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US Economy

GAP said:
California has always been a state of conspicuous consumption.....now they are paying the price.

Off the top of my head, I can't remember some of the more outlandish spending (and they have been the poster child for ridiculous programs), but it has been literally decades of living high off the hog, and now the hog is dying....

I can't see the Federal government bailing them out....they are in no better position, for the same reason...
[move][/move]



But this is sovereign debt (US debt) just as the Greek debt is sovereign debt, belonging to the Greek state. The EU is bailing our Greece. Who, besides the US national government, should, can or will bail out California and 20+ other states?

China?

Maybe, but the political implications are interesting.
 
I agree, but that does not make NOT stupid spending....

There is so much garbage spending based on "would likes", that the core spending commitments can't be met...

Even core spending commitments are rife with piles of addendum's that just inflate the cost of delivery....it's time to go back to basics, but not until the people know what's it's like to crash and burn under the present agenda...until then, the voter will just be swayed by the lies of someone else wanting to get in to dip their fingers in the honeypot of cash....
 
It is very rare that I agree with the Good Grey Globe’s Doug Saunders but, like a stooped watch, he has to get it right now and again, and he does, here, in this column which is reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/opinions/no-culture-of-poverty-here/article1609873/
No 'culture of poverty' here
Favela residents aren’t resigned – they are making plans to escape

Doug Saunders

From Saturday's Globe and Mail

When I went to interview people last year in Vigario Geral, a barren brick shanty-town neighbourhood in the northern flats of Rio de Janeiro, I first went through the mandatory formalities.

I found someone who knew the slum intimately, and had her phone up the drug gang that controls it and ask them not to kill the blue-eyed guy who’d be visiting tomorrow. Crossing the railway bridge into the neighbourhood, I was met by a boy of perhaps 16 clutching a 9 mm pistol. He checked my name and waved me past two equally young colleagues slumped in plastic chairs with rifles on their laps.

Given that ordeal, plus the isolated and densely crowded look of the place, the appalling poverty figures prevalent in these neighbourhoods and the fact that Brazil has one of the widest gaps between wealth and poverty in the world, I would have expected this to be a pretty helpless place. As anyone knows who has seen City of God – set in a slightly less dire Rio favela – these people are penned in by hard drugs and the highly armed gangs that move them, by terrible piecework jobs and sometimes squalid conditions. Coming from outside, life in the favela looks like the very definition of a “culture of poverty,” a set of behaviours that pin families down for generations.

Yet, despite all the things that could trap you in destitution or kill your children here, despite the grating frustration, it was hard to find anyone who did not have a very specific and carefully worked-out plan to get their children through university and build a better life, using painstaking savings and real-estate investments on the resale value of their self-built shacks (which they did not legally own – a fact that is not a barrier to functioning property markets). One Rio favela family in five has a broadband Internet connection, and almost everyone was fluent in the worlds of investment, entrepreneurship and education. And people weren’t resigned to their poverty; they were frustrated to the point of fury that their plans weren’t working out.

Forty-four years ago, an American scholar named Janice Perlman entered these same favelas for 10 years of study into what was then fashionably known as “marginality” – what was believed to be the distinct culture of the destitute who “isolate themselves in parochial ruralistic enclaves rather than take advantage of the wider city context,” as she wrote.

Her years in the slum and her thousands of interviews shattered that belief to the core, and her 1976 book The Myth of Marginality gave the world a new understanding of poverty: It is a condition that people pass through, not a disposition or a culture.

“I have found the prevailing wisdom completely wrong,” she wrote. The mud-floor-shack dwellers “do not have the attitudes or behaviour supposedly associated with marginal groups … in short, they have the aspirations of the bourgeoisie, the perseverance of pioneers, and the values of patriots.”

Beginning in 2001, Ms. Perlman, a professor of planning at Berkeley, returned to the slums of Rio, today far more violent than they were in the 1970s, to see what had happened to her theory. Her new book Favela is a crucially important examination of the nuts and bolts of urban poverty, the things that work and those that don’t; it should be required reading for the leaders of China, India and Bangladesh. It is often a despairing work, describing shattered dreams and stupid policies that have ruined lives; it is also a profoundly optimistic one.

Returning, she found that, amidst the murder and cocaine and street-vendor lifestyles, there was more optimism than ever. When asked, “Will your life be better in the next five years?” only 12 per cent in the favelas had answered “yes” in 1969; today, 64 per cent do. They have good reason: There is “significant upward mobility among favela residents relative to the population of Rio as a whole,” in both financial well-being and educational income.

Economist Deepa Narayan, in the huge study of 60,000 poor people in 15 countries she and her World Bank colleagues conducted last year, found that Ms. Perlman’s conclusions were universal: “We find very little evidence that poor people are trapped in a culture of poverty,” she wrote – even in the poorest countries, Ms. Narayan found that poverty in almost all cases is a “condition, not a characteristic” – something that people pass through, and make plans to escape.

“What has often been seen pejoratively as a ‘culture of poverty’ is not a culture at all,” Ms. Perlman concludes, “but a pragmatic response to coping with a harsh reality. If the urban poor had the opportunity to use their energy and skills to earn a decent living … their purported self-defeating beliefs and behaviours would disappear.”

The poor are not always with us. They know exactly how to leave, if we can only give them the basic tools to do so.


I have been ‘fortunate’ to have lived, worked and/or travelled in some of the poorest places in the world and I agree 100% with Janice Perlman, “What has often been seen pejoratively as a ‘culture of poverty’ is not a culture at all but a pragmatic response to coping with a harsh reality. If the urban poor had the opportunity to use their energy and skills to earn a decent living … their purported self-defeating beliefs and behaviours would disappear.” There is no “culture of poverty,” poor people, left to their own devices, work hard to become less and less poor. But there is, in the rich, industrialized West, a culture of entitlement which leads many to infantilize the poor, in Rio and Regina, and de facto, institutionalize poverty and misfortune because it allows us to assuage our unfocused guilt.

Much of the misspending that goes on in California - and Ohio and Ontario and Alabama and Alberta, too - is well intentioned but destructive social spending that destroys real family values (not the pseudo-intellectual garbage spewed by the Christian right, but the real family values that make parents care for children and, later, adults care for parents and so on) and creates dependency.

When, not if, the big, bloody cuts come they will, of necessity, disproportionately impact the poor but the consequence may be to “liberate” the poor from the shackles of mismanaged social programmes.

 
I find myself strangely compelled by Saunders observations, and further your analysis. The potential for entrepreneurship and innovation found in our planets slums is quite astonishing.
 
For further reading on how poor people realy live and work, try Hernando De Soto. The Mystery of Capital and The Other Path provide interesting answers to these questions.

Of course reading economists like Friedrich von Hayek and Ludwig von Mises would also provide real ideas on how to combat poverty and corruption as well...
 
I believe there are too many governments pursuing deficit financing at levels too high to be sustained by the productive economic activity of the world at large.  At this point, only one option remains: governments which control their own money supplies will inflate away their deficits and debts.  The lower levels will benefit as the cost of their public pension commitments in nominal dollars diminishes rapidly.

