Anecdotal Economics

Six Degrees of Deception

2009-12-06T16:28:00.011-06:00

“Lies, damned lies and statistics,” a quip of English statesman Benjamin Disraeli, was popularized by Mark Twain a century ago, and, well, for the early 20th century those categories more than sufficed.

In a vastly more complicated 21st century however, we find more shades of gray, more nuance necessary, and so we comment today on the Six Degrees of Deception, an upgrade from the mere three with which we made do for so many decades. The original trio remains intact, of course, but we embellish those with several more categories, namely “White Lies” to precede the three and “Government Statistics” to follow.

The Sixth Degree of Deception we will save until last, as our real focus today is lying’s fifth circle of hell, Government Statistics, namely the award-worthy work of fiction published Friday by the Bureau of ~~Made-Up~~ Labor Statistics known as the Employment Situation for November 2009. It depicts, fairy-tale-like, a U.S. U-3 Unemployment Rate of 10.2 percent and a broader U-6 rate of 17.0 percent, when, in fact as we illustrate below, the true unemployment rates are more like 15.5 percent (U-3) and, when including involutary part-time workers, 21.2 percent (U-6), which certainly are more Depression-like numbers.

Friday, December 4th, we reliably were informed, the U.S. economy, in the midst of the worst recession since The Big One in the 1930s, shed a mere 11,000 jobs, well below the 130,000 expected by forecasters and, by nearly an order of ten, the 169,000 private-sector jobs lost according to the ADP National Employment Report issued two days earlier, and a 23 rd consecutive month of declining employment.

According to the BLS, the Government sector created 7,000 jobs in November. Adjusting accordingly, it implies 18,000 private sector jobs were lost last month, an absurd, happy-face estimate which bears no resemblance to ADP’s more realistic assessment of reality. BLS also managed to refine its estimates of job losses in September and October, utilizing its own formulas of revisionist history, in which it now pretends far fewer jobs were lost than originally reported.

September’s Employment Situation guessed 263,000 jobs disappeared into the recession’s depths when first reported in early October, was revised upward to -219,000 a month later, and, to make the deception complete, revised upward again in the November report to -139,000, almost half as many job losses than first thought.

October’s Employment Situation originally pondered the loss of 190,000 positions, only to be pleasingly reworked this month to show 110,000 fewer jobs. At this pace, when December’s Employment Situation is released early next year, October may be upwardly revised to fewer than 50,000 job losses and, to maintain the illusion, November almost certainly will be upwardly adjusted to a positive, jobs-created, number.

The manipulation is breathtaking, particularly the fiction of jobs being created by new business creation (the Birth/Death Model adjustment), a convenient “plug” number designed to estimate the number of businesses being formed or closing – and the resulting jobs created or destroyed in the process. The Birth-Death Model employed by the Bureau of Labor Statistics ~~fabricators~~ statisticians clearly is nothing but a mechanism by which desired employment situation outcomes can be constructed. As evident in the chart below, from Jesse’s Café Américain, monthly Birth-Death adjustments are positive every month save January, and vary little month-to-month over the last six years, despite nearly two years of brutal recession and record-setting unemployment data.

In November, the Birth-Death Model added 30,000 jobs, and in April-May-June this year, it helped fertilize all the green shoots with a combined 630,000 new jobs created by intrepid Americans fed up working with for the man (or not working, as likely was the case) who, supported mentally and financially by loving spouses or family members, threw their hats into the deep end of capitalism’s pool by starting a new business, hiring themselves, and others, presumably, in the process.

Not.

This is data of convenience, designed to achieve political ends. When interested parties wanted to pass a near-trillion-dollar stimulus program in February, the employment situation suitably was grim. Once-passed, the data rapidly began improving. Now that 2010 mid-term elections are months away, the employment situation magically is darn-near robust, and no doubt will be upwardly adjusted to further robustness in months to come. Tell that to the record number of people – 5.9 million at last count if that data point can be believed – who now have been unemployed more than 26 weeks, half a year, and who are helping to rapidly deplete state unemployment insurance coffers.

Our favorite manipulation, however, centers around the manner in which the U.S. population is categorized in BLS-world, as in who is working, who isn’t working, who has stopped looking for work and who want to work, and bears witness to the astonishing manner in which data can be rearranged to suit to the objectives of those with a vested interest in the outcomes.

The deception lies in who BLS conveniently counts as employed and unemployed and how they are counted. Two areas for mischief jump out: “Persons Who Currently Want a Job (PWCWJs),” a 6.0 million subset of those Not In Labor Force (the NILFs*…see definition below) and those “Marginally Attached” to the workforce, a subset of PWCWJs. Persons Who Currently Want a Job are those able and willing to work, but who temporarily have left the Labor Force for any number of reasons. Sounds like “unemployed” to us.

In November, according to the BLS monthly cookbook, 2.3 million people were “Marginally Attached,” and of those, a record 861,000 officially were “Discouraged,” meaning in BLS terms they no longer are counted as Unemployed (part of the Labor Force), even though of course they were unemployed, but, being so discouraged, they had not looked for work in the last four weeks because “they believe no jobs are available for them.”

We reviewed BLS data from November 2004 to May 2007 (30 months) and from May 2007 to November 2009 (30 months) to establish some trends in both periods, as depicted in this table. From November 2004 to May 2007, the Labor Force – new entrants by age or immigration – grew on average by 149,100 each of the 30 months, Employment advanced by 189,400 a month, Unemployment fell and NILFs increased by about 86,000 a month over the time period.

From May 2007 to November 2009, however, the Labor Force increased only by 37,200 a month according to BLS, the number of Employed declined nearly 250,000 per month, Unemployment, of course, increased dramatically, an average of 285,000 each month over the 30-month span, and the NILFs grew by 138,000 a month.

When we adjust the November 2009 data (hey, we can make up numbers as well as the government) to account for a more realistic growth of the Labor Force over the last 30 months, which almost everyone including Ben Bernanke acknowledges is growing by at least 100,000 to 125,000 entrants per month (not the measly 37,200 per month fantasized by BLS), add the “Discouraged” subset to Labor Force and Unemployed and reduce the Persons Who Currently Want a Job fudge category to November 2004 – May 2007 levels (about five million), we find a much different “employment situation.” (Chart Column: More Realistic Nov-09)

U-3 “headline” unemployment increases to 12.9 percent and U-6 unemployment, which includes involuntary part time workers and the rest of “marginally attached” cohort, jumps to 19.4 percent.

But wait…There’s More. Let’s roll the Marginally Attached into the Labor Force and Unemployed because, after all, they really do want to find jobs and they’re able and willing to work. Now the U-3 unemployment increases to 13.6 percent and U-6 unemployment, which includes involuntary part time workers remains at 19.4 percent. (Chart Column: Even More Realistic Nov-09)

And More. When we include the rest of the Persons Who Currently Want a Job (3.688 million) in the Labor Force and Unemployed because, after all, they really do want jobs and they’re able and willing to work, we get the most realistic view of unemployment in America, numbers starting to approach Great Depression levels and a more reliable indicator of how badly the employment situation has deteriorated.

U-3 unemployment leaps to 15.5 percent and U-6, including the involuntary part-timers advances to 21.2 percent, scary numbers indeed if in reality one in five Americans willing and able to work cannot find full-time employment. (Chart Column: True Employment Nov-09)

And, as we continually have observed, those unemployed and underemployed tend to make lousy consumers and borrowers, and will for years to come as we progress through our own self-made, Japanese-style lost decade or two of sluggish economic activity, growing disparity between wealthy and other-than-wealthy, massive tax increases applied to a resentful populace able to pay taxes (primarily the wealthy, but wage-earners as well), steadily increasing federal government debt well beyond the best-case hopes of the Hoper-in-Chief, and continued eroding equity market values as money, including what’s left of the retirement funds of the Baby Boomers, is recycled into the perceived “safety” of government bonds, all spinning vicious-circle-like downward to some miserable equilibrium manifested in a much lower standard of living for just about everyone except Bill Gates and Warren Buffett and 398 other people on the Forbes list.

Bottom line, by manipulating the number of people allocated to the Labor Force (Employed and Unemployed) and the NILFs, BLS conveniently can make the monthly Employment Situation politically more palatable, which is why Government Statistics is the lying’s fifth circle of hell which fewer than one in a hundred in this country understand. Government Statistics certainly deserve a prominent place in the Six Degrees of Deception, to a degree which never could have been envisioned a century ago by a cynical and caustic Mark Twain, and the BLS Employment Situation is but one of the many ruses upon which markets gyrate and politics is practiced, so don’t even get us started on the topic of fictional GDP estimates.

And, oh yes, the Sixth Degree of Deception? Why, “Campaign Promises” of course, which completes are our revised, upgraded, nuanced Six Degrees of Deception, with apologies to Mark Twain and Benjamin Disraeli: White Lies, Lies, Damned Lies, Statistics, Government Statistics and Campaign Promises. Now that’s change we can believe in.

*NILFs: Not In Labor Force - Persons 16 years of age and older including students, homemakers, retired workers, seasonal workers counted in an off season who are not looking for work, institutionalized persons, and persons doing only incidental unpaid family work (less than 15 hours during the week prior to completing their census form).

Big Banks & Wall Street Fixed, But Where's the Lending?

2009-12-02T10:14:00.004-06:00

We reliably were informed 15 months ago fixing Wall Street, aka the FIRE economy (Finance, Insurance and Real Estate), was a necessary precedent to fixing Main Street. If the banking sector was suitably repaired, rivers of new credit swiftly would flow to already overleveraged people and businessess and the then-thought mild recession quickly would end as the debt-fueled consumption habits of the last generation were rebooted after a brief respite.

Not.

According to the FDIC's Quarterly Banking Profile for 3Q2009, new lending is the last thing in which many banks are engaging, being presently more concerned with collecting, restructuring or writing off that indebtedness already extended which cannot be repaid, or at least repaid according to the original terms of the underlying notes.

