greece) article on Greek VAT Insanity: 6.5% for Foreigners, 23% for Greeks

That Greece is an absurd country I knew the moment I decided to return from living abroad over some decades. But it was beyond my vivid imagination that I will have to experience this, day by day – and even moment to moment. With a decision that touches the limits of European constitution because of discrimination against the citizens of this hapless country, the Finance Minister announced that the increased VAT of 23% on catering goods will be paid only by the Greeks -meanwhile known also as money-spewing machines!

Earlier on Monday, Finance Minister Evangelos Venizelos clarified that the increased VAT from 13% to 23% will apply to restaurants, taverns, cafes and hotel restaurants. However if you buy an All-Inclusive package abroad, you will have a 6.5% VAT. Greeks who will buy similar packages in the country will pay 23% VAT.

The new increased VAT regulations are as complicated as they can be: there is a different VAT for consuming sitting or standing (restaurant/cafe), different for take away (but only if you take it yourself, not through delivery boy).

In short a pizza has four different VAT depending on whether you sit, stand, walk or lay (hotel room/all-inclusive).

Tortured to Death

The point of this discussion is not about minimum wage, but about absurd taxes on top of a reduction in minimum wages at a time the Greek economy is already imploding.

I am 100% in favor of work rule changes, pension changes, etc., but the tax hikes and tax structures are insane.

Furthermore, I fail to see how increased taxation and further austerity measures can possibly help Greece in the short-run. And by the way, the short run has now been extended to 2020 from 2013.

Greece is imploding. It's really too bad Greece did not exit the Eurozone three years ago instead of now smack in the midst of a depression.

Moreover, this is exactly what Spain and Portugal ought to be thinking about as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000

noreply@blogger.com (Mike Mish Shedlock) — Fri, 03 Feb 2012 17:09:00 +0000

Quick Notes About the "Falling" Unemployment Rate

In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.
In January, the Civilian Labor Force rose by 508,000.
In January, those "Not in Labor Force" rose by an amazing 1,177,000. If you are not in the labor force, you are not counted as unemployed.
Participation Rate fell .3 to 63.7%, taking out a 1984 low
Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low.

Jobs Report at a Glance

Here is an overview of today's release.

US Payrolls +243,000 - Establishment Survey
US Unemployment Rate Declined .2 - Household Survey
Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours
The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November.
Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

January 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) January 2012 Employment Report.

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Actual employment is about where it was in 2001.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

The January employment gained in total nonfarm brings the number of net jobs recovered since a trough in February 2010 to 3.2 million jobs, or 36 percent of the 8.8 million jobs lost between January 2008 and February 2010.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat. The average increase in 2011 was of 152,000 per month, barely enough make a dent in the unemployment rate.

Nonfarm Employment - Payroll Survey Monthly Details - Seasonally Adjusted

Average Weekly Hours

Index of Aggregate Weekly Hours

In January 2012 the index of aggregate weekly hours stood 4.8 percent below its peak in January 2008.

Average Hourly Earnings vs. CPI

"Success" of QE2 and Operation Twist

Over the past 12 months, average hourly earnings has increased by 1.9 percent; while in December, the CPI-U had a 12-month percent change of 3.0 percent.
Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

Birth Death Model Adjustments For 2012

Birth-Death Notes

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.

That is an amazing "achievement" to say the least.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status

click on chart for sharper image

Part-time status shows little improvement vs. a year ago.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

click on chart for sharper image

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 15.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.

In January, those "Not in Labor Force" rose by a staggering 1,177,000. Things are much worse than the reported numbers indicate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Providence Rhode Island Faces "Bankruptcy by June" says Mayor; Pension Plan 32% Funded (and About to Get Worse)

noreply@blogger.com (Mike Mish Shedlock) — Fri, 03 Feb 2012 15:12:00 +0000

Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city. Please consider Providence is facing bankruptcy

Rhode Island's capital city will be in bankruptcy by June if it doesn't get help resolving its financial crisis.

That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30.

The budget shortfall was projected at $110 million last March, when Taveras declared a "category five" financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid.

"Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe," the mayor said. "However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget."

Taveras said the city's retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city's pension liability "into the stratosphere" by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.

"These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year," Taveras said, calling the increases "raises," not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions.

Taveras's office released a list showing that the city's highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 if he lives to the age of 100.

Specter of Central Falls

The tiny city of Central Falls became the first Rhode Island municipality ever to file for bankruptcy last August. East Providence's finances were also placed under formal state oversight in November. Woonsocket and Pawtucket recently disclosed surprise deficits, and two-thirds of local pension plans in the state are "at risk."

Retired police officers and firefighters in Central Falls recently reached a tentative agreement with former R.I. Supreme Court Justice Robert Flanders, the city's receiver, that would see their pension payments reduced by as much as 55% if state lawmakers agree to augment that with supplemental payments over the next five years.

Taveras urged Providence's retirees to learn a lesson from what happened in Central Falls, warning he would find a way to reduce the cost of their pension benefits "one way or another."

As of June 30, Providence's city pension system was 32% funded with a shortfall of $901 million, and the city also had a $1.2 billion unfunded liability for retiree health benefits, according to its most recent audit. The entire city budget is roughly $619 million this year.

Unions, Politicians to Blame

Check that out: The entire budget is $619 million, and the city has a shortfall of over $2 billion.

Taveras is barking up the wrong tree arguing "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe".

It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras' comments ring true.

Absurd Benefits

This statement says it all "Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 [annually!] if he lives to the age of 100.

To double-check my $796,871 annually claim, I used this Compound Interest Calculator.

At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510.

With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void.

Restoring Equity

I would like to see a bankruptcy judge reduce McLaughlin's pension to the average of his last 10 years' salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable.

Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren't for Central Falls).

More Cities, Major Cities Will Follow

Without even looking at the details, it's easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter.

Moreover, it's only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them.

As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers.

Bankruptcy is the only way to shed absurd union contracts and pension benefits.

Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say "no deal". It is taxpayers' best hope of settling the mess in one shot without devastating tax hikes.

Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

EU says "Strict Application of Budget Rules Doesn't Make Sense"; Spain Kicks Off the Year Destroying 9,000+ Jobs a Day, 283,700 for Month; Impossible Dream

noreply@blogger.com (Mike Mish Shedlock) — Fri, 03 Feb 2012 08:22:00 +0000

On January 30, 25 of 27 nations signed the Merkozy accord calling for strict budget discipline and "quasi-automatic sanctions" for nations that violate budget rules. Only the UK and Czech Republic refused to sign.

Following that ceremonious signing it took precisely two days for European bureaucrats to propose "Application of the rules in a strict manner in the face of a downturn doesn’t make sense".

Spain Poses Six-Pack Rules Challenge

Please laugh along with Spain poses six-pack rules challenge

Spain’s deteriorating economy poses the first challenge to Brussels’ commitment to enforce tough new budget rules intended to repair credibility with financial markets and ease the debt crisis.

“Application of the rules in a strict manner in the face of a downturn doesn’t make sense,” said Andre Sapir, a senior fellow at Bruegel, a Brussels think-tank. “One has to find a compromise.”

Olli Rehn, the economics commissioner, threatened to “fully use this powerful set of new tools from day one”.

But the EU’s executive arm is also sympathetic to Spain’s plight. Following a meeting in Brussels on Monday with Mariano Rajoy, the Spanish prime minister, José Manuel Barroso, the European Commission president, suggested that a debate was now under way on whether to make some accommodation for Madrid.

“Efforts should be made to contain the deficits for 2012,” Mr Barroso told reporters. “However, it would be convenient now to have a discussion ... about this situation.”

It also risks drawing the ire of fellow member states, which have already been exposed to tough consequences because of the six pack.

Belgium, for example, earlier this month cut more than €1bn from this year’s budget in a frantic weekend exercise in order to avoid fines – an experience that led a top minister to lash out at Mr Rehn. Meanwhile, Hungary was threatened last week with a freeze on its EU development funds for next year if it does not comply with the rules.