The solution has a certain justice: a period of high inflation is bearable by those who are currently employed, or who have investment funds that can be shifted to avoid the worst impacts (ie. RRSPs, defined contribution pension plans).  Even people on income assistance may do OK if governments scale up the benefits.  The people who will get it in the neck are those who are retired in defined benefit plans without indexation to match absolute inflation - and they are same people who are stubbornly forcing governments into a corner from which the only way out is to pay out the pensions in a much weaker currency.
 
Stagflation, followed by what?

http://www.nationalreview.com/exchequer/231236/government-borrowing-corporations-are-saving-coincidence

Government Is Borrowing, Corporations Are Saving: Coincidence?

July 20, 2010 5:49 PM By Kevin D. Williamson
Tags: Barack Obama, deficits, financial Armageddon, sovereign debt, Stimulus

Today on the BBC’s The World Tonight, I had a very civil discussion with Robert Reich about the economics of a fifth round of stimulus spending, which now seems to be an inevitability. (I’ll link the audio when it is available.) Mr. Reich  took the conventional Keynesian view that our problem is a deficit in aggregate demand, which discourages producers from offering new products and services, from building factories and opening offices, and from hiring people to staff them.

“Government,” Reich said, “has to be the buyer of last resort.” I do not think he made a very convincing case. For a Keynesian, it’s always 1933. But it may very well be 1973, instead: the doorstep of staglation.

A few thoughts:

As F. A. Hayek put it, “The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.” (Those words should be engraved on the Federal Reserve building and the U.S. Treasury.) There are lots of sophisticated economic thinkers in the Obama administration, just as there were in the Bush administration, just as there were in the Clinton administration. Alan Greenspan has forgotten more economics than the average homo sap. will ever dream of. None of them has got the policy right. It is very, very difficult to transmute economic knowledge into fruitful public policy. If Mr. Greenspan could have foreseen the consequences of the Fed’s keeping interest rates so low for so long, surely he would have chosen to do otherwise. If the hundreds of U.S. policymakers who spent decades upon decades stimulating the residential real-estate market had been able to foresee that they were creating a bubble that would end in a crash, dragging the world financial system down with it, they surely would have chosen to act otherwise. But it is impossible to see into the future with any great clarity.

With that in mind: We do not know what will be the consequences of our current descent into unprecedented deficits and mushrooming sovereign debt. Prudence dictates that we proceed with the utmost caution — in fact, that we do not proceed at all farther down the path to deeper national debt.

Mr. Reich pointed to the 1950s, during which time the United States was able to grow so robustly, with the economic benefits so thoroughly dispersed throughout the population, that the debts left over from the FDR era and World War II were of relatively little economic consequence. Here’s the problem with that line of thinking: We are not in the post–World War II economy. The economic circumstances of the postwar era were utterly unique: The majority of the world’s productive manufacturing capacity was in the United States, Europe and Asia having fully militarized their economies only to see their factories and capital blown to bits, their work forces decimated (and, in some cases, worse than decimated). That is not going to happen in 2010, let us pray.

There are some other problems with the orthodox Keynesian account. As Tyler Cowen has asked: If aggregate demand really is so weak, why are profits so strong? Harley Davidson, to take one example, saw its profits quadruple in its last report, and it is a company that is very much dependent upon American buyers. Other firms, from Pepsi to Mattel to Ameritrade, have seen very strong profits of late. Analysts have remarked that, in terms of profits, this is one of the strongest recoveries we’ve seen in a good long while. That does not comport with Mr. Reich’s account.

In any case, profitable businesses are a more sure source of economic growth and jobs than are temporary government-spending measures. I’d rather have a job at the Harley factory than a job that depends upon such ingenious Obama stimulus proposals as the purchase of a polar icebreaking ship ($87 million) or new subsidies for beekeepers and fish-farmers ($150 million). Government is a reliable misallocator of capital, and that stimulus money has to come from somewhere. Where? From the sort of people who might like to start a factory to compete with Harley Davidson, or a toy company to compete with Mattel, and earn some profits of their own.

As my colleague Stephen Spruiell has pointed out, once this latest round of stimulus (in the form of expanded unemployment benefits) has gone out the door, we will have spent more trying to stimulate the economy than we spent on the Iraq war and the Afghanistan war — combined. To what end? Ten percent unemployment? A tottering recovery? The Democrats will argue that things would have been worse without the stimulus, that it would have worked better if it had been larger, etc. That hypothesis has the political advantage of being unfalsifiable. But we can look around the world and see that other countries that have enacted proportionally smaller stimulus programs have fared better than we have. (The Germans, of all people, are wondering what has gotten into us, why we seem to be going all Italian.)

Consumer demand is not the fundamental problem; it is, if anything, a symptom of the deeper problem: a few trillion dollars’ worth of devalued capital in the form of a cratered real-estate market and a similarly knee-capped market for mortgage-backed securities. Stimulus spending is not going to drive housing prices back up to where they were, and that is a good thing: We should not try to reinflate the bubble. Remember that our current problem is, in no small part, the result of earlier attempts to stimulate the economy through artificially low interest rates. Rather than allowing the markets to sort out the banks and the mortgage securities, we’ve propped up weak institutions, given a blank check to the government-sponsored enterprises at the heart of the problem — Fannie Mae and Freddie Mac — and produced an inscrutable financial-reform bill that will do little or nothing to address the fundamental problems behind the recent crisis, and little or nothing to prevent future bailouts, should such measures become politically feasible. The real cause of the credit crisis is the intertwining of politics and finances, and we have only complicated and deepened that relationship.

Which is to say: This is not 1933. A monetary tsunami may (or may not) follow this radical expansion of the money supply and credit. There are no obvious signs of inflation, but there need not be: General-price inflation can happen very rapidly, with little apparent warning. The truth is, nobody knows. And when you don’t know, you proceed with caution. It is not a coincidence that American corporations are adding rapidly to their cash reserves at the same moment that the American government is adding rapidly to its debts. Which course of action seems more prudent?

– Kevin D. Williamson is deputy managing editor of National Review.
 
Increasing personal savings is a start, and will act as the soil and fertilizer for renewed economic growth in the future. The only fly in the ointment is desperate cash strapped governments may go to astounding lengths to seize that wealth. The $2 trillion dollar unfunded liability cost in municipal, State and Federal pensions alone will spur action, as a very powerful constituency (unionized public service workers) will be demanding payment:

http://hotair.com/archives/2010/07/31/underneath-the-gdp-report/

Underneath the GDP report

posted at 8:00 am on July 31, 2010 by King Banaian

There are at least three sub-stories underneath the reported GDP growth rate of 2.4% for the second quarter of 2010 that we should pay attention to.  (There’s also the revision to GDP for the past three years, but that’s a different story.)

  1. The inventory buildout appears to be ending.  After contributing 2.8% and 2.6% to growth the last two quarters, the rate of increase in inventories — which has buoyed manufacturers — slowed to a contribution of 1.1% this time.  The number I follow more closely on final sales of GDP actually rose a bit, from 1.1% last quarter to 1.3% this quarter.  The contribution of investment in GDP in the 2nd quarter was more from equipment purchases and a surprising gain in housing off of the homebuyer’s tax credit.  But that may have ended already:

          Ryland says that the big question from last quarter’s conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. … Says they knew there would be a slowdown in May once the event passed, but they didn’t expect it to be as severe or prolonged as it’s been…

  2. There was a large surge in imports that dragged on the GDP estimate, along with a subsiding of the impulse from exports.  This may be due to petroleum products being drawn more foreign producers, but the data is not split out well enough for us to know this yet.  What worries me more is the decline in exports: That source of growth is beginning to slide now and create a potential negative impulse for a second downturn in the economy.  At any rate, absorption of goods and services in the US was up quite a bit, but many of those were bought from overseas.
 