Quarterly Decline in Loan Balances Is Largest on Record

Total assets of insured institutions fell for a third consecutive quarter. The $54.3 billion (0.4 percent) decline followed a $237.9 billion decrease in industry assets in the second quarter and a $303.2 billion drop in the first quarter.
The decline in assets was led by falling loan balances. Total loan and lease balances declined by $210.4 billion (2.8 percent) during the quarter. This is the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984. C&I loans fell by $89.1 billion (6.5
percent), residential mortgage loan balances declined by $83.7 billion (4.2 percent), and real estate C&D loans dropped by $43.6 billion (8.1 percent).
The reduction in loan balances was partially offset by increased balances at Federal Reserve banks (up by $142.4 billion, or 36.7 percent) and by a $59.7 billion (2.6 percent) increase in securities. Banks increased their holdings of U.S. Treasury
securities by $28.6 billion (49.3 percent) during the quarter. Much of the increase in other securities balances reflected higher market values for available-for-sale securities.

But the good news, especially for 2009 bonus pools and bonus recipients, is the industry earned a collective $2.8 billion in the third quarter. Growth in net interest income, lower realized losses on securities and other assets, higher noninterest income, and lower noninterest expenses, all contributed to the year-over-year increase in net income, according to the FDIC, and 43 percent of all institutions reported higher quarterly earnings compared to a year ago, the highest proportion of financial insitutions reporting improved earnings in the past six quarters.

So Wall Street now is fixed, but what about Main Street? With 10.2 percent "headline" unemployment and a 17.5 percent jobless rate when including involuntary part-timers and "discouraged" workers who have given up looking for employment (plus another million or so not counted as unemployed but who currently want a job) the Federal Reserve, Treasury and other federal and state government agencies have a daunting, and politically explosive task ahead.

Captain Obvious: Deficits DO Matter; May Lead to Double Dip

2009-11-19T16:52:00.000-06:00

In remarks which sent Keynesian economists and big-government proponents into apoplectic fits, President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

With the U.S. unemployment rate at 10.2 percent, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction. His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.

"It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession," he said.

By "people," Obama, who was visiting China at the time of the interview, clearly means those foreign purchasers of U.S. Government debt, the absence of which would immediately drive up long-term interest rates and crush stock markets and the economy as U.S. investors moved in to fill the funding gap, much in the way Japan's economy has limped along for nearly two decades.

Obama is scheduled to hold a forum with U.S. business leaders and financial experts on Dec. 3 to discuss ways to lift the economy. He said he had not decided yet whether any measures to boost the economy should be deficit neutral, with that being one of the things to be examined at the forum.

It is entirely likely a fourth fiscal stimulus plan will be floated early next year which would include, in addition to jobs-related programs and unemployment insurance extensions, aid to high-population, delegate-rich states whose budget shortfalls threaten massive spending cuts and higher taxes and fees, California and New York notably among at least another dozen or so states on that list.

October Retail Sales Remain Weak, Flat Ex-Auto

2009-11-16T10:00:00.000-06:00

Seasonally adjusted advance estimates of U.S. retail and food services sales for October were $347.5 billion, an increase of 1.4 percent from the previous month, but 1.7 percent below October 2008, as reported by the Census Bureau today. Ex-Auto, October retail sales were estimated to have grown 0.2 percent for the month, but fell (2.6 percent) from a year ago.

September retail and food service sales were revised downward significantly to (2.3 percent) from an advance estimate of (1.5 percent). Ex-Auto, revised September retail sales increased 0.4 percent, down a tenth from the advance estimate of +0.5 percent.

By revising downward September's data, and by a BIG amount (-2.3 percent vs. -1.5 percent, a downward revision of more than half the original estimate), October's corresponding comparison looks so much the better. Good statistical sampling? Coincedence?

We dare not speculate, we only observe that October's retail sales gain compared with unrevised September data would be +0.8 percent, and October ex-auto would be flat, zip, 0.0 percent, nada, no change from September.

From a year ago, the biggest losers are gasoline station sales (not unexpectedly), furniture, electronics/appliances and building materials/garden equipment and supplies, while clothing, health/personal care, sporting goods/hobby/book/music and restaurants are holding on to slim gains compared with 2008.

So much for a resurgent consumer, yet hope remains (somewhere) for a more exuberant holiday shopping season - flat compared with a year ago which most retailers would score as a win versus previous years in which anything below an expected +3.0 percent to +4.0 percent sales gain was considered a terrible season.

This year's holiday shopping season unofficially began November 1st, as quickly as unsold Halloween merchandise and displays could be carted away, with heavy advertising and discounting already to juice early month's sales, followed by what might, in fact, be a more subdued, less frenzied Black Friday at the end of the month, certainly, we hope, with fewer casualties in 2009 when big-box retailers throw open the doors at 5:00am.

We expect nothing less than scorched-earth merchandising campaigns in the coming six weeks, as retail giants Wal-Mart, Target, K-Mart, Best Buy and department stores adopt a no-shopper's-dollar-left-behind approach to induce consumers to deposit at their stores as much of their holiday wallets as possible. While consumers certainly will benefit from promotions and lower prices, smaller chains and independent retailers may be left holding stockings filled with lumps of coal.

October Federal Deficit Tops $176 Billion as Tax Receipts Collapse

2009-11-13T16:55:00.000-06:00

October, the first month of FY2010, began with a significant "on-budget" deficit of $170.0 billion as individual and corporate tax receipts collapsed, compounded by a meaningful net negative OASDI (Social Security and Disability Income) outlays of $6.4 billion, a first of such magnitude for an "off-budget" program which for more than 25 years routinely has generated surpluses borrowed by the Federal Goverment, for a total monthly shortfall of $176.4 billion as reported Thursday by the U.S. Treasury.

Individual and Corporate tax receipts plunged dramatically in October, down a combined 34.3 percent to $56.7 billion from $86.4 billion a year ago. Individual income tax receipts net of refunds dropped 29.1 percent to $61.2 billion from $86.3 billion a year ago, and corporate collections fell negative after refunds, ending at ($4.5 billion) compared with net positive collections of $81 million in October 2008.

By comparison, corporate tax receipts totalled $9.4 billion in October 2006 and $6.0 billion in October 2007. October individual income tax receipts peaked in October 2007, as stock markets were making record highs, at $95.6 billion.

The Social Security Adminstration now expects net outlays of $10 billion in FY2010 and FY2011, shortfalls now six years earlier than anticipated only six months ago. Total receipts in October fell 24.8 percent to $88.7 billion from $118.0 billion in October 2008, while outlays amounted to $311.7 billion in the first month of the fiscal year.

Total FY2010 deficits now are projected to be more than $1.58 trillion, compared with an FY2010 deficit of $1.50 trillion forecast in August by the White House Office of Management and Budget.

Lending Standards Remain Tight in October Senior Loan Officer Survey

2009-11-10T16:57:00.000-06:00

Loan origination terms and conditions remain "tight" according to the Fed's latest quarterly survey of senior bank lending officers at 57 domestic banks and 23 U.S. branches of international financial instiutions, however the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.

In the Federal Reserve's October Senior Loan Officer Opinion Survey on Bank Lending Practices, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.

The exceptions were prime residential mortgages and revolving home equity lines of credit, for which there were only small changes in the net fractions of banks that had tightened standards. A small net fraction of branches and agencies of foreign banks eased standards on C&I loans, whereas a significant net fraction continued to tighten standards on CRE loans. Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months. This weakening was somewhat less widespread than in the July survey for C&I loans, CRE loans, and nontraditional mortgages; approximately the same for consumer loans; and significantly more widespread for home equity lines of credit. However, banks reported stronger demand, on net, for prime residential real estate loans.

Demand for C&I and CRE loans at foreign banks continued to weaken, on balance, but the weakening was somewhat less widespread than that in the July survey. In response to a special question on the sources of the decline in C&I lending this year, the two sources domestic banks cited most often as being “very” important were decreased originations of term loans and decreased draws on revolving credit lines.

In response to a second special question, banks indicated that, of the CRE loans on their books that were scheduled to mature by September of this year, more loans had been extended than refinanced.

In response to special questions concerning the Credit CARD legislation passed in May 2009, a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments.

Consumer Credit Continues to Collapse: Sept Fed G.19

2009-11-06T17:00:00.000-06:00

In September, consumer credit decreased at an unprecedented annual rate of 7.2 percent according to the Federal Reserve's latest G.19 report on individual indebtedness, as revolving credit declined 13.3 percent, a ninth consecutive monthly contraction, and non-revolving installment credit fell 3.7 percent.

In the third quarter, total consumer credit decreased at an annual rate of 6.0 percent. Revolving credit decreased at an annual rate of 10.0 percent, and nonrevolving credit decreased at an annual rate of 3.8 percent.

Revolving consumer credit - unsecured credit card debt - is collapsing at a never-before-seen rate, now down 8.8 percent year over year, the first such decline ever and down y-o-y eight months in a row, and stands $101 billion below December 2008's peak outstandings of $988.2 billion.

During this decade, through the end of 2008, revolving consumer credit grew at a 5.5 percent annual pace - about half the 11.0 annual growth rate of the last three decades, 2000s included. At the pace revolving consumer credit is shrinking, voluntarily through pay-downs and pay-offs and involuntarily via consumer bankruptcies, an amount equivalent to 1.2 percent of GDP, about $160 billion, will be "missing" by year-end.

In the Fed's October Senior Loan Officer Opinion Survey on Bank Lending Practices, released November 9th, in response to a special question about implentation of Credit CARD legislation passed in May 2009, "a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments."