But such considerations may be overwhelmed by the severity of Spain’s situation. Even local business leaders who favour harsh curbs on public spending now say that sticking to the original 2012 deficit target of 4.4 per cent of gross domestic product is almost impossible and risks plunging the economy into depression.

Precise Targets Go Out the Window Already

Mr Rajoy’s ministers have recently been careful not to reaffirm their commitment to the precise 2012 deficit target of 4.4 per cent of GDP – although they reiterate their austerity pledges in general terms – and are evidently hoping that the Commission and Angela Merkel, the German chancellor, will accept the need for softer targets provided Spain launches its promised economic reforms.

“Once Merkel has the certainty that these [southern European] countries are doing the right thing, the stance of Europe may be relaxed,” says the banker. The head of another leading Spanish business said: “The important thing is that the path to a lower deficit should be credible and coherent.”

It should not take too long for Portugal and Ireland to find it "convenient" to also request a variance in the "Application of the rules in a strict manner".

Spain Kicks Off the Year Destroying 9,000+ Jobs a Day

Courtesy of Google Translate from El Pais, please consider The economy started the year destroying more than 9,000 jobs a day

As reported to the Ministry of Employment, Social Security membership fell by 283,700 people in January, about 9,000 jobs a day. The average number of employed fell below 17 million (16,946,237) for the first time since the beginning in 2005.

Courtesy of Google Translate from Libre Mercado, please consider Employment has Worst Start Since Fateful Year of 2009

Spain Social Security Membership

[Mish comment: Judging from the January numbers (all negative), the data is not seasonally adjusted.]

The total number of employed fell below 17 million (16,946,237) for the first time since 2004.

Very negative balance

According to the Foundation for Applied Economic Research (FEDEA), "after four years of crisis, employment continues to be destroyed, and what is worse, the intensity of this destruction increases."

Meanwhile, according to the Association of Large Temporary Work (Agettes), the January data show that "we continue down the wrong path. We are witnessing a dramatic scene again that, unfortunately, is unknown to us because we have four years assisting new negative record. The global economic situation continues to drown our perspective, while our own labor market tightens further the bit oxygen that remains."

Spain Unveils EUR 50bn Bank Sector Clean-Up

EU Business reports Spain Unveils EUR 50bn Bank Sector Clean-Up

Spain's government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion).

The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008.

According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened.

The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets.

The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said.

Impossible Dream

There was 176 billion euros in problem loans last summer. What is total now, 250 billion?

Banks are somehow supposed to come up with $50 billion in capital (when? how?) after which they merge struggling banks and via some undisclosed magic process "the clean-up will be quick and deep" forming viable banks.

This is an easy call, especially in light of employment trends: That plan is doomed and Spain is in deep trouble.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

noreply@blogger.com (Mike Mish Shedlock) — Fri, 03 Feb 2012 04:46:00 +0000

American Airlines filed for bankruptcy in November 2011. Here is the question at hand: Will Taxpayers Be On The Hook For American Airlines' Pensions?

American Airlines needs $18.5 billion to cover its pension promises to current and former employees, but it has only set aside $8.3 billion.

American Airlines is asking the bankruptcy court for permission to drop its pension plans. If the court allows that, the plans will be taken over by the Pension Benefit Guaranty Corp, a government agency that takes over pension plans for failed companies.

The PBGC works like an insurance company. Firms that are backed by the PBGC pay premiums to the agency. Those premiums are supposed to pay for the agency's costs, so taxpayers don't have to pay. But in recent years the premiums haven't been enough — the agency's funding shortfall is currently $26 billion.

The PBGC, for its part, is pushing back against American's request. Here's a statement from PBGC Director Josh Gotbaum:

"Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that."

If the PBGC does wind up on the hook for American Airlines pensions, it would be the largest single claim on the agency since it took over United Airlines pensions plans in 2005.

Three Simple Questions

Why should taxpayers be on the hook for private pension plans?
Why are airlines bankrupt?
What is the equitable solution?