  3. I was more surprised by the reported savings rate of 6.2% than any other number. An economy that is showing vigorous growth and high optimism would have a rate moving lower.  But of course sentiment is down to pre-2010 levels, and consumers appear to have decided to continue the repair of their balance sheets instead.  This makes business investment all the more important to growth, if you can get that without the small businessman who has checked out on the recovery.  Even larger firms are turning sour in July.

All of this will turn up the heat on Congress, which is now hearing in a new report that letting the Bush tax cuts expire would cause GDP to fall 1.1% in 2011.  (If you are going to say the Obama stimulus added to GDP, you sorta need to say as well that a tax increase cuts GDP, don’t you?)  There appears to be no impulse left on the demand side that would lead the next leg of the recovery; uncertainty seems also to be holding back supply.  Ed calls this “a political disaster for Democrats,” but one major way out of the problem — use monetary policy — seems on hold despite one Fed president’s call for more leniency.  A different one is asking the Congress and Obama Administration for less “random refereeing“, but that is the source of its power.

You will be able to hear more about the report on the King Banaian Show, starting at 9am CT Saturday on KYCR, AM 1570 in the Twin Cities.

(Crossposted at SCSU Scholars.)
 
More reasons to batte4n down the hatches in your own personal economies (and work like hell to convince Canadian politicians of all stripes and all levels to do the same with the municipal, provincial and federal economies...)

http://pajamasmedia.com/instapundit/  08 Aug 10

ON THE ECONOMIC FRONT, a coming “panic attack?”
UPDATE: A reader who requests anonymity writes:


I’ve given some thought to James Pethokoukis’ “August Surprise,” and I think he’s right that something like a bailout of underwater loans will happen soon.

Economically, however, there is little upside and a whole lot of potential downside. The worst of these loans are never going to be paid back. The “owner” of a $200,000 Inland Empire home that he paid a half-million dollars for, was never going to pay back the whole amount anyway. So there’s really no argument that the bailout will have a stimulus effect. There’s simply no additional spending created by eliminating an unpayable
debt.

But there are two potential downsides: one inflationary and one deflationary. Right now banks are sitting on many billions of dollars worth of unlisted foreclosed homes. The President’s action would give the illusion of a floor under housing prices and just might be all that it takes for banks to release their backlog. If all that shadow inventory hits the market at once, housing prices in the communities already hardest hit will be hit even harder. That’s the deflationary effect.

The inflationary problem is a little more obvious. As a practical matter, Fannie and Freddie debt is probably already being counted as federal debt even if it isn’t currently being accounted for that way. So that argues that the effect of transparently accounting for the debt will be negligible. However, the rumored amounts being discussed for the bailout (between two and eight hundred billion) are far smaller than the loss of value in the nation’s housing market. Bond buyers will have to ask themselves if another round of bailouts is coming. A bailout of this size (and one that circumvents Congressional authority) is a very visible signal that the Administration will do anything it can get away with try to prop up the economy. I can’t see how this risk wouldn’t put upward pressure on treasury yields—and thus, mortgage rates.

Now, imagine both consequences of this bailout hitting simultaneously: The bailout is followed by a temporary floor under housing prices, precipitating a deluge of backlogged inventory hitting the market right about the time that mortgage rates start creeping up.

No upside and a big potential downside. So why do it?

Politics. Three of the four states with the hardest hit housing markets are California, Florida, and Nevada. All three could see Republicans elected to the Senate. Not just any Republicans: In Florida and Nevada, the GOP candidates are Tea Party Republicans, while in California, the Democratic candidate is among the most liberal in the entire chamber. If purple states like Florida and Nevada will elect ruby red Republicans to statewide office, and a deep blue state like California can’t retain a liberal Democrat, imagine the political effect over the next two years.

There will be a rightward sprint in both parties. Furthermore, if all three of those states go Republican, it’s likely that Washington’s Murray and Wisconsin’s Feingold are in real trouble too. That could bring the GOP total in the Senate to 52. One party just doesn’t pick up a dozen seats in the Senate without the other party arriving at a little introspection.

And Barack Obama is deathly afraid of a little Democratic Party introspection under those circumstances. The fundraisers in the Democratic Party will find another nominee to back in the primary. He will be a lame duck within his own party.

To use a military term, California, Florida, and Nevada are Obama’s final protective fire. They are where all rounds of ammunition will be expended to stop the enemy’s advance. He will gladly commit the nation to hundreds of billion dollars of additional debt so that the people of those states feel just a little bit better–at least until they discover that even with a smaller mortgage, without a job, they can’t afford even that.

One hopes that the administration isn’t this cynical, self-centered, and unconcerned with the well-being of the country.
 
A simple and elegant solution (and a must in Canada as well, where the situation is very similar [last summer Fredricton had to borrow over $20 million to meet unfunded pansion and benefit liabilities]), but the civil service unions will fight to the last taxpayer to keep their perques and privilages. Note these figures are for the Federal government, comperable freezes and cuts at the state and municipal level (and corresponding actions in Canadian provinces and municipalities) would compound the savings further:

http://www.washingtonexaminer.com/politics/Cut-deficit-without-cutting-services_-Start-here-1008723-100306764.html

Cut deficit without cutting services? Start here
By: Byron York
Chief Political Correspondent
August 10, 2010


Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Cut-deficit-without-cutting-services_-Start-here-1008723-100306764.html#ixzz0wIhrzzip
 
Whenever a conservative suggests reducing the federal deficit by cutting spending rather than raising taxes, there's always someone to ask: Well, what would you cut? Americans may say they want less government spending, the argument goes, but they don't want anyone to touch their services and subsidies and monthly checks.

Fair enough. But there's a persuasive counter-argument going around in conservative circles these days: You can start cutting government spending without cutting anyone's services or subsidies or monthly checks. Just bring the pay of federal workers into line with pay in the private sector.

A recent Heritage Foundation study found the average federal worker (excluding the uniformed military) makes $78,901 a year in wages and salary versus $50,111 for the average private sector worker. When you count generous health and pension benefits, the average total compensation of federal workers comes to $111,015 a year versus $60,078 in the private sector.

In recent years, that disparity has been fueled by an explosion of federal generosity on the high end of the pay scale. For example, USA Today recently reported that in December 2007, a total of 1,868 civilian workers in the Defense Department earned $150,000 or more; by June 2009, the number was 10,100. In late '07, the paper says, just one employee at the Transportation Department earned more than $170,000. Less than two years later, 1,690 workers earned that much.

Other studies have come up with slightly different numbers. But there's no doubt that federal pay is higher than private pay across the board, not just in the upper brackets. If Congress were to freeze federal pay raises until the private sector begins to catch up, the savings to taxpayers would be considerable. Heritage scholar James Sherk estimates that ending the disparity could save the taxpayers $47 billion a year. (A study by the American Enterprise Institute put the figure at $40 billion.) That won't get close to balancing the budget, but add up 10 years of that and the government will save significant money.