The continuing collapse of consumer credit, and its impact on personal consumption expenditures, the consumer share of GDP (still about 71 percent), remains a key component of our economic "reset" theme, in which a decline in consumer activity, some naturally expected as aging Baby Boomers rein in spending and some contrived by circumstance due to extended weak economic conditions and near record-high unemployment which will be slow in dissipating, will make any economic recovery tepid at best and exposed to the likelihood of a "double dip" at worst.

But This Time It IS Different...

2009-11-01T10:35:00.004-06:00

Sorry, Mickey, but this time it IS different. My colleague in the dismal science, Dr. Mickey Hepner, associate professor of economics at University of Central Oklahoma, was thoughtful enough to make some observations in his blog, Mickey's Musings, about my “not very compelling” argument posted last month that a double dip recession is a done deal (Employment Situation Generating Second Wave of Economic Tsunami).

In my post I suggest, in my view (economist code for “guess”), that a record-setting unemployment situation, which myriad other economists agree will get worse before getting better sometime next year, will conspire to create a second round of recession, after a brief interlude of “technical” recovery. I likened it to the tsunami-generating effects of an undersea earthquake, in which multiple, destructive waves often are unleashed. In my analogy, the first wave was the liquidity and credit crises of summer/fall 2008, which temporarily has been tempered by the heroic, and unprecedented, fiscal and monetary stimulus efforts of the Federal Reserve, Treasury and Congress.

As I forecast guess in my post, which clearly is not a statement of factual foreknowledge of the future, “the developing impact of structural unemployment clearly signals the coming of a second economic tsunami wave, making a GDP double dip, and the likelihood of next year's Recession 2.0, in our view, a done deal,” and I offer as anecdote evidence our economy must create at least 15 million new jobs in the five years, after next year's unemployment peak, to return to some semblance of “full employment” of about 5.5 percent joblessness by mid-2015.

Some economists believe since we had robust, job-creating economic recoveries in 1982 and 1992 (both latent-demand-driven and consumer-debt-fueled, as we shall discuss), and a dollar-devaluation-, inflation-fueled rebound in 1934-1936 (which then collapsed into the second half of The Great Depression), a similar pattern is the default setting for all economic recoveries, and opinions to the contrary which ignore the historical precedent of those three instances, those offered by this guesser included, therefore are suspect.

“Why is it the default position of the eggheads that aliens would always be benign?” NSA Chief Michael Kirk inquires of SETI astronomer Eleanor Arroway in the movie “Contact.” Indeed, when it comes to forecasting the economic future, why is the default position always that past is prologue? Or at least it always is, right up until it isn't, and then all we hear is “whocouldaknown?”

History doesn't repeat itself, but it rhymes, Mark Twain is thought to have said, which, I suppose, is why the default setting for predictions of the future always are based on the past. If that was so, the investment and mutual fund industries would be allowed to boast “past performance IS an indicator of future results.”

“There is nothing in the historical data, nor anything in Mr. Hazelton's column,” Dr. Hepner snarks, “which indicates that a double-dip recession is 'a done deal' or 'inevitable' as Mr. Hazelton claims. As of now, it is important to note that any such claims must be based solely on opinion and (sic) because they are not based on facts.” (Emphasis added.) I'm confused: Aren't all predictions of the future, from weather to economics to astrology, based on opinion, no matter to what extent they are supported by factual historic evidence or precedence?

As it is, there was precious little in the historical data, if you review the writings and research of a number of learned, prominent, well-degreed economists, many of whom are employed by government, the Federal Reserve and academia, that would indicate we were going to begin in late 2007 the worst economic downturn and most severe stock market correction in two generations, but darned if that isn't what happened. (I am amused, constantly, at the boldness of those now confident a “V” shaped recovery already has begun, when among those few economists and other guessers who accurately foresaw the present recession, the absence of the current “V-shapers” is conspicuous.)

It is correctly observed my post was a “column,” not a peer-reviewed academic economic research paper. Perhaps my audience would have been better served had I thought to add a disclaimer at the bottom, something along the lines of what should appear underneath the scrolling ticker of financial cable TV channels: For entertainment purposes only. Not to be relied upon for actual economic or financial market advice.

It is my opinion, however, which, after all, merely is my best guess, as is anyone's about an unknowable future, the impact of generationally high unemployment only now is beginning to show up in GDP, price indexes, federal and state tax collections and budget deficits, retail sales, auto sales, consumer debt, savings and housing data, and that personal bankruptcies, a troublesome indicator of individual financial health, are likely to surge to 1.4 million this year, the highest since 2005 when rules were changed.

As stated, much of my thinking falls into the “this time it's different” category, as long-time readers will attest and of which I have been warned are the most dangerous words on Wall Street. But this time it is different, despite anyone's encyclopedic command of the statistics of recessions and depressions past, and as if those data had any relevance in the extant situation. (For the record, they may. It is my opinion they will not. Time will tell.)

Dr. Hepner asserts, according to his examination of historical data from several previous recessions, “that once the economy finds a bottom, consumers rapidly increase their spending even as high unemployment lingers.” (Emphasis added.) Yes on a number of occasions that has been the case, historically, but Dr. Hepner offers nothing but past-as-prologue (and an implied helping of wishful thinking) to bolster his guess it will be the case in the immediate, or any, future.

(The professor also helpfully suggests “unemployment does not cause recessions, recessions cause unemployment,” and that “generally, unemployment continues to rise well after a recession ends,” admonishing me for putting the unemployment cart before the recessionary horse. While it is, in fact, true that unemployment rates continue to rise well after recession's “technical end,” which is one aspect of our employment situation, one might care to review a chart compiled from BLS Employment-to-Population data, the ratio of which has peaked 6-12 months before the onset of every recession since the end of World War II, a leading indicator to be sure. Thus, it might be inferred, less employment as a percentage of total population, after peaking, always is predictive of future recessions.)

Why is it different this time? For one thing, in the 1930s, 1980s and the 1990s as recessionary conditions ebbed, American consumers were not already massively indebted. In 2009, however, having “pre-consumed” a decade's worth, at least, of houses, cars, trucks, vacations, timeshares, appliances, motorcycles, electronics, furniture, college educations and you-name-it, largely on credit, our debt, and, more importantly, our ability to service our financial obligations, to a great extent for many, has become impaired, and the consumer credit bubble has been burst.

For goodness sakes, we extracted nearly $4 trillion of wealth out of rising residential home values between 2002 and 2007, leveraging our living quarters to participate in a debt-fueled consumer spending binge and, in the process, more-than doubling our mortgage indebtedness alone to $10.4 trillion from $4.4 trillion at the beginning of the decade, at the same time, as if that weren't enough, ramping our unsecured credit card debt by nearly 60 percent to $988 billion at the end of 2008.

To my knowledge, that was not the case – extreme indebtedness – in the years immediately preceding 1982 or 1992, which makes this time different compared to the economic rebounds in those decades, and for which we now are paying a dear price.

(To my knowledge, however, that was the case, or something like that – purchasing stocks on margin and total credit market debt equal to 260 percent of GDP – in the years preceding 1932, and we know how the rest of that decade turned out, despite the professor's glaring omission of details surrounding the second half of that decade, and, more importantly, the impact of a near-70-percent currency devaluation against gold at the end of 1933. That devaluation created a surge of inflation in 1934-1936 which brought The Great Depression's deflationary spiral to a screeching halt – temporarily – and which upwardly distorts the personal/consumer spending data of those years. By the way, that gun had but one bullet. We can't devalue the U.S. dollar against anything anymore, but I suppose, via continued, massive helicopter drops of money by the Federal Reserve, and a fiscally unrestrained federal government, we could be successful in creating ample inflation to give us the illusion of vigorous economic rebound in years to come, but we will destroy our currency, our creditworthiness and our economy in the process.)

Speaking of unsecured debt, revolving consumer credit, has been shrinking this year for a record eight consecutive months, and has fallen year-over-year (7.8 percent) for the first time ever. Now that's different, especially after growing 5.5 percent each year during this decade through 2008, and 11.0 percent annually every year since 1979.

By my guess, our credit card debt will have declined by the end of this year by an amount equivalent to 1.2 percent of GDP, about $165 billion, voluntarily via paydowns and involuntarily from bankruptcies and reduced credit line availability, after topping last December close to $1 trillion.

That kind of credit-enhanced consumption will not be coming back anytime soon, and certainly not aided by home equity loans, mortgage refinances or credit cards, mostly because Baby Boomers, some two-thirds of whom are ill-prepared for any manner of future leisurely retirement, as a demographic cohort already were forecast to “naturally” reduce spending as they age and in the wake of the current recession likely will ramp up savings in desperate efforts to “catch up” after their 401(k)s became 201(k)s when the stock market collapsed last year. Now that's demographically different.

Early “Echo-Boomers, born between 1982 and 1989, in many cases already are swamped with consumer and student debt on graduation, unlike their Boomer parents who fueled the consumption-driven economic rebound of the early 1980s in which significant, pent-up demand for goods and services was unleashed once Paul Volcker's Federal Reserve beat interest rates into submission, yet another difference.

The Echoes are finding entry-level job searching difficult at best in a deep recessionary environment in which employers have not the luxury of lengthy training programs and apprenticeships, valuing more, instead, those with at least some relevant experience if hiring at all.

And there is anecdotal evidence this younger generation is delaying household and family formation, based on less-than optimal employment prospects and heavy indebtedness, unlike the 1980s Boomers, neither of which conditions seem conducive to an explosion of pent-up consumer demand in the next half-decade.

Finally, the nation's personal, business financial institution and government indebtedness collectively now stands at a record 373 percent of GDP, which was not the case in 1982 nor 1992 (but close in 1932), and with a White House and Congressional Budget Office best-case guess of $9 trillion of cumulative federal budget deficits alone in the coming decade, certainly can be offered as additional evidence this time is different.