1A. Clearly taxpayers should not be on the hook.
2A. Airlines are bankrupt because of over-regulation and absurd contracts and benefits negotiated with unions
3A. The key to answering question 3 is contained in the answer to question 2. Unions negotiated pension befits that bankrupted the companies. Thus it is unions who are largely responsible and it is unions, not taxpayers nor other corporations who should pay the price.

Equitable Solution Details

With the above guiding principles, the equitable solution is straight-forward.

American Airlines needs $18.5 billion to cover its pension promises but it has only set aside $8.3 billion. That is a shortfall of $10.2 billion on $18.5 billion. In other words, a haircut of 55% on pension benefits will fix the problem.

Interestingly, that is nearly the same percentage haircut as just as happened in the Central Falls, Rhode Island Bankruptcy.

Some might protest that airlines should have been setting aside more money for their pensions all along. True enough. But the result would have been bankruptcy sooner, and it does not change who is to blame.

It's best to look on the bright side. A 55% haircut is far less than is going to happen to Greece.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jim Grant is Ron Paul's Pick to Head Fed, Gingrich's Pick to Study Return to Gold Standard; Grant Waits for Call from Mitt Romney; One Fundamental Mistake by Grant

noreply@blogger.com (Mike Mish Shedlock) — Thu, 02 Feb 2012 21:18:00 +0000

MarketWatch comments on the politics of Getting Back to the Gold Standard

The legendary Wall Street writer, publisher of Grant’s Interest Rate Observer, has been mentioned by two of the rivals for the Republican presidential nomination. Newt Gingrich said if elected president, he’d name Grant to help run a commission looking at a possible return to the gold standard. And Ron Paul said, if elected president, he’d go all-in and name Grant — one of Wall Street’s best-known gold bugs — as the new chairman of the Federal Reserve.

As Paul wants to abolish the Fed, it would doubtless be a temporary post. But Grant says he found the offer — which came out of the blue — very flattering.

Alas, both men are trailing in the race to front-runner Mitt Romney. “Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when I called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”

He may have to wait some time. Romney, a conventional Wall Street figure, is unlikely to tap him anytime soon.

Jim Grant is a paradox: A legendary, well-established figure on Wall Street who is not part of the Wall Street “establishment.” He is a raging contrarian. A writer from a more elegant age, Grant is also a scathing critic of “too big to fail” banks and the whole Wall Street racket — with its privatized profits and socialized losses.

He is best known these days — to Gingrich and Paul, among others — for his long-standing support for the gold standard. The world has moved in his direction. In 12 years, gold has risen from a derided relic trading at $250 an ounce to a hot investment at $1,750. Everywhere paper currency systems are under challenge. In 2008, the world discovered that you can’t just manufacture endless wealth out of thin air, as the gold bugs had long argued, and it is still struggling with the realization.

Many people will think of the gold standard as a relic of a bygone era, something as old-fashioned as bow-ties and stuffed animals. Grant, when we met, argued the reverse. He says paper currencies and our current monetary system are the ones that are out of date.

“The anachronism is today’s system,” he says. We have a “command and control, top down” system whereby the Federal Reserve imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, oddly at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be.

I asked him, whimsically, what he’d do if he actually were to be named chairman of the Fed. He said he’d begin by communicating to the public why the present system was so wrong, and needed to be changed. He’d make the case for the gold standard.

“I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers. “ A dollar, he says, is supposed to be a fixed measure, “like a foot, or a pound,” not something that can be redefined every few weeks by the Fed.

In his ideal world, says Grant, he would lay out a three-year program to convert back to the gold standard, probably at around $2,500 per ounce of gold. He adds that he would take great care to avoid the notorious blunder made by Winston Churchill and the British back in 1925, when they went back on the gold standard at too high a price, and imposed brutal deflation on the economy. Alas, he admits, this would need an act of Congress.

For good measure, he’d also push for a repeal of a 1935 New Deal law that protected bank investors from runs on their financial institutions. Before the law, he notes, if a bank got into trouble, the investors were on the hook to bail it out: After all, it was their bank. The same was true of the partners in a Wall Street brokerage. The system of taxpayer bailouts, like that of paper money, is a modern innovation.