And it's done without cutting government services or subsidies. "In the past, the implication was that if you are spending less, then you are doing less," says Grover Norquist, the conservative head of Americans for Tax Reform. "But you could save money by paying public workers what you pay private workers and still do the same things."

Getting to public-private pay equity need not involve a sledgehammer approach. There are differences between the federal workforce and the private-sector workforce that pay reformers will have to take into account.

For example, government workers are more educated, older and more likely to be in managerial and administrative positions than the overall work force. That means they make more money, just as comparable workers in the private sector make more than less-skilled workers.

Reforming federal pay would take those differences into account. Highly paid federal workers who have the skills and experience to command high pay in the private sector would stay at the high end of the pay scale and might even see their pay go up. But others who make far more working for the government than they would for the private sector would likely have their pay frozen until it was closer to private standards. Nobody's pay would be cut.

In the Senate, Oklahoma Republican Tom Coburn has introduced amendments to the war supplemental spending bill that would freeze federal pay for a year. In the House, Republicans found a pay-freeze proposal was extremely popular with participants in the YouCut program, which asks the public for input on how to cut spending. When GOP leaders asked for a recorded vote on the measure, majority Democrats promptly shot it down. Still, the GOP sees pay equity as a winning issue. "If Republicans had thought that this was political death," Norquist says, "they would not have had that vote."

In the meantime, the problem is getting worse, not better. While the private sector has shed millions of jobs in the recession, the federal government has added nearly 200,000 employees to its rolls. That's more salaries, more benefits and more pensions. And the pay problem is replicated in states across the country; most of them have similar public-private disparities, and many of them are facing calamitous budget deficits.

Pay equity between government and private workers would help solve those problems. The next time someone asks, Well, what would you cut? -- conservatives have an answer.



Byron York, The Examiner's chief political correspondent, can be contacted at byork@washingtonexaminer.com. His column appears on Tuesday and Friday, and his stories and blog posts appears on ExaminerPolitics.com



Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Cut-deficit-without-cutting-services_-Start-here-1008723-100306764.html#ixzz0wIfU9u4d
 
Another point of failure. So much money is being sucked out of the productive economy, and so many claims are being made for what is left that soon there will be nothing left for investment or even maintaining what currently exists:

http://yidwithlid.blogspot.com/2010/08/hey-taxpayers-get-ready-to-pay-for.html

Hey Taxpayers, Get Ready To Pay For the Union Pension Failure Tsunami

Congress is coming after your wallets again, this time they will be bailing out multi-employer pension plans, retirement programs for union workers funded by employers and run by unions.

Many multi-employer plans are struggling after years of financial hits especially after the last recession. Along with the value of the plans going down, as the boomer generation is reaching retirement age, every year the number of people tapping those retirement funds hits a new record.

A 2009 study from ratings firm Moody's Investors Service estimated that the country's largest multi-employer plans have long-term deficits of about $165 billion (108 plans). The report is summarized at the end of this post.

According the Wall Street Journal, things are even worse than the Moody's report indicates. The number of union-run pension plans may be in the hundreds.

Big Labor is desperate about the issue, should these pension plans collapse its curtains for the Union Leaders and it would not be the best recruiting tool for the labor movement in general. Adding to the crisis is a proposed new accounting rule that may expose that the pension "emeror" has no clothes. While Congress is on vacation, union lobbyists are feverishly pushing for the federal government to bail out the troubled multi-employer pension plans via S.3157 The Create Jobs and Save Benefits Act of 2010


The big problem with these plans is that when one company in the pool goes out of business, the other companies remain on the hook for the cost of the plan. These spiraling liabilities inspired Pennsylvania Senator and Big Labor favorite Bob Casey to introduce legislation to cordon off "orphaned" pensions—those for which an employer has stopped contributing or withdrawn from the plan—and drop them on the federal Pension Benefit Guaranty Corporation.
The federal agency, Pension Benefit Guaranty Corporation (PBGC), is already significantly underfunded and tax dollars are the "go to" place for more funding. The Casey bailout could dump as much as $165 billion in new liabilities on the PBGC.

This cause has taken on new political urgency, and no less than Senate Majority Whip Dick Durbin has endorsed the bill. The reason for the rush is new rules that may soon be issued by the Financial Accounting Standards Board (FASB), the green-eyeshade outfit that dictates how companies keep their books. Those proposed rules would expose the multi-employer time bomb.

Here's why. In 1980 an amendment to the Employee Retirement Income Security Act established the principle that any company in a multi-employer plan had a right to assume that other members would pay in perpetuity. Those that did not, and left the plan, were required to pay a "withdrawal penalty" to make the plan whole. This is fine in theory, though in reality these penalties have rarely covered the true cost of withdrawal, which means liabilities for remaining companies have continued to grow.

As plan obligations climb, and a mediocre stock market has reduced fund assets, more companies are running for the exits. Most notably, UPS was willing pay a remarkable $6.1 billion in 2007 to flee its plan. FASB's new rules are likely to acknowledge this new corporate reality, and they would in effect require companies to assume that they must pay the withdrawal penalty, and therefore to include that liability on either an income statement or balance sheet.
Ouch. Many companies have withdrawal liabilities that exceed their assets, and the result would be a painful reckoning. The accounting changes would also embarrass Big Labor, exposing its pension promises as bankrupt and perhaps leading to wholesale reform of multi-employer plans. One labor law firm, Groom Law Group, sent out an SOS in July, announcing its intention to form a group to fight the FASB rules, which it noted would put unions under "increased pressure at the bargaining table to decrease contributions and cut benefits." Anything but that.

Here comes the Casey bill to the rescue. Progressive Democrats could shift orphan company pensions to the taxpayer, the liabilities for the remaining companies would fall dramatically and make their balance sheets look pretty again. Of course the systemic problem is not fixed an there is no downward pressure on union benefits. All thanks to the 88% of the country who are not part of a union, whose pension plans are not protected because they are not part of the progressive's favored class, union members.  Unions and employers will be rewarded for their mis-management of pension plans, indeed Union leaders will be able to brag about their wonderful management and benefits as they recruit new union members.

I supposed the union leaders will keep quiet about those members who are already retired, under Casey's bill, S. 3157  payouts to current retirees would be limited to $21,000 a year, much less than what they are expecting. 

If this all sounds like it could never pass, keep in mind this is the most willful Congress in modern history. Congress just completed paying off the teachers unions with $10 billion, and unions will put enormous pressure on Democrats to pass the pension bailout before they lose their huge majorities.

Many companies with multi-employer plans such as the trucking firm YRC Worldwide (organized by the Teamsters) are joining the union lobby effort, and more than a few Republicans could go along. The outrageous all too often becomes the inevitable with this Congress, and it will again unless taxpayers raise a ruckus.
And all this will come out of YOUR pockets.This administration with the help of the Progressives that run congress has already spend much of your tax dollars to bail out union members, the $800 billion plus stimulus plan was one example, The President's executive order, known as the “High Road Contracting Policy”gives preferential treatment to government construction contractors who hire union workers (or pay money to the unions if they don't) is another.

The President who complains about special interests is hiding the fact that there is at least one special interest that owns the Democratic Party...The Unions.

