Monopsony

Guambat learned a new word today from the erudite New York Times. Monopsony. It's "a single buyer with life-or-death power over its vendors".

Think government contracting. Think Pentagon. Read this article:

From Pentagon, a Buy Rating on Contractors

In economic terms, the Pentagon is a “ monopsony,” a single buyer with life-or-death power over its vendors. If the Pentagon wants the military industry to be healthy and profitable, it can pretty much ensure that outcome.

Monopsony or not, why should the Pentagon be talking up the stocks, even implicitly, of the companies it buys from? Why was Mr. Carter going out of his way to talk to investors and analysts? Didn’t he have more important things to do?

The answer, I eventually learned, has to do with something that happened a very long time ago, and goes under the category of “Be careful what you wish for.” Let’s just say that banking isn’t the only industry where the government has allowed a handful of companies to become too big to fail.

The article tells us that back in 1993, government officials invited defense industry executives to a "Last Supper" where they were told they would need to start merging to cut down on the costs of overhead being passed on to the government buyers.

The Last Supper has become part of the lore of the military industry — though partly that’s because Mr. Aspin’s prediction about tighter Pentagon budgets turned out to be so wrong. “On the day George W. Bush took office,” said Loren B. Thompson, a well-known military consultant, “defense spending was around $300 billion.”

Today it is more than double that amount, around $700 billion. The wars in Iraq and Afghanistan — not to mention the Pentagon’s voracious appetite for expensive weapons systems, and the lack of competition among the remaining contractors — have been a gold mine for the Big Five.

Not surprisingly, for most of the first decade of the 21st century, the stocks of these companies soared. But after peaking in 2008, they came crashing back to earth. Which, for the Pentagon, has turned out to be a problem. These companies need access to the capital markets, which is more difficult when their stocks are down. And the Pentagon simply can’t allow them get into serious financial difficulty; there are just too few of them. “What we can’t afford from the defense perspective is a sick industry,” said Jacques S. Gansler, a former procurement official for the Pentagon who teaches at the University of Maryland.

Recognizing that leaner times lay ahead, Defense Secretary Robert M. Gates made a speech last May acknowledging that Pentagon budgets were unlikely to rise substantially any time soon, and laid out a plan to create new efficiencies and increased competition among the companies.

taxpayers and shareholders are decidedly not in alignment: the tougher the Pentagon gets with its contractors, the better it is for taxpayers and the worse it is for shareholders. And yet it can’t get too tough, because if it is, the companies will start running into financial trouble, which means the stocks will sink even further and the companies will start to have trouble raising capital.

This is the bind created by the Last Supper.

Now can you see why the Pentagon has taken to talking up the industry to the investment community? With one side of its mouth, the Pentagon is saying it is going to be more tough-minded in its approach to military contractors than ever before. But with the other side of its mouth, it is telling investors not to worry: the profits will be there, no matter what.

The sidling up to investors actually began last October, when the deputy defense secretary, William J. Lynn III, held a private meeting for about a dozen Wall Street analysts, laying out the Pentagon’s cost-cutting plans in astonishing detail. Indeed, according to Reuters, which uncovered the meeting, the analysts were sworn to secrecy. Although this would seem to violate, at the least, the spirit of transparency that Americans expect of market participants, notes of the meeting became public only after Reuters exposed it. (A military consultant named James McAleese published his notes on his Web site a few days after the Reuters story broke.)

Whatever the ethics of this meeting — and the Pentagon insists that nothing new was divulged during the session — it appears to have had an effect. If you look at the stock charts of the Big Five, you’ll see that they all started to rise around October. Imagine that.

Guambat is reminded of another word: symbiosis.

Bernanke: Yes we Keynes

Guambat has been critical of QE2, not necessarily because of what it is, but because of what it is not. It is not fiscal policy, and Guambat fears that monetary policy has shot its wad.

As was said in Saving whose asset ?,

Keynes may not have been entirely right. At least, it may be that not all Keynesian follower's ideas have all worked out as planned.

But Guambat is now pretty sure that a busted economy needs real productive growth that comes with real spending on the ground that creates jobs and demand and tangible production.

Particularly in these circumstances, monetary policy in the main or on its own, cheap currency and artificially inflated asset prices is nothing but a bunch of fairy floss, peddled by people who know exactly what they're doing and grabbed up by people who don't know what's good for them.

And, at some point after the sugar rush, look out for the big let down.

Bernanke has finally, it seems, also accepted publicly the limitations of monetary policy. In a speech on November 19, he said,

In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable.

Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs.

However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.

That may not go down real well with the "don't tax, don't spend" Tea Party and other conservative members of Congress.

And would you like fries with that?

QE2= a mere $600 billion dollars, right?

McDonalds sells 75 hamburgers per second.

They sell at least 6,480,000 hamburgers per day, per this.

Suppose'n one burger at Macca's sold for a dollar.

Guambat remembers when you could one for 29¢. And 5 fishburgers for a buck on meatless Fridays.

He even remembers when keyboards had a ¢ symbol on them. Where has that gone?


How long would it take the world to eat through a QE2 pile of burgers?

Guambat reckons about 254 years.

And they better get crackin'.

'Cause it's going to be a hard thing to swallow.

Unemployment Static-stistics

You know the old saw: lies, damned lies, and statistics. It is rarely more true than describing employment data.

Despite Jobs Added, Unemployment Rate Stuck

The October jobs report was the best in a long time. The unemployment rate remains painfully high, but employers are starting to add jobs. The Labor Department says the private sector added 159,000 last month -- much more than expected.

A Few Thoughts on the Employment Numbers By Dr. Lacy Hunt, Hoisington Investment Mgt. Co from John Mauldin's Thoughts From the Frontline:

The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years.

The most distressing aspect of this report is that the US economy lost another 124K full-time jobs, thus bringing the five-month loss to 1.1 million in this most critical of all employment categories. In an even more significant sign, the level of full-time employment in October was at the same level that was reached originally in December 1999, almost 11 years ago (see attached chart). An economy cannot generate income growth by continuing to substitute part-time work for full-time employment.

The weakness in real income is probably lost in an environment in which the Fed is touting the gain in stock prices and consumer wealth resulting from the latest quantitative easing (QE), but QE has unintended negative consequences for real household income. Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant. Also, with five-year yields falling below 1%, rates on CDs and other types of short-term bank deposits will decline, also cutting into household income. At the end of the day these effects will be more powerful than any stock-price boost in consumer spending, which, as always, will be very small and slow to materialize.

Unemployment payouts push California deeper into debt

With one in every eight workers out of a job, the state is borrowing billions of dollars from the federal government to pay benefits at the rate of $40 million a day.