One Fundamental Mistake by Grant

Grant is certainly correct about the need to return to constitutional money. He is also correct about killing the FDIC.

However it is a mistake to think one can fix the price of gold. It cannot be done and should not be attempted. The irony is Grant correctly criticizes the Fed for fixing interest rates, then thinks he can correctly divine the correct price of gold at $2,500 an ounce.

Only the free market can determine the price of gold and what gold buys. If the US went to a 100% gold-back dollar, with guaranteed convertibility of paper to ounces of gold, the price of gold would be much higher than $2,500 an ounce.

Grant cites an error in 1925 in which the Bank of England set the price of gold too high. The opposite side of the coin is that if the price is set too low, is market participants will redeem all their paper dollars for gold, hoarding it.

Simply put, the Fed does not know the correct interest rate and Grant does not know the correct price of gold.

For the benefits of returning to a gold standard, please see

Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

Premature Dollar Obituaries and Mainstream Economists' Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?

noreply@blogger.com (Mike Mish Shedlock) — Thu, 02 Feb 2012 19:04:00 +0000

On January 29 Bloomberg reported Bing Races to Beat Michigan Deadline for Union Detroit Deal

Democratic Mayor Dave Bing is racing to wrest concessions from 48 bargaining units to erase a $200 million deficit in the home of General Motors Co. and the cradle of the U.S. auto industry.

Otherwise, the city of 714,000 dominated by Democrats may face a Republican-appointed manager with authority to sell assets and nullify contracts. State Treasurer Andy Dillon has said Detroit will run out of cash by May, and called for concessions by early February.

This week, Bing began firing 1,000 of Detroit’s 11,300 employees. The mayor also proposes a 10 percent cut in payments to vendors and doubling the 1 percent tax on corporations.

Bing, 68, has said the city must trim annual employee benefit and pension costs, which have risen since 2001 to $35,000 per employee from $18,000.

“We are meeting, not daily but more than weekly, and there are sidebar conversations every day,” said Al Garrett, president of AFSCME Council 25, which represents about 3,000 employees. “I’m not sure an emergency manager would be any more Draconian than what the city itself is asking, but it’s a real possibility.”

Deal Reached?

Mayor Bing is taking his script straight from Greece where a deal has been "close" for days, weeks, and now months.

Today's Bloomberg headline does not match the facts presented. Please consider Detroit Reaches Pact With City Unions to Avoid Takeover, Detroit News Says

Mayor Dave Bing and a majority of city employee unions have reached tentative agreement on concessions aimed at avoiding a state takeover.

“This agreement is the first meaningful step in achieving the necessary concessions and structural changes,” Bing, 68, said via Twitter.

The deal, but no details, was confirmed by Al Garrett, president of AFSCME Council 25. The agreement covers about 6,500 of the city’s about 11,000 employees, not including police and firefighters who have resisted a demand for a 10 percent wage cut, he said.

The city and unions must agree to concessions early this month to avoid state action, such as the appointment of an emergency manager with broad powers to cut spending, said state Treasurer Andy Dillon. Dillon is leading a review of city finances, after a preliminary review found it will run out of cash by May, and that it faces a $200 million operating deficit.

Deal Reached? Really? No, Not Really

According to mayor Bing we have an "agreement", albeit an agreement with no details, and without covering police or firefighters. What kind of deal is that?

What's Best for Detroit?

The best thing for Detroit would be if there is no deal, or the state rejects the deal.

Unions are the problem and the solution is to get rid of them entirely. That will not happen under Bing, but it could happen in a state takeover.

Bing is not interested in what's best for Detroit taxpayers nor is he interested is what's best for Detroit school children where shockingly only 25% graduate high schools. Rather, Bing is out to save as much of the status quo as he can, including his own job of course.

Detroit Schools Bankrupt

Flashback July 24,2009: The Wall Street Journal reports Detroit’s Schools Are Going Bankrupt, Too

Detroit is like many urban school districts—large, unwieldy and bureaucratic, with a powerful union that makes the system unable to adapt to changing circumstances and that until very recently had an indulgent political class that insulated it from reform. That insulation came in two forms. The first was neglect. Mayor Kwame Kilpatrick spent several years distracted by a scandal stemming from his affair with a staffer. He resigned last year, pleaded guilty to obstruction of justice, and was sentenced to four months in jail. Had he been an effective mayor, he might have also been a powerful advocate for students.