Moody's Report Summary.

How bad off are the union pension plans? The best single indicator of a plan’s financial health is its Funding Percentage. A fully funded plan will have a funding percentage of 100%. A plan is underfunded when the percentage is below 100%. The lower the percentage, the greater the risk that benefits will not be available when they come due.

According to the Pension Protection Act of 2006 multi-employer (plans set through unions and company sponsors) plans are evaluated via their funding levels. To ensure retiree benefits are protected, when a multiemployer plan falls below certain funding levels, stronger funding requirements become effective under provisions of the Pension Protection Act of 2006. Plans whose funding levels are below 80% are referred to as “endangered,” while those below 65% are referred to as “critical.”

The list of 108 union pension plans below is from the Moody's September 2009 report. The ones in green print are at the endangered level, the ones in red are critical.
 
When will we reach the tipping point. This paper (10 page PDF) suggests the timeframe is uncomfortably close: 2015 to 2035

http://mercatus.org/sites/default/files/publication/Guessing%20the%20Trigger%20Point%20for%20a%20US%20Debt%20Crisis%208.24.10.pdf

Guessing the Trigger Point for a U.S. Debt Crisis
by Arnold Kling1

Leading authorities in the United States, including the Congressional Budget Office, use the term
―unsustainable‖ to describe the long-term fiscal outlook.2 By the year 2080, spending on entitlements
alone could exceed total federal tax revenues. In the very long run (meaning from the year 2035
through 2080), the problem is primarily one of ―excess costs‖ in health care, meaning the tendency for
health spending to grow faster than the rest of GDP. However, in the medium run, meaning from 2010
through 2035, the aging of the U.S. population is the dominant factor.3
This paper explores the possibility of the U.S. experiencing a debt crisis in the medium run, meaning
somewhere between 2015 and 2035. It is impossible to state precisely the trigger point for a crisis. At
best, we can make guesses about some of the key parameters.
 
Thucydides said:
When will we reach the tipping point. This paper (10 page PDF) suggests the timeframe is uncomfortably close: 2015 to 2035

http://mercatus.org/sites/default/files/publication/Guessing%20the%20Trigger%20Point%20for%20a%20US%20Debt%20Crisis%208.24.10.pdf


That's a pretty scary analysis from a pretty respectable analyst. It's no wonder China is reducing it exposure in America.
 
What the end game may look like (part 1):

http://www.zerohedge.com/article/guest-post-hyperinflation-part-ii-what-it-will-look

Hyperinflation, Part II: What It Will Look Like
Submitted by Gonzalo Lira

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve.

It was a long, boring, snowy piece of macro-economic policy speculation, discussing Treasury yields, Federal Reserve Board monetary reaction, and the difference between inflation and hyperinflation—but considering the traffic it generated, I might as well been discussing relative breast size in the porn industry. With pictures.

Essentially, I argued that Treasury bonds are the New and Improved Toxic Assets. I argued that, if there was a run on Treasuries, the Federal Reserve—in its anti-deflationary zeal, and its efforts to prop up bond market prices—would over-react, and set off a run on commodities. This, I argued, would trigger hyperinflation.

The disproportionate attention my post garnered is indicative of people’s current fears. As I’ve said before, people aren’t blind or stupid, even if they often act that way. People are worried—they’re worried about the current state of affairs: Massive quantitative easing, toxic assets replaced by the full faith and credit of the U.S. government in the shape of Treasuries, fiscal debt which cannot possibly be repaid, a second leg down in the Global Depression that seems endless and only getting worse—people are scared. Many readers gave me quite a bit of useful feedback, critiques, suggestions and comments on the piece—clearly, what I was discussing touched on a deeply felt concern.

However, there were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event:

The first was, Where does all the money come from, for hyperinflation to happen? The question wasn’t put as baldly as that—it was wrapped up in sophisticated discussions about M1, M2 and M3 money supply, as well as clever talk about the velocity of money—the acceleration of money—the anti-lock brakes on money. There were even equations thrown around, for good measure.

But stripped of all the high-falutin’ language, the question was, “Where’s all the dough gonna come from?” After all, as we know from our history books, hyperinflation involves people hoisting bundles and bundles of high-denomination bills which aren’t worth a damn, and tossing them into the chimney—’cause the bundles of cash are cheaper than firewood. If the dollar were to crash, where would all these bundles of $100 bills come from?

The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets?
 
In this post, I’m going to address both of these issues.


Apart from what happened with the Weimar Republic in the 1920’s, advanced Western economies have no experience with hyperinflation. (I actually think that the high inflation that struck the dollar in the 1970’s, and which was successfully choked off by Paul Volcker, was in fact an incipient bout of commodity-driven hyperinflation—but that’s for some other time.) Though there were plenty of hyperinflationary events in the XIX century and before, after the Weimar experience, the advanced economies learned their lesson—and learned it so well, in fact, that it’s been forgotten.

However, my personal history gives me a slight edge in this discussion: During the period 1970–’73, Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende and his Popular Unity Government. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares.

The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now. But a slight detour through this history is useful to our current predicament.

To begin: In 1970, Salvador Allende was elected president by roughly a third of the population. The other two-thirds voted for the centrist Christian Democrat candidate, or for the center-right candidate in roughly equal measure. Allende’s election was a fluke.

He wasn’t a centrist, no matter what the current hagiography might claim: Allende was a hard-core Socialist, who headed a Hard Left coalition called the Unidad Popular—the Popular Unity (UP, pronounced “oo-peh”). This coalition—Socialists, Communists, and assorted Left parties—took over the administration of the country, and quickly implemented several “reforms”, which were designed to “put Chile on the road to Socialism”.

Land was expropriated—often by force—and given to the workers. Companies and mines were also nationalized, and also given to the workers. Of course, the farms, companies and mines which were stripped from their owners weren’t inefficient or ineptly run—on the contrary, Allende and his Unidad Popular thugs stole farms, companies and mines from precisely the “blood-thirsty Capitalists” who best treated their workers, and who were the most fair towards them.
 
Allende’s government also put UP-loyalists in management positions in those nationalized enterprises—a first step towards implementing a Leninist regime, whereby the UP would have “political control” over the means of production and distribution. From speeches and his actions, it’s clear that Allende wanted to implement a Maoist-Leninist regime, with himself as Supreme Leader.

One of the key policy initiative Allende carried out was wage and price controls. In order to appease and co-opt the workers, Allende’s regime simultaneously froze prices of basic goods and services, and augmented wages by decree.

At first, this measure worked like a charm: Workers had more money, but goods and services still had the same old low prices. So workers were happy with Allende: They went on a shopping spree—and rapidly emptied stores and warehouses of consumer goods and basic products. Allende and the UP Government then claimed it was right-wing, anti-Revolutionary “acaparadores”—hoarders—who were keeping consumer goods from the workers. Right.
 
Meanwhile, private companies—forced to raise worker wages while maintaining their same price structures—quickly went bankrupt: So then, of course, they were taken over by the Allende government, “in the name of the people”. Key industries were put on the State dole, as it were, and made to continue their operations at a loss, so as to satisfy internal demand. If there was a cash shortfall, the Allende government would simply print more escudos and give them to the now State-controlled companies, which would then pay the workers.