The debt, now at $8.6 billion, is expected to reach $10.3 billion for the year, two-thirds greater than last year. Worse, the deficit is projected to hit $13.4 billion by the end of next year and $16 billion in 2012, according to the California Employment Development Department, which runs the program.

Interest on that debt will soon start piling up, forcing the state to come up with a $362-million payment to Washington by the end of next September.

That's money that otherwise would go into the state's general fund, where it could be spent to hire new teachers, provide healthcare to children and beef up law enforcement.

Continued borrowing, meanwhile, means that employers face an automatic hike in their federal unemployment insurance taxes, pushing up annual payroll costs $21 a year for each worker.

Those costs are expected to more than double over the next five years if California continues to borrow from the federal government.

Economist: RI recovery will lag behind US

An economist says Rhode Island will lag behind the country as it recovers from the economic downturn. Moody's Analytics senior economist Andres Carbacho-Burgos told the state's top budget officials Friday that the target date is 2015 for the United States to make a "full recovery" and return to a "normal" unemployment rate of 5.5 percent.

He said the target date for a full recovery in Rhode Island is 2015 or 2016.

Carbacho-Burgos said his analysis is based on the last three months of unemployment data in Rhode Island, where the unemployment rate is 11.5 percent, according to the most recent numbers.

State of Indiana prepares to reduce unemployment benefits

The state of Indiana is preparing to curb unemployment benefits in what may become a more common occurrence as states wrestle with growing debt related to providing jobless benefits to its citizens.

Indiana owes nearly $1.9 billion to the federal government which it borrowed to pay jobless benefits.

At a news conference Thursday morning, Indiana Gov. Mitch Daniels said that cutting unemployment benefits will be a primary push in the months to come.

Daniels told reporters that he wants to raise the premiums on businesses and cut benefits for recipients, contending that it's the only way to bring the unemployment deficit under control.

Unemployment benefits, which pay a maximum of $415 a week in Indiana, could be cut by up to half, which gives rise to speculation as to the reason why Indiana has announced it will be adding armed guards to its unemployment centers.

Michigan currently owes the federal government $3.8 billion for funds it borrowed to pay unemployment benefits. The state will have to begin paying the interest on that debt — $151 million worth — next year. It's unclear how the state will afford to pay it without either raising taxes on business or cutting benefits as they are proposing in Indiana.

Bernanke: Rising stockmarket = economic growth

Forget high unemployment.

Forget falling dollar.

This is what the Federal Reserve Chairman had to say in today's op/ed in WaPo. Guambat may have cut and pasted and re-arranged the statement, but these are all direct quotes:

What the Fed did and why: supporting the recovery and sustaining price stability

The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation.

Two years have passed since the worst financial crisis since the 1930s dealt a body blow to the world economy.

Among the Fed's responses was a dramatic easing of monetary policy - reducing short-term interest rates nearly to zero. The Fed also purchased more than a trillion dollars' worth of Treasury securities and U.S.-backed mortgage-related securities, which helped reduce longer-term interest rates, such as those for mortgages and corporate bonds.

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011.

This approach eased financial conditions in the past and, so far, looks to be effective again.

Stock prices rose and long-term interest rates fell.

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable.

And higher stock prices will boost consumer wealth.

Lower corporate bond rates will encourage investment.

Dear Reader: what the Fed is doing is printing bogus bills. As fast as it can.

And, like his predecessor, who invented this shill (or, if not invented it, adopted it wholesale into the main tool of US monetary policy), as long as stock prices go up, stuff direct action to temper high unemployment and low inflation.

This policy will not, by any linkage or mechanical transmission, lower employment any time soon, if at all. It will, however, most assuredly, debase the currency.

And history tells us the only certain result of a debased currency is staggering inflation.

Hell of hyperinflation

a hyperinflation can be stopped easily. No outside help is needed and stabilisation at least can be achieved without much reform. All the government has to do is make a credible promise that it will not revert to the printing press and that it will balance its budget.

The hyperinflation is driven by corrupt and inefficient public bodies, packed with government cronies, that demand foreign currency from the central bank to buy fuel or fertiliser from abroad. They siphon off wealth and come back for more.

A kick in the asset purchase program

Hoist by his own petard?

Bernanke's Caution Doesn't Dim View On Asset Buys

While Federal Reserve Chairman Ben Bernanke was regarded as cautious about a second round of bond-buying to stimulate the economy, economists on Friday said the underlying message was still that some sort of program would be enacted.

"Bernanke knows that the market is allocating more than a 90% probability [of a second round of bond purchases]; he did nothing to slow down that rapidly moving train," said Lou Crandall, chief economist at Wrightson ICAP

.
`Liquidity Trap' Plagues U.S., More Stimulus Is Required, Fed's Evans Says

Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released this week.

Federal Reserve Bank of Chicago President Charles Evans said the U.S. is in a “bona fide liquidity trap” and needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.

“I believe the U.S. economy is best described as being in a bona fide liquidity trap,” Evans said to the Boston Fed’s 55th Economic Conference. “This belief is not a new development for me; instead it is a dawning realization.” In a liquidity trap, additions to the money supply fail to stimulate the economy.

With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, “the Fed’s dual mandate misses are too large to shrug off,” Evans said.

He gave his support to a target for the path of the price level over a “reasonable period of time” that is communicated “regularly and often” to the public.

Such a policy could complement large-scale asset purchases and a change to the Federal Open Market Committee’s statement to include a pledge to keep rates near zero for longer than “an extended period.”

By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy.

“The fact that Japan is still battling deflation highlights how pernicious deflation can be, and how difficult it is to counteract once it has been firmly established,” Rosengren said.

So, now, let's see. What we need is to keep interest rates low for an extended period of time to raise inflationary expectations? Is that right? Is that the prescription?

Well, that last article alluded to the Japanese experience. It included the following data points as well:

The Bank of Japan pledged last week to keep its benchmark interest rate at “virtually zero” until deflation has ended, after first introducing the rate policy in 1999.

So Japan tried this low interest rate policy for more than the last decade and just exactly how did that work out for them?

Guambat is dubious about comparisons of the same experiment in the US.

One very significant difference between the Japanese and US economy is the continuing significant decline in the Japanese population numbers, based both on lower births and on the refusal of Japan to welcome and integrate immigration. See, Getting a bit long in the ha.

Demand destruction in Japan results from social policy and Malthusian effect, not monetary policy, in that circumstance. Of course you're going to have deflationary outcomes, but born of totally different causes.

The structure and character of the Japanese economy and the US economy are not both apples, nor are they gooses and ganders. Guambat doesn't think that a medical experiment that proceeded with such faulty underlying assumptions would even pass FDA muster.