I was not speaking of indebtedness or consumer credit in my post to which exception has been taken, however, and although I have written often about the impact these issues will have on future economic conditions, I primarily was speaking of employment and unemployment.
One troubling aspect of the current employment situation, as I mention in my column and which Dr. Hepner ignores, is a record-low average workweek of 33.0 hours. Now that's different, and, as I argue, will make employers far more likely to slowly increase working hours of existing employees as economic conditions warrant long before they are inclined to create new, full- or part-time positions, notwithstanding the abundance of available unemployed swimmers in the labor pool.

Another “this-time-it's-different” troubling aspect of the current employment situation is the record number of people, 5.4 million, unemployed more than 26 weeks, nearly 36 percent of those without work. This, to me, is evidence of the more structural nature of this recession's job losses – high-paying jobs requiring highly skilled employees disappearing forever, the reason for which I describe more fully below.

But it would appear Dr. Hepner, in an inspired and hopeful effort to link past with an unknowable future, overlooks my primary observation: people who are unemployed, under-employed or who reasonably fear the possibility of becoming one or the other in the coming months (and who, aside from tenured professors, doesn't), in combination with debt-laden, retirement-conscious Baby Boomers and debt-laden, family-formation-delaying Echo Boomers, all with diminished expectations of the future, make lousy, or at least cautious, consumers.

And, as such, because this time it's different in my view, these cautious consumers with a newfound sense of austerity chic likely will be the cause of an economic double dip next year – a “done deal” as I have guessed – and, equally likely, since I'm in a guessing mood but which I did not discuss in this post, will be the cause of a series of lower-case “w” anemic recovery/recessionary episodes which, in the blessed hindsight of a generation hence, may last the better part of a decade or more, as did the two generational economic transformations of the past century.

From the safe distance of decades, we clearly can see the span from late 1929 to, essentially, late 1941, and from late 1973 to 1983, as, essentially, singular, generational, economic events encompassing a series of recessionary/recovery episodes which indelibly transformed our nation.

In the aftermath of The Great Depression/World War II, the United States emerged from its largely agrarian underpinnings to become the world's manufacturing powerhouse, which lasted a generation. As foreign manufacturing capability recovered, largely with our financial assistance and knowledge, and became capable of delivering equivalent- and better-quality goods at cheaper prices, the oil embargo of 1973 touched off a second generational economic transformation, another decade of upheaval which lasted until the early 1980s, resulting in an economic reordering based on information, finance, services, real estate, defense and consumption.

That era ended for the most part in 2006, the top of the residential real estate market, but perhaps, from an event perspective, the era's end is better demarked by the collapse of Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch, Washington Mutual, Wachovia and CitiGroup, to name a few, some of which were allowed to fall and others which were rescued, which would date the beginning of the extant generational economic transformation to late 2008. Or we can split the difference and use the recession's beginning, December 2007, because it won't matter 30 years from now when we look back to observe the meaningful changes that will have taken place.

To what, for the next generation, will we transform ourselves into this time? Perhaps a “back-to-basics” economic model, in which agriculture, water, healthcare, energy and information play even greater roles than in the generation now concluded, where automobiles and residential and commercial real estate are far less dominant, and cheap, imported, throwaway consumer goods are supplanted by the output from a technology-aided resurgent micro-manufacturing capability. Or maybe Asteroid 99942, Apophis (the Destroyer) will slam into this planet (currently a 1-in-45,000 chance) on April 13, 2036 rendering our entire discussion moot. Who on earth knows?

Certainly not me, for I assure you, dear readers and Dr. Hepner, I have no “spidy-sense” upon which I rely to make my guesses about the future. I have no proof that “this time it's different” as we emerge – technically, thus far – from the longest, worst recession since The Great Depression, as the professor and others have no standing to assert, other than by their best of guesses and fondest of wishes, that whatever recovery ensues will emulate recoveries past. (It shall be noted, however, that the result of each of the prior two generational economic transformations was, for the most part, a generation-encompassing increasing standard of living.)

That any enlightened reader would mistake for fact my observation “the developing impact of structural unemployment clearly signals the coming of a second economic tsunami wave, making a GDP double dip, and the likelihood of next year's Recession 2.0, in our view, a done deal,” despite the strength of my convictions, the source of the statement' strength, is absurd.

In life, we place our bets and await the outcomes. As any participant in, or observer of, economies and financial markets is aware, those who possess facts, like, say, Bernie Madoff or, allegedly, Sir Robert Allen Stanford, or those who, far more likely, are the beneficiaries of lucky, even educated, guesses, rarely shout them from the rooftops, preferring instead to retire to private islands, mountain retreats or city penthouses, where the surroundings attest to their accuracy.

Other, mere mortal, guessers, as am I, read the entrails to the best of our ability and leave it at that, admitting our errors, relishing our accuracies, hoping, upon completion of a career's worth of prognostications, like the meteorologists and astrologers in whom we economic forecasters attempt to imbue respectability, the latter exceed the former.

In the past several years, when economic and financial market forecasting has failed so spectacularly on so many levels, when so many dismissively ignored the warnings of the so few, who, as it appears, guessed right this time, perhaps we may be forgiven, in this instance, for suggesting, but not stating as fact, that this time it's different.

(The views of Keith Hazelton, as expressed in this post, are his personal opinions. This post is for entertainment purposes only and should not be relied upon for actual economic or financial market advice.)

Deja Vu All Over Again as WTIC Returns to $80/bbl Nearly a Year Later

2009-10-20T17:02:00.000-05:00

It's déjà vu all over again as crude oil trades above $80/bbl, reaching $80.05 in NY trading nearly a year to the day it crossed $80/bbl on the way down in October 2008 after reaching a record $147 in mid-July of that year.

Crude oil first traded above $80/bbl in September/October 2007, prior to the official beginning in December that year of the worst recession in the post-WWII era.

At that time, oil's upward march was attributed to the robust global demand reflective of robust global economic growth, particularly in Asia, coupled with a slowing of significant new field discoveries and declining output from a number of existing fields, including some of the largest in Saudi Arabia, Kuwait and Mexico.

Global demand now is estimated by the International Energy Agency to have retracted a couple of percent below the 2007 consumption peak of 85.5 million barrels-per-day, however, and the global economic machine has wrenched to a halt, at least in developed, importing nations. So what's driving oil's upward move again, now nearly $50/barrel above its January 2009 low of $33.50, besides the recovered financial health of the major commodity speculators?

Primarily a weakening U.S. dollar, again, which at $1.4994/Euro in trading today marked the greenback's lowest point against the Euro in 14 months. From March to early August 2008, the dollar traded above $1.50/Euro, making a secondary peak close to $1.60/Euro about the same time oil was popping to $147/bbl.

The dollar index, which measures the greenback again six major currencies, also fell to its lowest since August 2008, declining 0.4 percent 75.181. The dollar index has some support in the 75.00 range dating back to late 2007, and weakened to its lowest readings around 71.00 last year from March to July, again as crude oil was peaking.

Gold prices also advanced against the U.S. dollar, almost reaching the new high of $1,070.80 set in in spot trading October 14th. (Adjusted for inflation, gold's all-time high remains about $2,350.00/oz. set in early 1980.)

For crude oil, déjà vu all over again, with some of the same underpinnings pushing it, and other commodities higher. For the U.S. economy, oil above $80.00 is troublesome, as it would drive our annual energy bill to about four percent of GDP, about $560 billion, a percentage at which the U.S. economy previously has stalled.

FY2009 Record Federal Budget Deficit $1.544 Trillion

2009-10-16T17:05:00.000-05:00

The United States spent $1.544 trillion more than it received in FY2009 which ended September 30th, according to the Monthly Treasury Statement issued today. Outlays exceeded receipts all 12 months of the fiscal year for the first time in decades.

Social Security and other health, retirement and welfare "off-balance-sheet" programs generated a $137 billion surplus which was borrowed by the federal government, as it routinely has for decades, to partially fund the nation's deficit spending, which is prohibited in the private sector.

On a consolidated basis, the "headline" FY2009 federal budget deficit was a record $1.417 trillion, more than three times that of consolidated FY2008, $454.8 billion, which at the time itself was a record-setting deficit. In FY2008, the "on-balance-sheet" deficit was $638.1 billion and the off-balance-sheet surplus was $183.3 billion.

FY2010 is best-case forecast for federal outlays to exceed receipts by $1.612 trillion, more than FY2009. Consolidated FY2010 is budgeted at a deficit of $1.501 trillion and the off-balance-sheet component is estimated at $109 billion, despite the Social Security Administration's recent acknowledgement it expects outlays to exceed payroll withholdings in FY2010 for the first time, at least six years earlier than forecast in May.

Indeed, the White House Office of Management and Budget and the Congressional Budget Office now expect cumulative federal deficits over the next 10 years to exceed $9 trillion, assuming we can find creditors to lend us such astronomical sums. (Hey, even Carl Sagan stopped at "billions," but we now bandy about trillions as if we really had it.)

Perhaps the most alarming aspect of the full FY2009 report, aside from the sheer enormity of the deficit, is the collapse of individual and corporate tax receipts, a phenomenon now also being replicated in nearly all 50 states.

Individual tax receipts fell 20.1 percent in FY2009 to $915.3 billion from $1,145.7 billion. Corporate tax collections plunged nearly 55 percent to $138.2 billion, down from over $300 billion a year earlier.

The outlook for FY2010 is optimistic by comparison, calling for a 10 percent increase in all on-balance-sheet revenues to $1.65 billion, but spending increases of nearly $200 billion to $3.21 trillion, but, again, these are best-case scenarios which assume a robust, "V" shaped economic recovery which, despite our fondest wishes, cannot be presumed as the most likely outcome over the next 12 months.

In fact, the likelihood of a "double dip," a return to recessionary conditions in 2010 after a brief, technical recovery the last half of 2009, cannot be ruled out, and, in our opinion, is the more probable outcome based on the relatively uncharted territory of extremely elevated unemployment and under-employment, consumer overindebtedness and "exhaustion" and crumbling state and municipal finances across the country, a "done deal" as we have expressed in the recent past.