This is how hyperinflation started in Chile. Workers had plenty of cash in hand—but it was useless, because there were no goods to buy.

So Allende’s government quickly instituted the Juntas de Abastecimiento y Control de Precios (“Unions of Supply and Price Controls”, known as JAP). These were locally formed boards, composed of loyal Party members, who decided who in a given neighborhood received consumer products, and who did not. Naturally, other UP-loyalists had preference—these Allende backers received ration cards, with which to buy consumer goods and basic staples.

Of course, those people perceived as “unfriendly” to Allende and the UP Government either received insufficient rations for their families, or no rations at all, if they were vocally opposed to the Allende regime and its policies.

Very quickly, a black market in goods and staples arose. At first, these black markets accepted escudos. But with each passing month, more and more escudos were printed into circulation by the Allende government, until by late ’72, black marketeers were no longer accepting escudos. Their mantra became, “Sólo dólares”: Only dollars.
 
Hyperinflation had arrived in Chile.
 
(Most Chileans, myself included, find ourselves both amused and irritated, whenever Americans self-righteously claim that Nixon ruined Chile’s economy, and thereby derailed Allende’s “Socialist dream”. Yes, according to Kissinger’s memoirs, Nixon did in fact tell the CIA that he wanted Chile’s economy to “scream”—but Allende did such a bang-up job of fucking up Chile’s economy all on his own that, by the time Richard Helms got around to implementing his pissant little plots against the Chilean economy, there was not much left to ruin.)

One of the effects of Chile’s hyperinflation was the collapse in asset prices.

This would seem counterintuitive. After all, if the prices of consumer goods and basic staples are rising in a hyperinflationary environment, then asset prices should rise as well—right? Equities should rise in price—since more money is chasing after the same number of stock. Real estate prices should rise also—and for the same reason. Right?

Actually, wrong—and for a simple reason: Once basic necessities are unmet, and remain unmet for a sustained period of time, any asset will be willingly and instantly sacrificed, in order to meet that basic need.
 
To put it in simple terms: If you were dying of thirst in the middle of the desert, would you give up your family heirloom diamonds, in exchange for a gallon of water? The answer is obvious—yes. You would sacrifice anything and everyting—instantly—in order to meet your basic needs, or those of your family.

So as the situation in Chile deteriorated in ’72 and into ’73, the stock market collapsed, the housing market collapsed—everything collapsed, as people either cashed out of their assets in order to buy basic goods and staples on the black market, or cashed out so as to leave the country altogether. No asset class was safe, from this sell-off—it was across-the-board, and total.
 
Part 2:

http://www.zerohedge.com/article/guest-post-hyperinflation-part-ii-what-it-will-look

Now let’s return to the possibility of hyperinflation in the United States:

If there were a sudden collapse in the Treasury bond market, I argued that sellers would take their cash and put them into commodities. My reasoning was, they would seek a sure store of value. If Treasury bonds ceased to be that store of value, then people would invest in the next best thing, which would be commodities, especially precious and industrial metals, as well as oil—in other words, non-perishable commodities.

Some people argued this point with me. They argued many different approaches to the problem, but essentially, it all boiled down to the argument that commodities and precious metals have no intrinsic value.

Actually, I think they’re right. In a strict sense, only oxygen, food and water have intrinsic value to human beings—everything else is superfluous. Therefore the value of everything else is arbitrary.
 
Yet both gold and silver have, historically, been considered valuable. Setting aside a theoretical or mathematical construct that would justify the value of gold and silver, look at it from a practical standpoint: If I went to a farmer with five ounces of silver, would he give me a sack of grain? Probably. If I offered him an ounce of gold for two or three pigs, would he give them to me? Again, probably.
 
Where there is a human society, there is a need to exchange. Where there is a need to exchange, a medium of exchange will soon appear. Gold and silver (and copper and brass and other metals) have served that purpose for literally millennia, but then they were replaced by paper.
 
Right now, there are two forms of paper currency: Actual dollars, and Treasury bonds. One is a medium of exchange, the other a store of value.

If Treasuries—the store of value—were to collapse in price, and the Fed—as I predict—tried everything in its power to at least initially prop up their prices, would those sellers who managed to get out of Treasuries in time then turn around and invest in even dodgier bits of paper, like stocks? Or REIT’s? Or even precious metal ETF’s?

No they would not: They would get out of Treasuries—supposedly the “safest” investment there is—and get into something even safer—something even more tangible: Actual commodities. Not ETF’s, not even futures (or anything else that entails counterparty risk)—sellers of Treasuries would get into actual, hard commodities. Because if suddenly even the safest of all investment vehicles is now unsafe, do you really want to get behind the wheel of an even more unsafe vehicle, like stocks or corporate bonds or ETF’s? I mean, c’mon: If Treasuries crash, what else might crash?

That’s why people in a Treasury panic would buy commodities. This ballooning of non-perishable commodities would be as a means to store value. Because that’s what people do in a panic—they batten down the hatches, and go into what’s safest. When the stock markets tanked in the Fall of ’08, where did all that sellers’ cash go? To Treasuries—because it was then considered the safest store of value. Commodities suffered in comparison—gold took a bit of a hit, as did the other precious metals—but Treasuries ballooned as the equities markets tanked.
 
But if Treasuries—the ultimate store of value—now tanked? If the last sure-thing in paper-based stores of value took a hit, where would people go to both store value, and have ready access to that value?

Commodities. And this rush to commodities, I argued, would trigger hyperinflation.

Now, I said I would answer two questions—one was why commodities would outpace all other asset classes in a Treasury panic and subsequent hyperinflation. The other question was, “Where’s all the dough to feed my fireplace gonna come from, in a hyperinflationary event?”

The first wave of dollars in a hyperinflationary event will come from people’s savings accounts.

If Treasuries tank, and the markets all barrel into commodities, then prices will rise for regular consumers—this should not be a controversial inference. What would consumers do, with suddenly much higher gas prices, and soon much higher food prices? Simple: They’ll bust open their piggy banks, whatsoever those piggy banks might happen to be: 401(k)s, whatever equities they might have, etc.

But if the higher consumer prices continue—or become worse—what will happen to the 320 million American consumers? They’ll start buying more gas now, rather than wait around for tomorrow—and the market will react to this. How? Two way: Prices of commodities will rise even further—and asset prices will fall even lower.

Again, the man in the desert, the diamonds, and the water: If American consumers are getting hit at the gas station and the supermarket, they’ll start selling everything so as to buy gas, heating oil (most especially) and foodstuffs. The Treasury panic will thus be transfered to the average consumer—from Wall Street to Main Street by way of $15 a gallon gas prices, and $10 a gallon heating oil prices.

All other consumer prices would soon follow the leads of gas, heating oil and food.

In the above bit of Chilean history, I described how the Allende government printed up escudos to make up for the shortfall in nationalized businesses that was produced by their policy of hiking wages, while at the same time fixing prices.

This is a completely different way to hyperinflation than the way I envision it for the American economy—but once the American economy gets there, the effects of hyperinflation will be exactly the same: People will try to get out of assets in order to get hold of commodities. To get all eccy about it, money velocity would approach infinity, as money supply remains (at first) fixed, yet in the panic over commodities, aggregate demand as measured by aggregate transactions goes vertical.