Saving whose asset ?

Back in the olden days, the Federal Reserve's role in life was to assure price stability, which from the beginning tended to focus on stabilizing unemployment and moderating inflation.

You young-uns may not know that because when Greenspan took the reigns, his focus began to shift. And ever since, the primary focus, based on action and not words, has been on asset price protection. Indeed, the Greenspan legacy is his "put". Not a Laffer curve or other analysis of the natural rate of unemployment. Not the Volker strangle on inflation by raising interest rates, but on pumping money, 24/7.

So what? Well, by focusing on unemployment and inflation, the business cycle was a tangible notion based on real production of real goods and services. By focusing on asset prices, all that has changed. There is no longer a business cycle, and the wealth of the nation is now determined by the price of assets. Certainly not the price of its currency.

Financial policy has shifted heavily from fiscal responsibility and action to monetary irresponsibility and action, helped along the way by Wall Street's wholesale buy-off of Congress and its population of the Treasury and Federal Reserve with its own. See, Goldie as political hedge fund.

And if that sounds a bit scary, it is. Happy Halloween.

Commentary: Quantitative easing will work for only a short time

At one time, news that Americans might be enjoying a little happiness was enough to provoke saturnine Fed chairmen to jack up interest rates, thin the money supply and generally just bum us out.

So you can understand that investors have been slow to understand the new Fed, which appears to be populated by unicorns and leprechauns who spend their days paging through how-to manuals to find new ways to shower the markets with cheap money.

And as proof that asset price is the focal point of Central Bank policy, around the world, consider these articles, all current and easily accessed at a glance from amongst the plethora of same such from multiple public news items, blogs and academic papers: it is no secret nor conspiracy theory.

Policy makers need long-term plan to cut deficits, Kohn argues

Speaking just hours after Federal Reserve Chairman Ben Bernanke urged caution in proceeding with quantitative easing, Donald Kohn also raised some concerns about any plan by the Federal Reserve to buy additional long term securities. Kohn until September was vice chairman of the Fed and spent 40 years at the central bank.

Kohn added that additional purchases by the Fed of securities distort asset prices and lower interest rates to stimulate the economy.

“That’s the whole point of the purchases is to change asset prices and they do induce people to take more credit and interest rate risk than they otherwise would do. That’s the way they stimulate spending and borrowing,” Kohn said.

It seems the whole QE exercise is not to lead a horse to water, let alone try to make him drink it, but simply to increase the size of the water hole with the idea that a bigger hole will be so much more tantalizing to run to and drink from.

Commentary: Oil back above $80 raises question over Fed policy

As crude oil edged dangerously closer to $85 a barrel over the past few weeks, the buzz in oil trading pits and among a number of market strategists is increasingly about potential “demand destruction,” or the impact this might have on retrenched consumers and an already weakening economy.

Ironically, of course, crude’s more than 11% rally in September, and further gains so far this month, are largely symptoms of the Federal Reserve’s determination to help the U.S. economy avoid deflation by pumping more dollars into the system.

By itself, a weakening U.S. currency helps boost commodities, most of which are dollar-denominated. In addition, over the past two years, near-zero interest rates and the Fed’s so-called quantitative easing measures have fueled a carry trade: Investors have borrowed cheap and cheapening dollars to buy assets such as stocks and commodities.

But unlike the last commodity boom of 2007, the unemployment rate is currently at 9.6%, not under 5%.

“There’s definitely concerns about the recovery and demand destruction while crude is being [lifted] by the dollar,” says Tariq Zahir, managing member at Tyche Capital Advisors. “Fundamentally, there’s enough [crude] out there and we should head lower.”

And it’s not so much the exact dollar level that’s a cause of concern but rather the increasingly strenuous conditions in the rest of the economy.

Gluskin Sheff chief economist Dave Rosenberg notes that $84 a barrel means higher gasoline prices ahead, while at the same time food prices are also rising.

While higher food and gasoline prices are most likely not what the Fed wants to see, it might be good to remember that it’s likely there will soon be some reprieve in early November, when the Fed is believed to actually announce new quantitative measures.

But in the longer-run, the problem is likely to return, especially if the effectiveness of quantitative measures remain elusive, while the impact on the dollar and commodities is clear to all.

Note this, too: Cotton Prices Hit 140-Year High. Mrs Main Street won't even be able to afford yardage to make her own clothes.


The Fed is the biggest seller of volatility

Risk measures are inevitably going to become more correlated in a world where the Fed and central banks generally are playing a bigger role in determining market outcomes.

In a nutshell, the Fed has become the ultimate seller of volatility into the market and that is because it was always the Fed’s goal to force investors to make one decision and one decision only — to put their money in risk assets rather than cash.

And this is why all the are going up in unison.

By design, the Fed is seeking to punish those who want to hide in cash. As a result, investors are either embracing “risk assets” or unwinding exposure and raising cash. This leads to a high degree of correlation both among equities as company specific factors are overwhelmed by macro consideration and across risk assets that largely serve as proxies for one another.

Don’t get used to the new Fed

The bottom line is that QE2 should work for a spell. At some point, though, any rally that ensues will shut down if marked improvements in these indicators do not begin to appear: unemployment claims, payrolls, the First Call earnings revision index, the Rasmussen consumer confidence survey, the ECRI weekly leading index, the oil and gas rig count, and a rise in bond yields.

More specifically, here are some benchmarks that pessimists use to show the glass is half empty: ADP’s employment measure has stalled at a very depressed level; for the first time, the labor force is declining year-on-year (down 0.4% in September); state and local employment in September fell at a negative 5% annualized rate; the unemployment rate remained close to 10% for a ninth month; the global composite Purchasing Managers Index fell in September to 52.4%, from its recent peak at 57.3%; U.S. and U.K. house price surveys are weakening; and manufacturing and trade sales, after surging 13.3% from their recession low, have been unchanged for five months.

There are at least 15 similar points that optimists may use to buttress their own arguments, including a significant rebound in recent weeks in the ECRI leading index. The point is that the stock market can only rally for so long on the prospect that the new Fed is omniscient, caring, and will make everything better. At some point, that actually needs to happen.

Now, at this point in that last article, the author loses Guambat. He says:

Now the best weapon that the Fed has at its disposal is a rise in the market itself. A swell in stocks would be the cheapest stimulus measure available, as it increases confidence and household net worth, and makes businesses and individuals alike more confident to invest and spend.

Guambat cannot for the life of him understand how Mr and Mrs Main Street are going to be gladdened and have their confidence restored if Wall Street keeps getting wealthier. That will not be such a swell idea for those without jobs, homes and hopes.