Japan's Top Bank Regulator Proposes Debt Moratorium to Spur More Lending

2009-10-08T17:08:00.002-05:00

In this week's edition of "destroying a village to save it," Japan's new financial services minister Shizuka Kamei, the nation's top financial regulator, has proposed a novel national experiment to determine whether, in fact, it is possible to spend one's way to prosperity. After two "lost decades" of stagnant economic growth, and in the midst of a durable goods export collapse, Kamei wants Japanese banks to offer debt moratoriums to individuals and small businesses, as a means of inducing them to borrow (spend) more. Huh...?

To make the concept palatable to banks, which would be granting additional credit to borrowers which would not be servicing current obligations, much less new ones, Kamei suggests that banks would not have to classify existing, unserviced loans as "non-performing." Banks which balked at making new loans to those not paying current indebtedness would be "hit with a business improvement order," a Japanese equivalent, presumably, of a lending mandate, in Kamei's plan.

In a nation in which the bankruptcy rate has reached a six-year high, not everyone is sanguine about the plan's soundness or likelihood of success, fraught as it may be with unintended consequences. From a Bloomberg report about the proposal:

“Easing debt classifications means less transparency and causes anxiety for overseas investors,” said Nemoto. “They may lose business opportunities overseas and find it difficult to raise funds abroad.

Japan's three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged. "There is a potential for any proposal along the lines Kamei has made of debt moratoriums to backfire horribly,” said David Threadgold, a Tokyo-based analyst at Fox-Pitt Kelton. The plan could make banks more reluctant to lend to small firms, Threadgold said.

Hirofumi Gomi, who once held Kamei's position as Japan's top financial regulator, said in an interview yesterday that forcing banks to defer debt payments may hurt them. “Banks will ultimately end up carrying the bill for a compulsory moratorium,” Gomi said.

This policy is a disaster, at least theoretically,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “We're talking about zombie companies. Just protecting these guys isn't making Japan more productive.”

Kamei is pushing to grant small companies and individuals a moratorium on their debt payments in order to stave off future bankruptcies, which, at first, second and third glances, seems merely a "kick the can down the road" approach yielding the same eventual, insolvent outcome, for both borrowers and banks. Despite the glaring flaws, the plan is expected to be presented to Japan's Parliament next month.

Consumer Credit Continues Collapse in August: Fed G.19 Report

2009-10-07T17:30:00.000-05:00

U.S. consumer credit fell in August for a seventh straight month as job losses and a new "austerity chic" made households reluctant to borrow. Consumer credit fell by $12 billion, or 5.8 percent at an annual rate, to $2.46 trillion, according to the Federal Reserve G.19 report released today. Credit dropped by $19 billion in July, less than previously estimated. The series of declines is the longest since 1991.

Revolving debt, such as credit cards, decreased by nearly $10 billion in August to under $900 billion, its lowest level since June 2007 before the recession began. Revolving credit now has declined eight months in a row, exceeding a consecutive-month-decline record dating to 1980 and in August fell at a seasonally adjusted 13.0 percent annual pace.

The plunge in revolving consumer credit is unprecedented as a generation-long spending spree grinds to a halt. Revolving debt recorded its first year-over-year declines from February to August this year, down 7.8 percent y-o-y in the current report, after growing at a 5.5 percent yearly pace in the 2000s up through December 2008, and double that rate, 11.0 percent annually, since December 1979.

Continued job losses and under-employment, declining wage and salary growth, reduced consumer credit availability and a newfound interest in saving, particularly among Baby Boomers ill-prepared for retirement, have conspired to strain consumers this year, and the upcoming holiday shopping season, already expected to decline one percent from 2008, may be even more Grinch-like than now forecast.

At this pace, continuing declines in revolving consumer credit alone through year-end would translate into a 1.2 percent drop in GDP in 2009, based on the amounts paid down so far plus the level to which revolving consumer credit would have grown at its previous 5.5 percent annual growth rate during this decade.

Key September Data Make Double Dip a Done Deal

2009-10-02T17:33:00.000-05:00

September job losses of 263,000, well-above the upper bound of a range of forecasts, and a U-3 "headline" unemployment rate of 9.8 percent, were reported today by the Bureau of Labor Statistics, an unexpected turn on the road to economic recovery. Yesterday September automobile and light truck sales came in at an annualized 9.2 million units, the worst month since April, and far below the Cars-for Clunkers inspired August annualized sales of 14.2 million vehicles.

That "V-shaped" recovery now is looking less likely, despite Fed chief Ben Bernanke's recent observation the recession very likely is over "from a technical perspective." He will be proven correct in due course as Cash-for-Clunkers alone may be enough to tip 3Q2009 GDP into positive territory. It's the last quarter of the year and early next year with which we are concerned, on the basis widespread unemployment, which will translate into a weak retail holiday shopping season, makes a double dip recession an inevitability, not a outlier.
15.1 million people now are unemployed, a generationally high 9.8 percent of a labor force of 154 million. The last time we were close to this rate was June 1983. But the U-3 rate only tells part of this scary story: Another 9.2 million people are under-employed, involuntarily working part time due to economic conditions impacting their employers, and 2.2 million additional Americans are deemed "marginally attached" to the workforce.
Those 2.2 million are divided into two subsets: 700,000 who simply have given up looking for work - they're "discouraged" and believe no jobs exist for them, and another 1.5 million who, for a variety of non-job-related reasons, haven't looked for work in a month.
For those playing along at home, U-3 unemployed plus discouraged workers, the U-4 rate, now is 10.2 percent. Add in the other 1.5 million who are marginally attached and the U-5 rate increases to 11.1 percent. Finally, we include the 9.2 million under-employed to arrive at the very frightening U-6 unemployment rate, a record 17.0 percent in September .
But wait, there's more. In the BLS data, the 2.2 million marginally attached workers are part of a larger category with the pleasing description "Persons Who Currently Want a Job," a 5.6 million cohort stashed away in the "Not in the Labor Force" group of 82.7 million people who don't work because they are retired, in school or disabled.
Which means there are 3.4 million "persons who currently want a job" who aren't counted anywhere in the unemployment aggregates or rates, with no explanation provided as to why they aren't working. To be sure, the number of persons who currently want a job, net the marginally attached, consistently amounts to about three million people, and increases slightly during recession. These are the people "in flux," say, college graduates now looking for a first full-time position, or those who have voluntarily left a job without a replacement in hand.
Folding that cohort into the BLS unemployment rates adds about two percentage points to each reading: U-3, 11.8 percent, through U-6, 19.1 percent. If we factor in only the incremental gain from September 2006, for example, about 300,000 more persons who currently want a job in September 2009 compared with three years ago, it still adds two-tenths of a percent to the published rates, enough to put U-3 unemployment at the difficult 10.0 percent milestone, clearly with higher rates to come.
OK, enough fun with numbers. The point is generationally high unemployment only now really is beginning to show up in GDP, Retail Sales, Auto Sales, Consumer Debt, Savings and Housing data after the event-shock spending lockdown from September 2008 through March 2009, which was followed by a temporary "all clear" signal through the end of summer as we emerged from whatever rocks we took shelter under during the dark days of last year's financial industry apocalypse.
As Autumn daylight hours shorten, our collective mood turns circumspective and reflective and we begin the annual process of "hunkering down" for the uncertainty winter months always bring, September's employment and auto sales results clearly portend some difficult sledding ahead, making a GDP double dip, and the likelihood of next year's Recession 2.0, in our view, a done deal.

Employment Situation Generating Second Wave of Economic Tsunami

2009-10-01T10:34:00.000-05:00

Strong earthquakes recently in the South Pacific served as a powerful reminder of the unpredictability of nature, and one, near American Samoa, generated tsunami waves which caused significant damage and loss of life, though fortunately not nearly as destructive as the event near Sumatra in late 2004.

Tsunamis resulting from undersea earthquakes often occur as a series of waves, and the parallels to the current economic downturn, the worst since The Great Depression, are clear as anecdotal evidence of recession's end incline us to believe the first wave, a great swell of liquidity and credit crises which arose and crashed violently upon our shores a year ago – since receded – will be the worst of it.

Indeed, Federal Reserve Chairman Ben Bernanke appears confident the National Bureau of Economic Research (NBER), arbiter of the nation's business cycles, eventually will date this recession's end to sometime in the third quarter of 2009, suggesting late last month "…from a technical perspective the recession is very likely over at this point.”

His pronouncement garnered headlines and Dow points, briefly, but many observers overlooked the astute, and far more important, insight embedded in the second half of his remark, that “…it's still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was."

Bernanke's comments came before the September Employment Situation was released last week by the Bureau of Labor Statistics (BLS) in which September job losses were estimated at 263,000, well-above the upper bound of a range of forecasts, and U-3 "headline" unemployment rate inched ahead to 9.8 percent, an unexpected turn on the road to economic recovery.
A day before, September automobile and light truck sales came in at an annualized 9.2 million units, the worst month since April, and far below the Cash-for Clunkers-inspired August annualized sales of 14.2 million vehicles, perhaps making that "V-shaped" recovery now appear less likely.

Dr. Bernanke will be proven correct, however, in due course by NBER as Cash-for-Clunkers alone may be enough to tip GDP into positive territory by adding an annualized impact of $75 billion, about 0.5 percent, to 3Q GDP. As such, the first economic tsunami wave has passed, destructive and frightening, and cautiously we have emerged to sort out the wreckage, assess damage and begin repairs, not realizing a second wave even now approaches.

For although 3Q GDP will be estimated as a positive number at month-end, perhaps as much as 2.0 percent annualized growth compared with the thrice-revised 2Q's -0.7 percent, it's the final quarter of the year and early next year with which we are concerned. Widespread, record unemployment will translate into a weak retail holiday shopping season, making a double dip recession inevitable, not an outlier, as the economic tsunami's second wave – the devastating impact of structural, long-term unemployment – reaches shore.