Would there be Federal government intervention of some sort? Most definitely—people would be screaming for it. Would food rationing be implemented? Probably, and probably by way of the current Food Stamps program. Troops on the streets, protecting gas stations and supermarkets? Curfews to prevent looting? Palliative dollar printing? Yes, yes, and very likely yes.

That last bit—palliative dollar-printing: That’s the key. When palliative dollar-printing happens, it will be the final stages of hyperinflation—it’s when sensible people ought to realize that the crisis is almost over, and that a new normal will soon appear. But this stage will be fucking awful.

Palliative dollar printing will take place when the Federal government simply runs out of options. Smart economists will get on CNBC and argue that, “The velocity of money is destroying the economy—we must expand the currency base!” It’ll sound logical, but palliative money-printing will be a policy option born out of panic. The final policy option. It won’t be done for evil conspiratorial reasons—always remember Aphorism #6 (“Never ascribe to malice what can be explained by incompetence.”). It’ll be carried out because of fear and panic.

A whole boatload of fools in Washington, on seeing this terrible commodity-driven crisis unfold, with consumer prices shooting the moon, will scream for dollars to be printed—and their rationale will be perfectly reasonable, I can practically hear it now: “We've got to get cash into the hands of the average American citizen, so he or she can buy food and heating oil for their families! We can’t let Americans starve and freeze to death!”

Palliative money-printing will take place—hence the average American family will likely be using bundles of $100 bills to fire up the chimney that hyperinflationary winter.

Hoo-Ah.

Now, this fairly Apocalyptic scenario is simultaneously horrifying, and exciting as all get out. Hell, why do you think disaster movies are so popular? Shit blowing up is way cool! That's why Roland Emmerich gets paid the big bucks, God bless ‘im.

But for sensible people, Apocalypse is a distraction—it’s not the main event. For sensible people who want to be prepared, Apocalypse represents opportunities.

A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that.

Another true story: A banker friend of mine manages the assets of a fabulously wealthy 70-something gentleman, whom I'll call Alfredo. In 1973, Don Alfredo was a youngish man, just starting out, with a degree in engineering but no money—until he inherited US$3,000 from a deceased aunt. Alfredo realized that the $3,000 were in a sense worthless: He couldn’t buy anything with them, and it wasn’t enough for him to leave the country and start over someplace else. After all, even then, $3,000 was not that much money.

So he took those $3,000, went down to the stock exchange, and spent all of it on Chilean blue-chip companies: Mining companies, chemical companies, paper companies, and so on. The stock were selling for nothing—less than penny stock—because of the disastrous policies of the Allende government. His stock broker at the time told him not to buy stocks, as Allende’s government, it was thought, would soon nationalize these companies as well.
 
Alfredo ignored his broker, and went ahead with the stock purchases: He spent all of his $3,000 on buckets of near-worthless equities.
 
On September 11, 1973, the commanders in chief of the four branches of the Chilean military staged a coup d’état. Within a year, Alfredo’s stock had rebounded about ten-fold. Since then, they’ve multiplied several thousand-fold—yes: Several thousand-fold. Don Alfredo has lived off of that $3,000 investment ever since—it’s what made him a multi-millionare today.
 
He realized, of course, that either those blue-chip companies would be nationalized by Allende—in which case he would lose all his $3,000 inheritance, which really wouldn’t change his fortunes very much—or somehow a new normal would arrive in Chile. Since the $3,000 couldn’t buy him anything, he took a gamble—and won.
 
What do these two true stories tell us? Simple: Buy when there’s blood on the streets.
 
That’s Baron de Rothschild’s famous line—but it hides a key insight, one which should be highlighted perhaps even more forcefully than the line itself:
 
Even in the midst of Apocalypse, things will get better.
 
That’s something people don’t quite seem to understand. In fact, it’s why teenagers tragically kill themselves over some girl or boy: They don’t realize that, no matter how bad things are now, they will get better later. To repeat:

Even in the midst of Apocalypse, things will get better.
 
I’m not repeating this insight as an empty comfort to my readers—I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when thing are about to turn for the better. This applies to every situation—including and most especially in a hyperinflationary situation.

Why? Simple: Because hyperinflation—by definition—cannot last. Because people need a stable medium of exchange. So if the currency goes up in flames in a hyperinflationary fire, of course there will be a period of terrifying instability—but it will pass. Either the currency will be repaired somehow (as Volcker repaired the dollar back in 1980–’82). Or the currency will be completely and irrevocably trashed—and then be replaced by something else. Because—to insist—people need a stable medium of exchange.

If Treasuries tank and commodities shoot up so high that they essentially break the dollar, civilization will not come crashing down into anarchy. At worst, there’ll be a three-four years of hell—economic hell. Financial hell. But then things will settle down into a new normal.

This new normal might well have unsavory characteristics. I tend to be a pessimist, and just glancing through history, I can see that just about every period of hyperinflation has been stabilized by some subsequent form of autocratic or totalitarian government. The United States currently has all the legal decisions and practical devices to quickly transition into an authoritarian or totalitarian regime, should a crisis befall the nation: The so-called PATRIOT Acts, the Department of Homeland Security Agency, the practical suspension of habeas corpus, etc., etc.

But as I said in my previous post, and reiterate here: Speculations about the new normal are pointless at this time. The future will happen soon enough.

What I do know is, One, a hyperinflationary event will happen, following the crash in Treasuries. Two, commodities will be the go-to medium for value storage. Three, all asset classes will collapse in short order. And Four—and most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

During that stumble, opportunities will present themselves. I hope I have explained why.
 
The real numbers get even worse:

http://www.commentarymagazine.com/blogs/index.php/wehner/353456

Defining Recovery Down
Peter Wehner - 09.03.2010 - 12:44 PM

What are we to make of the most recent jobs report, which shows that (a) unemployment increased from 9.5 percent to 9.6 percent and (b) nonfarm payrolls fell by 54,000 last month? If you’re White House press secretary Robert Gibbs, you tweet, “Don’t be fooled — the economy added 67,000 private sector jobs, 8th straight month of added private sector jobs, job loss came in Census work.” Picking up on this, David Mark, Politico’s senior editor, writes this:

    At the White House Friday morning President Obama praised the private sector addition of 67,000 jobs in August, the eighth straight month of job growth. “That’s positive news, and it reflects the steps we’ve already taken to break the back of this recession. But it’s not good enough,” the president said. And Christina Romer, outgoing chair of the president’s Council of Economic Advisors, said the jobs figures were “better than expected.” Do they have a point about a slowly-but-surely improving jobs situation?

The answer is “no.” To understand why, it might be helpful to put things in a wider perspective.