The other insulating force was a conscious decision to wall off Detroit from charter schools. In 1993, Michigan’s legislature made it difficult to create new charters in Detroit by declaring that only community colleges could authorize charters for primary and secondary schools in “First-Class Districts”—defined as those with more than 100,000 students. Detroit was the only First-Class District. In 2003 the state, under pressure from the Detroit Federation of Teachers, turned down a gift of $200 million from philanthropist Robert Thompson that would have established 15 charter schools in the city. Those charters are needed today.

The net result has been a school system that’s been coming apart as the teachers union has dug in its heels. In 2006, the union illegally went on strike, killing a plan to force teachers to take a pay cut to balance the system’s books.

Collective Bargaining has Morally and Fiscally Bankrupted Detroit Schools

Read that again. Under pressure from the Teachers' Union, Detroit turned down $200 Million. That was in 2003 dollars. Wow. No doubt the union "did it for the kids".

For more on the appalling behavior of Detroit's teachers' unions please see Detroit Public Schools (25% graduation rate) teachers unions opposing highly qualified volunteer teachers.

It is time to kill collective bargaining for public unions, every one of them, and nation-wide, not just Detroit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Swarms of Mini-Drones to Forever Change Warfare; "Mr. President, We Have a Drone Gap"

noreply@blogger.com (Mike Mish Shedlock) — Thu, 02 Feb 2012 17:34:00 +0000

As a temporary diversion from economic analysis, inquiring minds are watching an amazing video of swarming mini-drones.

Information Dissemination says UAV Swarms Will Change Warfare Forever

Global Guerrillas discusses Drones in the USA.

Global Guerrillas also discusses the slippery slope of assassinations in DRONES and US Internal Security

Previously, when thinking of killer drones people had images in mind of big extremely high flying predators such as this drone captured by Iran.

Mini-drones flying in organized patterns are a completely different thing.

Some of the ideas expressed in the above articles seem a bit far-fetched, such as swarms of tiny drones attacking ships.

Could they carry enough explosives? According to Wikepedia, it would take at least 4 kg of plutonium (about 8.8 pounds) to build a nuclear weapon, and that does not count housing. Other explosives would seem to be more of a nuisance to a big ship than anything else.

Thus thoughts of using mini-drones as explosive weapons may not be in the cards, but something substantially bigger, say a hundred pounds or so could conceivably work, and could easily be launched undetected a hundred miles out at sea, flying just above the water until it reached shore.

Mr. President, We Have a Drone Gap

Now, having wasted enormous amounts of money on researching and testing weapons shields in outer space, we can turn our thoughts to preparing for the invasion of swarms of yet to be announced killer nano-drones much smaller than the ones in that video. We also need to prepare for micro-drones capable of firing needle-sized poison darts, mini-drones such as one in the video able to fire a single bullet, and of course suitcase-sized drones capable of carrying nuclear bombs or firing a machine gun. Thus, the defense department obviously needs anti-drone drones at the nano-level, micro-level, mini-level, and suitcase-level.

To paraphrase a general in the movie Dr. Strangelove regarding an alleged mineshaft gap, "Mr. President, we have a drone gap".

If you have not seen the movie, please do. It is one of my all-time favorites. The only missing ingredient now is for some nutcase to champion a drone-defense program as the best way to save the economy.

With those sarcastic thoughts out of the way, this drone-diversion is over. It's time to get back to discussing financial Armageddon.

Addendum:

Inquiring minds may wish to watch these big brother videos on drones being used or tested by police.

Link if video does not play: UAV Spy Drones, Police to Tackle Privacy Issues Later

Military drones being used by Local Police

Link if video does not play: Military drones being used by Local Police

German Microdrones, Your Eye in the Sky

Link if video does not play: New German UAV -- microdrone

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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