15.1 million Americans now are without work, a generational high (6.8 percent in Oklahoma). The last time we were close to this rate nationally was June 1983. But the U-3 rate only tells part of this tale: another 9.2 million people are under-employed, involuntarily working part time due to economic conditions impacting their employers, and 2.2 million more are deemed "marginally attached" to the workforce – have stopped looking or think no jobs are available for them. Collectively we arrive at the very frightening U-6 unemployment rate, a record 17.0 percent in September comprising 26.5 million affected people.

People wishing for better job security or employment status generally make lousy consumers, and as extended unemployment benefits quickly are expiring (but likely will be extended again by Congress, and soon), one wonders from whence any nascent economic recovery will ensue. Indeed, in “normal” recessions of last half-century unemployment rates continue to advance after recession's end but they notoriously are slow to dissipate upon return to economic growth, easing only about one percentage point a year, under ideal recovery conditions, after peaking.
For one thing, average workweek hours dipped to a record-low 33.0 earlier this summer and again in September, meaning employers more readily will begin to increase those workforce hours long before they create new positions. For another, people now unemployed more than six months recently reached a dubious record-high of 5.4 million, making their re-employment prospects, in similar work at similar wages, challenging at best as some kinds of jobs – think construction, manufacturing, retail and finance – will recover so slowly, if at all, it will seem as if those opportunities will have been lost forever.

It's estimated we need to create 250,000 new jobs a month, for the next five years, to re-employ the jobless and gainfully employ the 125,000-a-month or so of new entrants jumping into the labor pool. To return to 5.0 percent unemployment by the middle of 2015, we would need to create about 15 million new jobs – 250,000 a month – but unfortunately past is not prologue. In the best employment growth year of this decade, 2006, when it seemed every other person was swinging a hammer building homes and condominiums or punching a keyboard building collateralized debt obligations and commodity straddles, employment grew about 232,000 a month, 18,000/month shy, in the best year under the best of economic circumstances, compared with our job creation needs for the next half-decade.

The point is generationally high unemployment only now really is beginning to show up in GDP, Retail Sales, Auto Sales, Consumer Debt, Savings and Housing data following the event-shock spending lockdown from September 2008 through March 2009 following the first tsunami wave. Personal bankruptcies, a troublesome indicator of individual financial health, are likely to surge to 1.4 million this year, the highest since 2005 when rules were changed.

As Autumn daylight hours shorten, our collective mood turns circumspective and reflective and we begin the annual process of "hunkering down" for the uncertainty winter months always bring, The developing impact of structural unemployment clearly signals the coming of a second economic tsunami wave, making a GDP double dip, and the likelihood of next year's Recession 2.0, in our view, a done deal.

Social Security Net Outflows in 2010 and 2011: Day of Reckoning Edition

2009-09-28T17:35:00.000-05:00

Surprise! Swamped by a 23 percent increase in benefit applications fueled by a surge in early retirements (age 62-65), higher disability payment requests and declining payroll withholdings resulting from generationally high unemployment and underemployment, Social Security Administration officials for the first time in the OASDI program's history now expect to pay out more in benefits the next two fiscal years than are received in contributions.

Since all previous annual Social Security surpluses have been lent to the federal government to partially fund national budget deficits, including $142 billion in FY2009 (which for a generation have masked the true extent of our profligate deficit spending), OASDI (Old Age, Survivors and Disability Insurance) has about $2.5 trillion of government bonds in which those surpluses have been "invested" and from which it can fund the $10 billion shortfalls it now projects for the next two fiscal years, and any other deficit years, by redeeming those bonds from the federal government.

The implications of Social Security no longer generating a borrowable surplus and redeeming government bond "investments" to fund current retirement and disability benefits, however, even for two years, are huge and far-reaching. Right off the bat it will require the federal government to borrow - from other sources, including a growing reliance on international governemnts - another $120 billion in FY2010 over and above the already projected $1.5 trillion in borrowing necessary to plug next year's budget chasm, and a like amount in FY2011.

We have known with certainty the day was coming when Social Security outflows exceeded inflows, but since it was not projected until 2017 or 2018 in typical fashion we ignored the issue. Now come the days of reckoning as the worst recession of the post-WWI-era unfortunately coincides with the coming-of-retirement-age of a Baby Boomer generation ill-prepared for job losses or retirement.

Baby Boomers were born between 1945 and 1964, so the forward elements of this 77-million-plus cohort have been eligible for age-62 reduced Social Security benefits since 2007. The recession likely is driving more early retirement decisions as job losses or reduced hours force Boomers to tap what in many cases is their only source of income based on estimates 70 percent of that generation have no retirement savings whatsoever and many are deeply indebted with mortgages, home equity credit lines and credit card obligations amassed from a decade of overconsumption.

According to an Associated Press story posted at Yahoo! Finance Sunday, "Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large. What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security. Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs."

A new "austerity chic" among retirement-savings-deficient Baby Boomers, who now are spending and consuming less and saving and repaying debt more, in addition to the increased borrowing burdens on the federal government, will conspire to dampen any consumption-led economic recovery in the coming years, perhaps, in a worst-case scenario, setting up a Japan-style lost decade(s) as more and more Americans reduce spending and turn to the federal government for various income supplements, whether unemployment compensation, health care or retirement benefits.

Recent budget projections by the Congressional Budget Office and the White House Office of Management and Budget forecast cumulative deficits of $9 trillion over the next decade, and that's a "best-case" scenario. If we miss the extremely optimistic annual GDP growth projections, even by only a little, we could be looking at more than $12 trillion of cumulative deficits, assuming we are able to find willing lenders in the face of such substantial numbers at a time when, in 2019, our total government debt could exceed 140 percent of GDP, a level at which it would exceed even the post-WWI high of 120 percent .

In any event, hold on to your wallets in preparation for a series of significant tax hikes at all levels of American government, which would assure an economic lost decade or two. Either that or some intentional devaluation of the U.S. dollar to generate a massive inflationary surge, after which, if destroying the U.S. dollar to save the country as in 1933 with a 60 percent devaluation against gold is deemed "reasonable" policy, $4.00/gallon gasoline in 2008 will seem quaint in comparison to the price levels to which motor fuel would spike as an "unintended consequence" of such a hyper-inflationary monetary policy.

Ben Bernanke and the Missing $165 Large

2009-09-08T17:37:00.000-05:00

$165 large (billion) is missing from the economy, or soon may be, about 1.2 percent of GDP including the vig, and Ben Bernanke knows the whereabouts, or, rather, the where-it-isn'ts.

We're referring, of course, to the Federal Reserve's Consumer Credit Report, the July G.19 released today, which shows a seventh consecutive monthly decline in revolving charge card balances, the longest pay-down streak seen since a similar stretch in 1980.

More importantly, at least as far as the recession is concerned, is the unprecedented sixth month of year-over-year charge card contraction. Never before has unsecured revolving consumer credit declined over a 12-month span, until February 2009.

Now charge-card credit is falling at an 8.0 percent pace, seasonally adjusted (7.0 percent NSA), after advancing at a 5.5 percent clip the entire decade (about half the 10.9 percent annual growth rate since 1980).

Typically credit card balances peak in December and decline for two or three months as holiday season purchase balances are paid down. Not this year for the first time since...ever. Revolving consumer credit balances almost hit $1 trillion at the end of 2008, but have fallen to less than $900 billion in July.

Which brings us to the missing $165 large. As Ben Bernanke knows, consumers, especially retirement-conscious Baby Boomers in their peak earning years, are shifting to saving from spending and fervently are paying down debt to begin laying away more money for those increasingly elusive golden years.

Credit card issuers also are trimming availability and card limits in aggregate, within a few years, to perhaps half of the more than $5.0 trillion of total credit lines out at the end of 2008 according to one Wall Street financial analyst.

If revolving consumer credit still was increasing at its 5.5 percent average annual growth rate this decade, outstandings would have topped $1.03 trillion this December. At the pace at which balances are declining, however, we project a contraction to $875 billion at year-end, a difference of more than $150 billion.

Including the interest not being earned on these "missing" balances, the total impact on the economy - money NOT being spent on stuff - could exceed $165 billion, about 1.2 percent of annual GDP. There's your recession, and the impact could be greater in coming years if the trend continues.

It's one of the many reasons were remain more concerned about deflation than inflation, and why this time is different...

In Bernanke Second Term, Volcker Act II Unlikely

2009-09-01T10:29:00.000-05:00

Ben Bernanke campaigned fervently for re-election this summer, perhaps a first for a Federal Reserve Board Chairman, and in an oddly timed, hastily arranged news conference at a Martha's Vineyard beach estate late last month, President Obama continued a long-standing tradition of newly elected presidents by nominating for reappointment the sitting Fed chair.

Dr. Bernanke, the mild-mannered economist who recently saved the world from financial Armageddon, apparently doesn't believe in quitting while one is ahead, as evident by his ill-concealed bid for a second term. At a summer town-hall campaign stop in Kansas City, Bernanke said he “was not going to be the Federal Reserve chairman who presided over the second Great Depression," the first Great Depression being his academic forte and expertise. Time will tell, but in the next four years he will be facing some strong, maybe vicious, headwinds as he leads the nation's central bank into the uncharted economic territory of 2010 and beyond.

Least of which will be the Fed's current legal entanglement with Bloomberg LP over a Freedom of Information Act request for data about financial institutions which have been, or now are, beneficiaries of the Federal Reserve's numerous credit facilities. Bloomberg won the first round and disclosure was ordered, then stayed for 30 days at the request of the Fed. For Dr. Bernanke, another ill wind blowing is HR 1207, the Federal Reserve Transparency Act, Congressman Ron Paul's (R-TX) drive to “audit the Fed” which has 282 co-sponsors (and 23 Senate sponsors of companion legislation S 604).