Indeed, it will more likely engender greater resentment than already exists, social divide and political crisis, if not higher problems with law and order. It may be simply marvelous for those with assets who see their assets rise, but for those who have not been able to get back up off their assets after the shocks of this last decade of living with Greenspan's legacy, it will hardly be a party.

Wall Street confidence may be emboldened, but Main Street confidence cannot be lifted, in this economic environment, by a rise in stock prices. Not when there is no salary and no pension and no savings, and not when household net worth is generally zero to negative. You cannot get any confidence from household net worth until it rises to a point you can actually spend some of it.

The way those Wall Street hotshots do.

Keynes may not have been entirely right. At least, it may be that not all Keynesian follower's ideas have all worked out as planned.

But Guambat is now pretty sure that a busted economy needs real productive growth that comes with real spending on the ground that creates jobs and demand and tangible production.

Particularly in these circumstances, monetary policy in the main or on its own, cheap currency and artificially inflated asset prices is nothing but a bunch of fairy floss, peddled by people who know exactly what they're doing and grabbed up by people who don't know what's good for them.

And, at some point after the sugar rush, look out for the big let down.

MORE ON THIS: Our Fiscal Policy Paradox, by Alan Blinder

The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens.

To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve.

In 2008 and 2009, the U.S. government rolled out the heavy fiscal and monetary artillery to stave off Great Depression 2.0. Taxes were cut, spending was increased, and the Fed pushed the federal-funds rate all the way down to virtually zero. It worked.

But that was then and this is now. Today, the economy still needs a boost. But we seem to be trapped in what I call the paradox of macroeconomic policy: The policies that might work won't be tried, and the policies that will be tried might not work. If that sounds irrational, well, you've got the message.

There are plenty of powerful weapons left in the fiscal-policy arsenal. But Congress is tied up in partisan knots that will probably get worse after the election. On the other hand, the Fed stands ready—indeed, seems eager—to act. But it has already deployed its most powerful weapons, leaving only weak ones. That's the paradox.

...

Get Ready For The Fed's Great Experiment

The Board has used all of its conventional tools and some not so conventional, and now is in the position of entering into a great experiment with unknown outcomes and possible unintended consequences. The truth is that the Fed cannot use monetary policy to force companies, banks and consumers to take credit that they do not want.

Read more: http://www.businessinsider.com/get-ready-for-the-feds-great-experiment-2010-10#ixzz13Vq5lg27

The prospects of a US$ Banana Republic??

Paul Keating has made his inimitable mark on Australian politics, first as Treasurer and later as Prime Minister. He was the self-proclaimed "Placido Domingo of Australian politics". He certainly was (and mostly remains) a man of words.

In 1983, as Treasurer, he did away with the fixed exchange rate mechanism of the Aussie Dollar, allowing it to float. It floated like a rock. Interest rates jumped up to 20%.

As one admiringly critical website explained,

In spite of the lower value of the dollar, many areas of the manufacturing sector were not competitive with more technologically advanced industries in Asia, especially South Korea and Taiwan. Imports continued to rise. By 1986 foreign debt was higher than anticipated.

Treasurer Keating warned that if Australia did not "get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, it would end up being a third-rate economy . . . a banana republic."

His "banana republic" remark, made off the cuff in a radio interview if Guambat's memory doesn't fail (most unlikely), had the same salutary effect as Alan Greenspan's "irrational exuberance" quip.

But it was Keating's banana republic quote that came to mind whilst Guambat was perusing the most recent soothing words from David Stockman, who once advised The Other Great Communicator -- the American one.

Commentary: Trillion-dollar deficits don’t matter

According to CBO’s August update, the two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. But that doesn’t count the upcoming lame duck session’s predictable one-more-stimulus bacchanalia.

Juiced up by their election rout, the tax-side Keynesians in the GOP are certain to ram through a two-year extension of the Bush tax cuts for one and all.

In return, the hapless White House will insist this one-half trillion dollar gift to the “still haves” be matched with several hundred billion more in presently unscheduled funding for emergency unemployment benefits and other safety net programs for the “no-longer-haves.”

In combination, these measures — along with more realistic economic assumptions — mean that the FY2011-2012 deficit will be $700 billion higher than current projections, pushing the two-year total to at least $2.5 trillion. Read Minyanville’s “What a Republican Victory Means for Equity Markets.”

These considerations make one thing virtually certain: After the new Congress sinks into rancorous partisan stalemate and does absolutely nothing about this fiscal hemorrhage, the Treasury will be selling at least the $100 billion per month of new government paper for so long as the New York Federal Reserve is open to buy. Stated differently, national policy now amounts to monetizing 100% of the federal deficit.

In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more. Earlier this week, William Dudley, who occupies the Goldman Sachs permanent seat on the Fed’s Open Market Committee, helpfully clarified that the new-age Fed should be judged by what’s in its heart, not what’s on its balance sheet. He said:

“I am mindful of concerns… that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.”

They may devoutly believe in their hearts (if hopefully not in their minds) that it’s economic milk and honey that they’re bringing to America, but in fact what they’re dispensing is digital greenbacks.

At the moment, the five-year note yields barely 1.0%, and the maturities below that quickly descend toward zero — with the 2-year at 35 basis points and 90-day bills at 12 basis points. Those maturities account for in excess of 90% of the $9 trillion in Treasury debt presently held by the public. So, in the world of ZIRP, the public debt is now essentially non-interest bearing.

Moreover, with a stroke of the “repo” key it can also be turned into cash — that is, legal tender — in a millisecond.

But what emergency motivates today’s greenback experiment?

It would appear to be two self-evidently foolish objectives.

The first is the claim by the Fed’s money printer’s caucus that QE2 in the magnitude being contemplated might lower the 10-year benchmark rate by 50 basis points.

Stunning.

We have a nation drowning in 19 million empty housing units owing to the Fed-engineered housing bubble, households still buried in $13 trillion of debt from the same cause, and idle business capacity on a scale not seen since the 1930s — and we’re supposed to believe that taking down the current all-time low interest rate by another 50 basis points will make a difference?

Worse still, [the other] salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways -- owing to the illusion of higher net worth, as conjured by the Fed.

These are pretty pathetic reasons for issuing massive quantities of digital greenbacks.

Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don’t matter because the Fed is financing them for free.

The long train wreck

Trouble with you is the trouble with me,
Got two good eyes but WE still don't see.
Come round the bend, you know it's the end,
The fireman screams and the engine just gleams...

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.

-- Casey Jones, by the Grateful Dead
(via sing365.com)

The Great Depression was not all for naught. At least not yet. The social safety nets put in place in the aftermath of that Great Ruction have kept unemployment at half the rates seen then. And the unprecedented bail out of bankers in the last couple of years have kept them in fine fettle, caviar and Housewifes.