For one thing, the so-called underemployment rate, which includes workers who are working part-time but who want full-time work, increased from 16.5 percent to 16.7 percent. During our supposed “Recovery Summer,” we have lost 283,000 jobs (54,000 in June, 171,000 in July, and 54,000 in August). And for August, the employment-population ratio — the percentage of Americans with jobs — was 58.5 percent. We haven’t seen figures this low in nearly three decades. As Henry Olson of the American Enterprise Institute points out, “Since the start of this summer, nearly 400,000 Americans have entered the labor force, but only 130,000 have found jobs. … America’s adult population has risen by 2 million people since [August 2009], but the number of adults with jobs has dropped by 180,000. The unemployment rate declined slightly despite these numbers, from 9.7 percent to 9.6 percent, because over 2.3 million people have left the labor force entirely, so discouraged they are no longer even looking for work. ”

Keep in mind that all this is occurring during a period when job growth should be considerably higher, at least based on past post-recession recoveries. Former chair of the Council of Economic Advisers Michael Boskin points out that “compared to the 6.2% first-year Ford recovery and 7.7% Reagan recovery, the Obama recovery at 3% is less than half speed.” Bear in mind, too, that today’s jobs report comes a week after the GDP for the second quarter was revised downward, from 2.4 percent to 1.6 percent. Economists generally agree that the economy needs to grow 2.5 percent to keep unemployment from going up, and a good deal better than that to begin to bring it substantially down.

What all this means, I think, is that we’re not in a recovery at all, at least not in any meaningful sense. And those who insist otherwise are (to amend a phrase from Daniel Patrick Moynihan) Defining Recovery Down.

The most recent GDP figures also have harmful fiscal ramifications. For example, estimates for the deficit this year (more than $1.3 trillion) are based on both the Congressional Budget Office’s and the Obama administration’s assumption of roughly 3 percent growth. If growth is well below that, government revenues are going to be lower than estimated. And so this year’s deficit and net increase in the debt are going to be worse than even the (already quite troubling) projections. Meanwhile, the Federal Reserve has very few, if any, arrows left in its quiver. It has done just about all that can be done.

The narrative the Obama administration is trying to sell is that we were on the edge of another Great Depression but avoided it and are now, in the president’s oft-repeated phrase, “moving in the right direction.” If we persist in following Obama’s policies on spending, taxes, and regulations, Obama assures us, we will build on this recovery and turn a sluggish one into a strong one. At the end of Obamaism lies the land of milk and honey.

This is wishful thinking. The economy right now is sick and, in some important respects, getting sicker. And the president is pursuing policies that are not only not helping; they are downright counterproductive.

Robert Gibbs can tweet away, but he cannot tweet away reality.
 
This administration is so bad that it makes the Carter years look good.
 
This reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail is both interesting and germane:

http://www.theglobeandmail.com/report-on-business/economy/us-jobless-rate-hints-at-permanent-shift/article1696060/
U.S. jobless rate hints at permanent shift
Structural change in labour market may be behind lack government intervention’s lack of success

KEVIN CARMICHAEL

WASHINGTON — From Saturday's Globe and Mail

As the United States continues its battle with high unemployment, policy makers are confronting a troubling question: What if they’ve been taking the wrong approach to fixing the ailing job market?

The latest government survey showed on Friday that the jobless rate was 9.6 per cent in August, the 12th consecutive month that unemployment was at or above 9.5 per cent.

That’s a poor return on the hundreds of billions the Obama administration, backed by Congress, has poured into the economy over the last couple of years, and on the Federal Reserve’s decision to hold its benchmark interest rate near zero since December of 2008.

Policy makers around the world directed their recession-fighting efforts at propping up consumer demand that they assumed would return once the crisis had passed.

In some countries, including Canada, this approach worked. But not in the United States, humbling for a country that has long prided itself on a labour market that was considered the most resilient and flexible in the world.

And some prominent economists and policy makers are now suggesting the real problem isn’t lack of consumer spending – it’s that the unemployed don’t have the right skills to fill the jobs that are open.

These people are now theorizing that the financial crisis has altered the structure of the U.S. labour market, perhaps permanently.

If they’re right, the Obama administration and the Federal Reserve will need to change their approach to increasing employment because their current one, which is aimed at stoking spending, could end up exacerbating the conditions that led to the financial crisis.

Raghuram Rajan, a professor at the University of Chicago’s Booth School of Business, argues the U.S.’s high unemployment rate  is the result of structural changes rather than a cyclical downturn in demand. He reasons the U.S. housing bubble and the boom in world trade over the last couple of decades created millions of jobs that won’t be coming back. That leaves millions of construction and factory workers without a decent paycheque, and lacking the experience for higher-skilled jobs.

A case in point is Charlotte, N.C.-based Carlisle Cos Inc., whose units make products such as tires, construction materials, and transmissions. The company’s chief executive officer, David Roberts, created something of a stir in Internet chat rooms earlier this month after he told CNBC that he had $50,000-a-year engineering jobs that were going unfilled for lack of qualified applicants.

What is needed, Prof. Rajan argues, is education and retraining so workers can fulfill their dreams for houses and cars by winning higher-paying jobs. The continuation of rock-bottom interest rates only risks another credit and housing bubble.

This is more than the pet theory of an ivory tower economist trying to sell some books. In recent weeks, James Bullard, the president of the Federal Reserve Bank of St. Louis, and Narayana Kocherlakota, the head of the Minneapolis Fed, both have said that they believe much of the current unemployment problem is structural.

For decades, American workers displayed an uncommon willingness to chase jobs around the country. This is in part because the country’s meagre unemployment benefits leave them little choice. But it also was because they could quickly sell their house, likely at a profit. That’s no longer the case, since millions of Americans are stuck with homes that are worth less than the mortgage.

Over all, non-government employment increased by 67,000 last month, more than many economists on Wall Street were expecting, but far less than is needed to keep up with monthly additions to the work force. Some 139.3 million Americans had jobs in August, compared with 145.7 million on a seasonally adjusted basis in August, 2007.

“That’s positive news,” President Barack Obama said of the eight-consecutive monthly increase in private-sector employment. “But it’s not nearly good enough. That’s why we need to take further steps to create jobs and keep the economy growing.”

Mr. Obama said he would elaborate on the policies he has in mind next week. The Wall Street Journal and Washington Post, citing unnamed officials, reported this week that the President is weighing a package of tax breaks, including a temporary reduction of payroll levies.

Measures of that kind suggest the White House continues to view the weakness in the labour market as a cyclical problem that can be fixed by continuing to prop up demand.

That might disappoint Prof. Rajan, but it would be fine by Gary Burtless, a senior fellow at the Washington-based Brookings Institution and a former economist at the U.S. Labour Department.

In an interview, Mr. Burtless called the argument that the U.S. is suffering from a skills mismatch “nonsensical” because employment in most industries has declined over the last couple of years, suggesting there is little work to be had – period. It’s possible that some specific occupations are understaffed, but if there’s a broad misalignment between available jobs and available workers, Mr. Burtless insists it doesn’t show up in the labour statistics.

The problem, he says, is much simpler to understand, if no easier to solve: “What we are looking at is the mother of all business-cycle downturns.”


One might want to argue that the reason that stimulus spending worked (or appeared to work) in Canada is that we have a less sophisticated, less productive economy than does the USA. They have already made the transition from hewing wood, drawing water and bending metal and have become innovative and service oriented; we have not – hence our lower standard of living. It’s not that our workers are stupid or lazy or even overpaid: it’s just that Canadian management is, by and large, fat, dumb and happy behind a wall of government support programmes.

The same problem is already beginning to confront China. Manufacturing jobs are already leaving the rich East coast centres for lower wage areas in Indonesia and the Philippines – because Central and Western China are not, yet, ready to take them. The Chinese government and the plutocrats are, already taking a licking for poor planning in the media, even in the English language media.
 
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