More vexing for Ben Bernanke in the coming years, we maintain, will be continued deflationary gales of debt-deleveraging as individuals, particularly Baby Boomers, and businesses voluntarily seek or involuntarily are required to shed a generation's accumulation of indebtedness, an unprecedented trend already manifesting itself in the economic data releases of the past twelve months. For the federal government, Ben Bernanke's Fed will have no such deflationary, debt-deleveraging concerns. In some way explaining the rushed timing and unusual manner of Dr. Bernanke's reappointment nomination, which by any measure of accomplishment could have happened months ago as a reassuring signal to the world's governments, central banks and markets, it would appear the President's formal nod preceded only by hours his administration's candid admission that cumulative budget deficits over the next decade would exceed $9 trillion, resulting in total projected national debt in September 2019 of at least $26.5 trillion when one includes social retirement/welfare programs and government-sponsored enterprise (Fannie Mae/Freddie Mac) obligations.

With such grim numbers, it is fair to assume, Obama reasoned it would be better to go with a seasoned hand at the Fed, rather than bring in a rookie off the bench in the midst of the worst economic recession in the post-WWII era. For those playing along at home, 10-year cumulative federal deficits of $9 trillion are about $2 trillion more than the Administration's estimate in May, much of it front-loaded into 2010-2014, and this is the best-case scenario based on expectations for resumption of real annual economic growth in the 3.5 percent range from 2011 to 2019 and nominal growth of 5.0 percent.

Amusingly, the Administration also is expecting individual tax collections accelerating at a 9.0 percent annual pace for a decade (13 percent 2010-2012) with help from an upper-income surtax, and 5.0 percent unemployment the last seven years of the budget forecast. It also assumes 4.0 percent 90-day bill and 5.0 percent 10-year note interest rates over the next ten years which, if on the mark, would result in more than $1 trillion annual interest on our national debt in 2019, and our national debt would exceed 115% of 2019's guessed GDP of $23.2 trillion. That's the best-case scenario. If we grow at half the real/nominal rates projected, by 2019 GDP will have increased only to $18.1 trillion, a $5.1 trillion miss, and total government debt likely would be much higher as well due to tax revenue shortfalls, in which case we could be looking at a Japan-style 166 percent debt-to-GDP.

Now at least one Nobel laureate economist thinks past can be prologue when a nation's debt becomes a very large percentage of its economic output. Dr. Paul Krugman, who teaches at Princeton and comments for the New York Times and thinks the government has been stingy with fiscal stimulus, is of the opinion that since we emerged from World War II with a national debt 121 percent of GDP which rapidly subsided as a war economy evolved into the world's largest consumer economy, once the current recession has been stimulated away future tax revenues from booming economic growth will allow us to later pare down this lofty ratio. While admitting such a debt-level is “bad,” Krugman seems confident in our ability to earn our way out of such a deep hole.

His wishful thinking about the future isn't supported by the economic facts of the post-WWI era. In 1945, 90 percent of our federal budget was consumed by defense expenditures, and rightly so as we defeated serious existential threats to our nation. Defense outlays fell by 80 percent over the next three years and while total federal debt remained close to the 1946 high-water mark for more than a decade, GDP more than doubled to $518 million (yes, million) by the end of Ike's second term as we converted into a peacetime consumer economy, reducing the debt-to-GDP ratio to 56 percent. (Fun Facts: our lowest modern debt-to-GDP ratio - 32.5 percent in 1981. In 2009 - 82 percent without GSE, 109 percent including GSE.)

By contrast, this time it's different. In 2016 defense is forecast to be 14 percent of the budget and other expenditures about the same, but more than 70 percent of the federal budget is committed to mandatory entitlement-related spending. Try reducing that by 80 percent in three years, or ever, short of revolution. If Paul Krugman can figure out how, peaceably without hyperinflation, he'll get another Nobel, easy.

Perhaps, instead, we should take heed of the impact of unrestrained government deficit spending, and the toll it exacts on an economy and a nation. Japan, still the world's second-largest economy but fading, has been hard hit with an export collapse in this recession. Its aging workforce and population, combined with a birth dearth well below population replacement rates and lack of government-sponsored retirement programs like Social Security, have exacerbated two “lost decades” of anemic economic activity since 1990. Japanese adults 45 and older save more and consume less and a younger generation defers family formation as economic instability and job insecurity weigh heavily on the national social mood. Its government debt has more than doubled in recent years as a determined government and central bank try in vain to replicate the go-go years of 1980s, driving it to a mind-boggling 200 percent of GDP as its economy yet limps along in a self-reinforcing deflationary course. With at least $9 trillion in deficits ahead, it would appear we are headed in the same direction.

In the 1980s, Fed Chairman “Tall” Paul Volcker crushed inflation with record-high interest rates, costing Jimmy Carter re-election but setting the stage for a robust, multi-year demand-driven economic recovery and Ronald Reagan rewarded him with a second term in June 1983.
For Ben Bernanke, a second Fed stint in opposite-world, a zero-rate environment and record accumulation of government debt, may not someday result in the legendary status now accorded the towering inflation fighter of a generation past, as the unfamiliar headwinds of deflation and the unpredictable gales of private-sector deleveraging conspire to confound our assumptions that past is prologue.

Wag the Dog? The Continuing Inflation/Deflation Debate

2009-08-01T10:17:00.003-05:00

As would be expected during an extended period of conflicting economic data – dawn following darkness or eye of the hurricane – an intensifying debate now rages over timing of the coming Great Inflation.

Imminent? Two years? Never? We don't know, nor do Federal Reserve Board Chairmen, Fed Presidents, Fed economists, mere mortal economists, or astrologers, although sometimes, it would seem, the astrologers often guess more correctly. When we analyze the activities of the Federal Reserve the last 18 months, ballooning its balance sheet to more than $2 trillion, committing to acquire up to $1.75 trillion of mortgage-backed securities and government debt and creating excess bank reserves of nearly $800 billion in the process, those amounts, while staggering, pale in significance to the stockpile of money represented by total credit market debt.

$52.9 trillion at last count, according to the Fed's Z.1 Q1 Flow of Funds Report, about 370 percent of GDP, split among consumers, who owe $13.7 trillion, businesses $10.9 trillion, governments $8.9 trillion and financial sector liabilities of $17.0 trillion (of which $12.1 trillion represents GSE debt, GSE-backed mortgage pools and asset-backed securities – the so-called shadow banking system). On the other side of the ledger, loans at commercial banks exceeded $9.3 trillion at, and savings institution/credit union loans added another $2.0 trillion. Finance companies, broker/dealers and other lenders account for $3.3 billion, so nearly $15 trillion of assets held by financial institutions.

We wade through these tedious numbers to illustrate, when compared to the magnitude of total credit market debt, just how accurate it is to describe the Federal Reserve's efforts during a period of economic contraction as “pushing on a string” (a phrase coined in 1935 by Congressman Alan Goldsborough questioning then-Fed-Chairman Marriner Eccles which encapsulated the asymmetric nature of monetary policy – that it is far easier to stop an economic expansion than to end a severe contraction.)

In traditional neoclassical, post-Keynesian economic thought (of which Dr. Bernanke is an adherent), the fiat-money tail wags the financial sector dog. Government and a determined central bank increase the monetary base, giving rise to excess reserves, and, eventually banks create new loans – create additional new money – by lending those excess reserves. By the time all is said and done, the traditional money multiplier model suggests $6 - $8 of new “credit/money” is willed into existence for each $1 of fiat money created by a central bank.
This is the money multiplier model right out of your old Macroeconomics 101 textbook, which suggests that bankers idly await deposits in order to make new extensions of credit in excess of the reserves required to be held on those new deposits.

Near-hysterical “Inflationistas,” however, point to these excess reserves – about $750 billion at month-end now earning about a quarter percent interest – and express alarm at the vaster quantity of new bank loans, say, $4.5 trillion to $6 trillion, which could materialize in a hurry when the economy begins roaring again.

The Inflationistas also wring their hands over Ben Bernanke's 2002 speech, “Deflation: Making Sure 'It' Doesn't Happen Here,” in which Dr. B suggested:

“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”

His comments presume the Fed is in control of the financial system, that the tail wags the dog, and that “helicopter drops” of money are more than sufficient to battle a nascent deflationary episode. But is the Fed really in control?

According to economist Steven Keen, the standard money multiplier model's assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend, in the real world, banks extend credit, creating deposits in the process, and look for reserves later. Thus loans come first – simultaneously creating deposits – and at a later stage the reserves are found.

Which implies that all is as it should be: it's really the financial sector dog that wags the fiat-money tail. Both the actual level of money in the system, and the component of money which is created by the government, are controlled by the commercial financial system itself, and not by the Federal Reserve.

Central banks around the world learned this lesson the hard way in the 1970s and 1980s, says Keen, when they attempted to control the money supply, following neoclassical economist Milton Friedman's theory of “monetarism” that blamed inflation on increases in the money supply. Friedman argued that central banks should keep the reserve requirement constant, and increase Base Money at about 5 percent annually (remember waiting for weekly money supply reports from the Fed?); this would, he asserted, cause inflation to fall as people's inflationary expectations adjusted, with only a minor (if any) impact on real economic activity.

Though inflation in the early 1980s was ultimately suppressed by a severe recession, not by the collective expectations of market participants, the monetarist experiment overall was an abject failure. Central banks would set targets for the growth in the money supply and miss them completely—the money supply would grow two to three times faster than the targets they set. Ultimately, the Fed abandoned monetary targeting, and moved on to the modern approach of targeting overnight interest rates as a way to control inflation (now of negligible effectiveness since reaching the zero interest rate bound in December).