It has all conspired to conjure a complacency that is as unwarranted as it is fanciful.

But David Stockman has his hand on the train whistle as the Great Depression redux continues picking up speed. Just a couple of weeks ago he did an Op-Ed for the NYT:

Four Deformations of the Apocalypse

The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice.

In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

After a short intermission, he's back for round two with more op-ed.

Beware the light at the end of the tunnel (Commentary: It's a debt train about to collide with federal obligations)

The federal deficit is no longer an abstract long-term problem; it's a financially critical freight train hurtling down the track at alarming speed.

Here's a dramatic way to look at it: Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.

Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running!

the federal debt still has grown at two times the rate of GDP during what looks to be the strongest phase of the recovery.

at $52 trillion, credit-market debt today is 3.6 times that of GDP, compared with 1.6 times that of GDP when the original argument of supply-side versus Keynesians opened up back in 1980.

Moreover, this 1980 total economy "leverage ratio" hadn't fluctuated appreciably for 110 years going back to 1870. So I call it the "golden constant," and note that had the total economy-leverage ratio not gone parabolic after 1980, credit-market debt today would be $22 trillion at the 1.6 times ratio.

In short, the economy is freighted down with $30 trillion in excess debt. The process of liquidating the household and business portion of this -- about $24 trillion -- will swamp the normal cyclical recovery mechanisms for years to come. And it's insane to keep adding the mushrooming public-sector portion of the debt or order to artificially juice the GDP numbers for a few more quarters.

Further, if we're in a period of sustained debt deflation, it's extremely likely the GDP deflator will shrink toward zero and real growth will struggle to make 2-3%. Hence, nominal GDP growth is almost certain to be even slower in the quarters ahead

At the same time, there's virtually no chance unemployment will drop much below 10% in the context of a deflationary "recovery," meaning that budget costs for unemployment, food stamps, etc. will remain elevated, not come down by hundreds of billions as currently projected

So we have baked into the cake a rather frightening scenario: monthly federal debt growth upwards of $125 billion, or three times the likely nominal GDP growth of $40 billion per month -- as far as the eye can see.

At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines and how healthy business-sector balance sheets are.

That's pure baloney. If you peruse the flow of funds, and you'll see that corporate-sector cash assets have increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. According to the same data, non-financial, corporate-sector debt has increased by $480 billion and now stands at $7.2 trillion. Corporate debt net of cash has actually increased by $200 billion during the Great Recession.

Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There's been no de-leveraging in the business sector either -- especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period.

Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Also, there's no possibility in either this world or the next of obtaining the needed $700 billion to $1 trillion in structural deficit reduction by spending cuts alone. We've had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies and even Amtrak!

Like Casey, the GOP has been in the anti-spending batter's box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity -- the "roadmap" of Congressman Paul Ryan -- has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it's too late and too urgent for anything else.

That should be a call to arms, fiscally and monetarily. But this is an election year (isn't every year, these days?) and no elected doctor will be prescribing caster oil for the ailing economy. Or, should they, they will add a bucket full of sugar to make it go down -- and out -- before any prophylactic effect.

And what's the Fed to do? Well today, they said this:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.

Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

inflation is likely to be subdued for some time.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

As Rex Nutting summed it up,

The Federal Open Market Committee announced it would reinvest the proceeds of its investments in mortgage-backed securities as they mature into Treasurys.

As economic stimulus goes, this is pretty thin gruel.

What has the Fed accomplished? It avoided a second Great Depression, but large sectors of the economy are still struggling. It's not clear what easier credit conditions can do to ease that suffering.

Trouble ahead, Lady in red,
Take my advice you'd be better off dead.
Switchman's sleeping, train hundred and two is
On the wrong track and headed for you.

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, YOU KNOW, trouble behind,
And you know that notion just crossed my mind.

-- id.

Another Stockman tells the story of his ride

Hardly anything is more iconic to Australia than the story of The Man from Snowy River, a stirring poem by Banjo Paterson. It tells the tale of a truly heroic effort by a young, gangly stockman (in America they're called cowboys) who rode hell bent for leather to corral a runaway and his herd of wild horses.

The poem starts:

There was movement at the station, for the word had passed around
That the colt from old Regret had got away,
And had joined the wild bush horses - he was worth a thousand pound,
So all the cracks had gathered to the fray.
All the tried and noted riders from the stations near and far
Had mustered at the homestead overnight,
For the bushmen love hard riding where the wild bush horses are,
And the stockhorse snuffs the battle with delight.


There was Harrison, who made his pile when Pardon won the cup,
The old man with his hair as white as snow;
But few could ride beside him when his blood was fairly up -
He would go wherever horse and man could go.
And Clancy of the Overflow came down to lend a hand,
No better horseman ever held the reins;
For never horse could throw him while the saddle girths would stand,
He learnt to ride while droving on the plains.


And one was there, a stripling on a small and weedy beast,
He was something like a racehorse undersized,
With a touch of Timor pony - three parts thoroughbred at least -
And such as are by mountain horsemen prized.
He was hard and tough and wiry - just the sort that won't say die -
There was courage in his quick impatient tread;
And he bore the badge of gameness in his bright and fiery eye,
And the proud and lofty carriage of his head.

And it finishes:

The man from Snowy River is a household word today,
And the stockmen tell the story of his ride.

And in between is a tale of legends.


Recently, on NPR, another stockman, David Stockman, told of his heroic ride with the Great Communicator. Who, it appears, quit communicating with the stockman when the stockman began to communicate things the Great Communicator didn't want communicated.

The David Stockman interview begins as follows:

Economist: Bush Tax Cuts Will Make U.S. Bankrupt

RAZ: In the early 1980s, Stockman became a kind of Washington wunderkind, the vanguard of a new type of economic thinking, supply side, deregulation, low taxes to stimulate growth.

As the White House budget director, Stockman was an architect of what would come to be known as Reagonomics. But a few years into the job, he became disillusioned.

Mr. DAVID STOCKMAN (Economist): He was one of the, you know, greatest human beings I've ever met.

RAZ: And he noticed a problem. The government wasn't collecting enough money to cover its costs and he started telling that to Reagan.

Mr. STOCKMAN: The military budget got out of control and the tax cuts went to special interests as much as they did to the broad public.

As time passed, he was less and less enthusiastic about what I had to say.

RAZ: So, in 1985, Stockman left. Now these days, he's still a conservative and still a Republican, but he doesn't think his party is taking a responsible position on taxes any longer. At the end of this year, the Bush era tax cuts are set to expire. Republicans want them renewed, Democrats want to keep the tax cuts for the middle class but not for the wealthiest 2 percent of Americans.

Now, Stockman says they're both wrong and he says extending either of those cuts is tantamount to the government declaring bankruptcy.

Mr. STOCKMAN: So we're spending $3.8 trillion in defense, non-defense, entitlements, everything else, and we're taking in only 2.2 trillion. So we got a massive gap, you have to pay your bills. You can't keep borrowing from the rest of the world at that magnitude year after year after year. So, in light of all of those facts, I say we can't afford the Bush tax cuts.

RAZ: And I think many people will be surprised to hear Ronald Reagan's former budget director make this argument. I mean, what happened to the idea you once pushed that tax cuts ultimately stimulate the economy?

Mr. STOCKMAN: I think that's true. But we're in a much different world today than we were in the early 1980s. We have had a spree of debt building for the last 30 years, both in the public and in the private sector.

So in that environment, the highest priority is solvency now, not incentives for growth.

RAZ: You seem to suggest that many of our economic troubles are the result of Republican economic policies over the past few decades. You are a Republican. You are a conservative. Why do you think Republicans are largely to blame?

Mr. STOCKMAN: Because the Republicans abandoned their old-time fiscal religion in favor of two theories, which I think are now proving to be both wrong and highly counterproductive and damaging.

One was monetarism, which said let the dollar float on the international markets. Let 12 men and women at the Fed decide whether to raise or lower interest rates and use the Fed to try to run this massive economy. What they've done instead is run the printing press, they've flooded the world with dollars. The whole monetarist policy has been a mistake.

The second thing was the perversion of supply side. Yes, there was a good idea that in certain circumstances, lower tax rates will encourage economic activity and savings. But when you make it a religion, when you make it a catechism and you say you cut taxes no matter what the circumstance, what the season, what the condition, then I think the whole idea has been perverted.

By getting off track over the last 30 years, the Republican Party has basically given out its historic view that the key thing was financial discipline, financial responsibility and that we had to live within our means. Today, we have two free lunch parties, and as a result, we're borrowing ourselves into grave danger with each passing month and year.

Guambat wishes Stockman was as great a communicator as Mr. Reagan. The information in the interview is most interesting, and you should go read it, but, unfortunately, Mr. Stockman doesn't have the vast PR backing that Mr. Reagan had, nor the screen charisma. Regretfully, it does not appear his fellow stockmen will be retelling his tale.

Let alone learn anything from it.

MORE NEWS AT 10:00:

See Paul B. Farrell's take on Stockman's message here: Reagan insider: 'GOP destroyed U.S. economy'

The Greenspan But

Ahh, the irrationally inscrutable Mr. Greenspan, he of the Greenspan Put.

Mr. Greenspan is now, it appears, older and perhaps wiser. Perhaps just conscious of his legacy.

This is him in testimony in 1998 on regulating the OTC derivatives market, which spun wildly out of control, bringing down the whole CDS and other credit derivatives markets in the last few years:

the Board supports a standstill of attempts by the Commodity Futures Trading Commission (CFTC) to impose new regulations on OTC derivatives

The Commodity Exchange Act of 1936 and its predecessor the Grain Futures Act of 1922 were a response to the perceived problems of manipulation of grain markets that were particularly evident in the latter part of the nineteenth and early part of the twentieth centuries.

Financial derivative contracts are fundamentally different from agricultural futures owing to the nature of the underlying asset from which the derivative contract is "derived." Supplies of foreign exchange, government securities, and certain other financial instruments are being continuously replenished, and large inventories held throughout the world are immediately available to be offered in markets if traders endeavor to create an artificial shortage. Thus, unlike commodities whose supply is limited to a particular growing season and finite carryover, the markets for financial instruments and their derivatives are deep and, as a consequence, are extremely difficult to manipulate.

Etc.

This is him again in 2002 discussing bank regulation more broadly:

an ever burgeoning global financial system also inevitably raises the potential of increasing systemic risk. Here I would like to focus on a narrower, but nonetheless increasingly important, issue: the nexus of risk-taking, regulation, innovation, and wealth creation.

evolution in financial structure has also meant that supervision and regulation must be continually changing in order to respond adequately to these developments. In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control.

An example more immediate to current regulatory concerns is the issue of regulation and disclosure in the over-the-counter derivatives market. By design, this market, presumed to involve dealings among sophisticated professionals, has been largely exempt from government regulation. In part, this exemption reflects the view that professionals do not require the investor protections commonly afforded to markets in which retail investors participate.

But regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets

But unfettered competitive capitalism is by no means fully accepted as the optimal economic paradigm, at least as yet. Some of those involved in public policy often see competition as too frenetic. This different perspective is captured most clearly for me in a soliloquy attributed to a prominent European leader several years ago. He asked, "What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature." A major determinant of regulatory regimes is how a rule of law is applied to strike a balance between the perceived benefits of wholly unfettered markets and the perceived societal costs of overly fierce competition.

The extent of government intervention in markets to control risk-taking is, at the end of the day, a tradeoff between economic growth with its associated potential instability and a more civil but less stressful way of life with a lower standard of living.

Those of us who support market capitalism in its more-competitive forms might argue that unfettered markets create a degree of wealth that fosters a more civilized existence. I have always found that insight compelling.

And here, at last, is Mr. Greenspan discussing this topic in 2008:

Greenspan Says He Was Wrong On Regulation

The former chairman of the Federal Reserve said the crisis had shaken his very understanding of how markets work, and agreed that certain financial derivatives should be regulated -- an idea he had long resisted.

"You found that your view of the world, your ideology was not right, it was not working?" said Rep. Henry A. Waxman (D-Calif.), the committee chairman.

"Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Waxman asked whether the former chairman was wrong to consistently oppose regulating the multitrillion dollar derivative market that has contributed to the financial crisis.

"Well, partially," said Greenspan, before stressing the difference between credit-default swaps and other types of derivatives.

Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.

"I made a mistake," Greenspan said, "in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

"The Federal Reserve had as good an economic organization as exists," Greenspan said. "If all those extraordinarily capable people were unable to foresee the development of this critical problem . . . we have to ask ourselves: Why is that? And the answer is that we're not smart enough as people. We just cannot see events that far in advance."

BUT ..., he said:

"We have to recognize that this is almost surely a once-in-a-century phenomenon," Greenspan said, "and in that regard, to realize the types of regulation that would prevent this from happening in the future are so onerous as to basically suppress the growth rate in the economy and . . . the standards of living of the American people."

And, now, here he goes again. While he supported the Bush tax cuts when they were proposed, he's not supporting their extension.

He would, BUT ....

Greenspan Calls for Repeal of All the Bush Tax Cuts

“I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse.

"The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

There are plenty more backtracks, qualifications and prevarications in that NYT piece.

It's sure to make him the BUT of many more jokes.

Most Americans are living on a fixed income

And damned lucky to have it.

But this is not about retired baby boomers, or any other kind of boomers.

This is about thems what's workin'.

Workers' salaries lost ground in past decade

Median weekly wages, when adjusted for inflation, fell slightly for both high school and college graduates from 2000 to 2009, according to a recent analysis by the Economic Policy Institute, a Washington think tank.

For high school graduates, median inflation-adjusted wages were $626 per week in 2009, compared with $629 in 2000, according to EPI. If you assume a worker gets paid for a full year, that adds up to $32,552 in 2009, down from $32,708 in 2000.

For college graduates, weekly wages were $1,025 in 2009, compared with $1,030 in 2000, according to EPI. Over one year, that works out to $53,300 last year, down from $53,560 in 2000.

But the recent recession isn't to blame for the "prolonged period of wage stagnation," according to EPI.

"Between 2002 and December of 2007, the country was in a period of economic expansion and for most of that time, from 2003 through 2007, wages fell," the study said.

"Even with low inflation over the past year we have seen wages lagging," Bivens said. "The recession is so deep and widespread that even those close to the top of [the income scale] will do much worse than they have been accustomed to doing. The pain will not be spread evenly, but it will be the very fortunate worker who does not see slower wage growth."

We are mostly wards of the State

Assuming "we" are Americans, more of us are now wards of the State than not, and that isn't even taking into account the banks and auto companies.

Private pay shrinks to historic lows as gov't payouts rise

A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007. [So 58% of personal income comes from non-private wages and salaries or other sources.]

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says.

Sounds to Guambat like a slippery slope. Indeed, Greecy.

The Ten Percent Solution?

For most of Guambat's six decades plus long life, the standard, wet-finger-in-the-air benchmark for interest rates has been ten percent. Mind you they have fluctuated, and rather violently in the 1980's, but for the most part you'd often hear people say, "well, assume you get 10% ...."

Since Greenspan, however, real and nominal rates have been south of that 10% "norm".

Are we soon to revert to mean? You might expect so if we continue to be stuffed full of stimulus and bail out moneys, but where're the "green shoots" of inflation that would get us there?

Well, Australia has been raising rates multiple times in the last year due to heating economy, and China (always China) has been reporting trouble holding its tiger in line, and now this:

Sharp inflation rise may force Bank to raise interest rates

Sharply higher petrol, gas and food prices have pushed inflation to "uncomfortably high" levels, ahead of City expectations, raising fears that the Bank of England may need to lift interest rates sooner than expected. The cost of motoring is about 17 per cent up on a year ago, and some food prices may spike further as a result of the no-fly zone restricting imports of some fruit and vegetables.

The spike in inflation will also further depress the real returns being offered to savers. The real return on an average no-notice account, after basic tax and inflation, today stands at minus 2.82 per cent, according to the price comparison website Moneyfacts.

Although still historically low, British inflation is markedly higher than in other comparable advanced economies. "Core" inflation, which strips out volatile items such as fuel and food, is also up, from 2.9 per cent to 3 per cent.

California home default cases plunge

Mortgage default notices — the first step toward foreclosure — plunged 40.2% statewide in the first three months of the year compared with the same period in 2009, according to San Diego research firm MDA DataQuick.

Foreclosure sales dropped 1.7% from a year earlier and 16.1% from the last three months of 2009, DataQuick said Tuesday.

The numbers suggest that the housing market won't be flooded by a fresh wave of bank repossessions, which had been seen as a major threat to the market's recovery.

BOJ's Nishimura: signs Japan escaping deflation

Bank of Japan Deputy Governor Kiyohiko Nishimura said on Wednesday there are positive signs that Japan will escape deflation.

"It can be said that some beams of light are starting to break through a thick cloud of deflation."

India Boosts Rates To Tackle Inflation

As expected, India has joined Australia in lifting rates more than once to try and control a strong recovery.

Vietnam and Malaysia have also lifted rates, China has started a small tightening via lifting asset ratios and curtailing bank lending and Singapore has boosted the value of the Singapore dollar as a first, and possibly only step to start controlling a strong rebound.

First signs of an inflationary spring, or still too much to swallow?

Early recovery foreclosed in some parts

Ohio foreclosures spike in 1Q

A surge in lender filings last month helped send first-quarter foreclosures up 5 percent in Ohio as bank repossessions nationwide hit their highest point in at least a half-decade, according to a Thursday report from RealtyTrac Inc.

Irvine, Calif.-based RealtyTrac, which compiles and sells foreclosure data, said Ohio logged 15,041 default notices, 7,543 auction notices and 10,637 bank repossessions in the first three months of the year. While up 5 percent from the same period in 2009, it was a 12 percent jump from the fourth quarter of last year.

Foreclosure rate drops but crisis not over yet

The number of New Jersey homeowners in various stages of the foreclosure process dropped in the first quarter of the new year — yet was still higher than in the same period in 2009.

Foreclosure Flood Waters Are Still Rising Fast

The dam is bursting on foreclosures. New data out today shows that the number of homes repossessed by banks has hit a record high.

REOs, as they’re called in the trade, rose nine percent in the first quarter compared to the previous one, according to housing industry research firm RealtyTrac. Home seizures are up 35 percent from the year-ago quarter.

RELATED: Unemployment rises in 24 states

Jobless rates in California, Florida, Nevada and Georgia all set record highs during March.

North Dakota continued to have the lowest jobless rate in March. The state's 4% rate was followed by South Dakota's 4.8% and Nebraska's 5% unemployment rates.

Fat lady ain't sung yet

Panel not ready to say when the recession ended A committee of economists, charged with determining the beginnings and ends of recessions, confirmed Monday that it could not yet declare an end to the recession that began in December 2007.

"Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature," the group at the National Bureau of Economic Research (NBER) said in a statement.

"Many indicators are quite preliminary at this time and will be revised in coming months," the committee statement said.

Many will continue to struggle. Unemployment usually keeps rising well after a recession ends. After the 2001 recession, for instance, unemployment didn't peak until June 2003 — 19 months later.

More of the same is not corrobative evidence

Guambat would really like to jump on this as a harbinger, a swoop, an "I was just saying". But reading the same thing several times is not corroboration.

BUT, just in case I might later be able to crow, "I told you so", there's this:

Swooning canaries, exploding debt

The FT’s Gillian Tett makes the point in her Tuesday column that the recent inversion of 10-year swap spreads could be heralding something important, namely worries over US sovereign risk.

It’s a theme that was picked up by Bloomberg on Monday, in relation to US Treasury yields generally, and again on Tuesday with its chart of the day, which is focused on what negative swap spreads might be saying about the US dollar’s fortunes.

[There's a quote and a reference to this Bloomberg article, which Guambat had read at the time, as well as that chart, and thought "hummmmm. There might be something in this." But then his mind went blank.]

Of course, correlation ≠ causation, and there are still plenty of people who think negative swap spreads have absolutely zip to do with how the market views US debt, and by extension, its currency.

But still, something to think about as the dollar slides for a second consecutive day.

Presumably, someone will at some point for no particular reason snap their fingers, and Guambat will come out of it.

The case for a very extended recovery

John Mauldin, in this week's Thoughts from the Frontline, rationalizes his impression that recovery, in the US and around the world, will be a long time comin'. Guambat finds it pretty convincing, not the least because he puts the bigger picture in the context of the "fingers of instability" lesson he explained to us years ago.

He relates that theory of order in chaos to Minsky's observation that stability leads to instability, with the corollary that the longer the period of stability, the greater the degree of instability.

He then places those notions up against some economic data, namely, a "60 year debt supercycle", illustrated by this chart (which Guambat doesn't dispute but notes that a very quick google-search to find other such charts was not corroborative):


Finally, he brings in Professors Ken Rogoff and Carmen Reinhart, authors of This Time It's Different, to make the point that we've only begun a recovery process; the return to some form of normalcy is way off, maybe another decade.

We borrowed (and not just in the US) like there was no tomorrow. And because we wereso convinced that all this debt was safe, we leveraged up, borrowing at first 3 and then 5 and then 10 and then as much as 30 times the actual money we had. And we convinced the regulators that it was a good thing. The longer things remained stable, the more convinced we became they would remain that way.

this time is really different from all the other crises we have gone through since the Great Depression

every debt crisis always ends this way, with the debt having to be paid down or written off or defaulted upon. That part is never different. One way or another, we reduce the debt. And that is a painful process. It means that the economy grows much slower, if at all, during the process.

If it were not for the fact that we are coming to the closing innings of the debt supercycle, we would already be in a robust recovery. But we are not. And sadly, we have a long way to go with this deleveraging process. It will take years.

You can't borrow your way out of a debt crisis, whether you are a family or a nation.

We built a very unstable sandpile and it came crashing down and now we have to dig out from the problem. And the problem was too much debt.

And here's where I have to deliver the bad news. It seems we did not learn the lessons of this crisis very well. First, we have not fixed the problems that made the crisis so severe. We have not regulated credit default swaps, for instance.

And this next time, we won't be able to fight the recession with even greater debt and lower interest rates, as we did this last time. Rates are as low as they can go, and this week the bond market is showing that it does not like the massive borrowing the US is engaged in.

Guambat has pared down his list of subscriptions to this last one, but not only because Mauldin's Frontline Thoughts is a free one. It is interesting. Not always agreeable, not always rewarding, but usually interesting enough. (You can subscribe yourself here: http://www.frontlinethoughts.com/learnmore.)

For instance, in his fingers of stability discussion, he mentions the "power law", with its impact on critical mass.

Going back to the sandpile game, you find that as you double the number of grains of sand involved in an avalanche, the likelihood of an avalanche is 2.14 times as unlikely. We find something similar in earthquakes. In terms of energy, the data indicate that earthquakes simply become four times less likely each time you double the energy they release. Mathematicians refer to this as a "power law," or a special mathematical pattern that stands out in contrast to the overall complexity of the earthquake process.

Guambat wonders if there are any implications in that idea to suggest that the market lows we saw back in early 2009 released sufficient "energy" or stress from the system that they will mark the lows for this cycle? He hopes Mr. Mauldin might provide his own conjecture.

Yeah, but who's counting?

No, really. Does anyone care? Does it matter?

Four Lenders Shuttered as U.S. Bank Failures Reach 41 This Year

Four banks in Georgia, Florida and Arizona were shut down by regulators, bringing the total for the year to 41 as smaller lenders are pressured by bad loans tied to commercial real estate.

The banks seized yesterday had total assets of $1.24 billion and deposits of $1.1 billion, according statements from the Federal Deposit Insurance Corp. Regulators have seized 181 U.S. lenders since the start of 2009.

U.S. lenders are collapsing at the fastest pace in 17 years amid losses on loans made at the height of the market. The number of banks on the FDIC’s “problem” list climbed to the highest level since 1992 in the fourth quarter. FDIC Chairman Sheila Bair said on Feb. 23 that the pace of failures will exceed last year’s total of 140.

Yesterday’s closings will drain $320.3 million from the FDIC’s deposit insurance fund, the agency said.

Want names? Read the article.

Equal and opposite reaction to depressed imports

Backhaul.

One of the reasons given for the unspeakably high freight rates people on Guam have to pay is that there is no backhaul for the ships carrying freight here. The explanation given is that the one-way trade has to pay the two-way transit.

That may be what is also happening on US West Coast ports at the moment.

Guambat's reader may recall a few posts back at the end of 2009 about the dearth of imports to the US, and the signal that sent up that the consumer was becoming distressed. US consumers were trimming their requirements for trade from Asia.

Now, according to Guambat's reading between the lines of the following WSJ article, the backhaul effect may be restraining US exports to Asia.

Export Revival Threatened By Shipping Bottlenecks

The U.S. finally is enjoying some strength in exports, thanks to economic recovery in Asia and a generally weak dollar. But just as U.S. goods find demand abroad, there's a problem getting them there.

It's the opposite of what one might expect. Carriers have a surplus of ships. And since the U.S. still imports more than it exports, freighters arrive in America looking for export cargo to take back, so they don't have to go home empty.

Yet American producers of everything from hazelnuts to cardboard are complaining they can't get their goods shipped in timely fashion.

The constraints arise from the unusual economics of transport businesses such as ports and container shipping. U.S. ports, thanks to the huge appetite Americans have developed for goods made abroad, are oriented more to the import than the export trade. So are the big foreign ship companies, which gear their schedules and their routes to American imports, not to exports.

The ship glut, instead of providing more vessels, perversely is helping make fewer available. That's because the glut, in combination with a fall in trade during the recession, cut shipping rates below the cost of operation for some routes. Carriers responded by idling many ships and reducing their trips to the U.S., to save money and try to force shipping rates higher.

When ships carrying imports call less frequently at U.S. ports, or even skip some ports they once went to, exporters have to wait longer or look harder to find a ride for the goods they want to ship abroad.