Which further implies that until the financial sector finds compelling reasons to begin lending in earnest again, which could be years away, the quantity of excess reserves accumulating at the Federal Reserve will be inconsequential. Financial history shows that asset bubbles create capacity, which no longer is needed once they deflate. An inevitable and intense period of consolidation follows. No one knows that better than Oklahoma bankers and energy producers who weathered the 1980s and early 1990s. A similar bubble developed in the late 1990s, the dot.com stock market (and telecommunications infrastructure) bubble, and a host of variables came together like aligning planets in the early part of this decade to produce yet bigger bubbles in residential real estate (now showing) and commercial real estate (coming soon), which now are deflating.

Clearly the current bubble has created capacity in manufacturing, building, service and financial sectors which no longer is needed, or, at least, won't be needed again for some time. The inevitable and intense period of consolidation now has ensued, not only in real estate, but many other consumer products, such as automobiles (notwithstanding the current help-your-neighbor-buy-a-new-car Cash for Clunkers stimulus program), furniture, appliances and electronics.

Evaporating capacity follows evaporating demand, including, now, in many parts of the country, the demand for loans and the supply of creditworthy borrowers. Factor in a more determined effort on the part of Baby Boomers, and many others, to deleverage and generationally high unemployment rates in many parts of the nation, which could persist well into 2010, and one is hard-pressed to pinpoint from where loan demand will arise.

Home prices in major markets east and west, despite some (seasonal) anecdotal evidence of stabilization, likely will remain in a downward trend. Meaning, as day follows night, the homes-as-an-“investment” or, worse, an ATM, theme is unlikely to resume anytime soon. In fact, home prices in many regions have not yet reverted to mean, much less the typical downside overshoot which often characterizes a bursting asset bubble. (Worse, should long-term bond rates meaningfully rise, bringing mortgage rates along for the ride, phase two of the residential real estate bubble deflation would be set in motion, as mortgage rates, and, hence, monthly payments, are the chief determinant of home price affordability.)

Compounding the problem, once bubbles pop, once an asset class is disrupted by manic buying/appreciation and subsequently roiled as everyone heads for the exits, it usually is a long, long time, if ever, before that asset class comes close to regaining and exceeding previous highs.
Think of the recent dot.com stock market bubble. Many of the most egregious IPOs simply disappeared months after March 2000 (the top) as their cash burn rates quickly consumed the proceeds of their one-off offerings. No doubt you fondly remember pets.com with the entertaining sock puppet, or computer.com which blew $3 million – half its seed money - on three 2000 Super Bowl ads. (Not to digress, but it's said on Wall Street “they never ring a bell at the top.” $3 million for three ads had a certain clank to it though, didn't it?)

And shares of internet stalwarts such as Microsoft, Intel, Cisco Systems, Yahoo!, and others, which had actual, substantial sales, earnings and staying power, now trade at fractions of their 2000 bubble highs nearly a decade later.

Fret not about inflation, the financial sector dog wags its fiat-money tail, and the Fed pushes on strings. As such, we should not be concerned runaway, Weimar/Zimbabwe-style monetary inflation will result anytime soon, if ever, from the current policies of the Federal Reserve, determined though it may be to reignite some positive inflation.

Bankers, and Oklahoma bankers at that, for the next few years, maybe even a decade, again should be far more concerned about the impact excess capacity and falling asset prices might have on borrowers' debt service and loan collateral values while awaiting more favorable business conditions.

Deleveraging and Disinflation Will Deliver a GDP Double Dip

2009-07-01T10:04:00.001-05:00

Inflation is NOT a credible threat in the short term, notwithstanding the Fed's best efforts to jumpstart at least a couple of percentage points of price appreciation and heated summertime talk of Zimbabwe-like hyper-inflation in the offing.

What's the short term? At least until GDP turns solidly positive with at least three consecutively growing quarters, which, for reasons we entertain below, is not likely to happen in 2009 or 2010. Green shoots aside (now perhaps a most-overused, threadbare metaphor) and profound wishes for a “V-shaped” recovery to the contrary, we now believe the most likely scenario into next year is a double dip.

San Francisco Fed President Janet Yellen, often mentioned as a potential Fed Chairman only to make it slightly less obvious that presidential economic adviser Larry Summers is the designated front runner to replace Ben Bernanke next year, agrees big-time inflation – say, more than 6 percent - is unlikely to unfold as a plausible scenario in the next few years.

“I'll put my cards on the table right away,” she said in a June 30 speech. “I think the predominant risk is that inflation will be too low, not too high, over the next several years. I take 2 percent as a reasonable benchmark for the rate of inflation that is most compatible with the Fed's dual mandate of price stability and maximum employment.

“First of all, this very weak economy is, if anything, putting downward pressure on wages and prices. We have already seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent—a sign of the sacrifices that some workers are making to keep their employers afloat and preserve their jobs. Businesses are also cutting prices and profit margins to boost sales. Core inflation—a measure that excludes volatile food and energy prices—has drifted down below 2 percent. With unemployment already substantial and likely to rise further, the downward pressure on wages and prices should continue and could intensify. For these reasons, I expect core inflation will dip to about 1 percent over the next year
and remain below 2 percent for several years.

“If the economy fails to recover soon, it is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more. But I don't view this as likely. The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won't be tolerated." (Emphasis ours.)

Two things: one, clearly the Fed is determined to fight deflation, having lost the battle to make sure “it” didn't happen here (see B. Bernanke's 11/21/2002 speech: “Deflation: Making Sure “It” Doesn't Happen Here”), and two, serious inflation isn't in the cards in the midst of a wage-price downward trend. The $14 trillion question, of course, is can the Fed muster the precision necessary to shift from deflation prevention to inflation prevention at exactly the right moment such may be required in the more-distant future.

Which is why we are speaking of “disinflation,” the likelihood of persistent wage and price softness – unevenly distributed by economic sector and region - in a near-term of the next two-to-three years, but not, thanks to the Fed and central banks around the world, a self-reinforcing, deflationary spiral of asset devaluation as was prevalent in the 1930s. Mounting evidence now suggests the Fed's heavy lifting since early 2008, during which its balance sheet more than doubled to $2.1 trillion and excess bank reserves stand at more than $800 billion, stemmed the greater part of collapsing real estate and capital markets prices toward the end of the first quarter.

Less Bad is the New Good?
The economy clearly no longer is in a free fall. It's now a “controlled descent” at terminal velocity, that speed at which a falling object accelerating at 32-feet-per-second/per second stops gaining speed due to wind resistance, but remains falling at a steady120mph). Although the downward rate of acceleration has been stabilized, the trajectory remains the same, as evident by a host of economic data points illustrating an often conflicting period following the initial shock.

Residential construction spending, obviously, has been slashed and burned, down more than 30 percent year over year after first going negative in mid-2006 as the housing market peaked, but non-residential (commercial) construction now also has gone negative for the first time since mid-2001 with a year-over-year decline of slightly more than 3 percent, which will turn decidedly more negative as projects are shortened, abandoned or completed. In total, reduced construction spending, including public-sector, has shaved off a percentage point from GDP, about $140 billion over the last 12 months.

Factory capacity utilization stands at a record-low 68.3 percent, a full dozen percentage points below its 1972 - 2008 average, and now has exceeded the previous low of 70.9 set in late 1982. Retail sales, while showing modest signs of improvement, remain nearly 10 percent below year ago numbers, as retirement-conscious Baby Boomers become reacquainted with an old-fashioned concept called savings. The personal savings rate has jumped to nearly 7 percent in May, up from below zero as recently as 2006. Current savings equates to deferred consumption according to our Econ 101 textbook, and nowhere has deferred consumption become more evident than in the automobile industry where two of three domestic manufacturers are in some stage of bankruptcy and the decade's 16 million – 18 million unit annual sales pace of the 2000s has found terminal velocity at about 10 million units, a 40 percent hit.

Not that those newly acquired personal savings are finding their way into deposit accounts, unfortunately. More likely, the net increase in discretionary income being created by deferred consumption is going straight to the liability side of the balance sheet repair mode in which many Americans find themselves halfway through 2009. Debt repayment, especially credit card obligations, has become a priority, both voluntarily and with the gentle nudges provided by increasing interest rates and higher minimum monthly payments, which, in the long run is a very good thing, but in the short run will further dampen retail sales for several years.

Those not paying their credit card bills are contributing to a charge-off rate – not past dues – approaching 10 percent annualized at many of the major issuers who may now wish they had not as aggressively expanded and consolidated this line of business in the last decade.
Credit issues certainly are not limited to the credit card arena. Prime mortgage delinquencies more than 60 days past due as of March 31 have risen to 2.9 percent from 1.1 percent a year ago, according to a June 30 report published by the OCC, as subprime disease, like a slow-spreading H1N1 flu virus, mutates and infects a new constituency.

Since prime borrowers represent two-thirds of all mortgages, about 23 million primes, with more than 650,000 now more than 60 days past due, clearly this is a troubling trend. Those 650,000 mortgages represent nearly 15 percent of the current pace of existing home sales, which stand at about 4.6 million annualized, and would represent an amount equivalent to 25 percent of all subprime mortgages.

Equally troubling, the OCC data show that about half of all mortgage modifications made at least a year ago in 2008 already have re-defaulted and only 30 percent of modifications made in the first half of 2008 are “current and performing.” Fannie Mae's and Freddie Mac's new 125 percent loan-to-value mortgage modification guidelines, which became effective this month and replace the previous 105 percent LTV limit, likely will not appreciably improve these re-default rates (and isn't 125 percent LTV what got us into trouble in the first place?).

Home prices in many of the troubled regions of the country are not declining at the torrid pace of earlier this year (18 percent YOY decline in April vs. 19 percent in January), which is good news, but this could be a head-fake, as was the case a year ago when the widely followed Case-Shiller/S&P Home Prices Index showed some seasonal improvement in a half dozen or so major cities, only to see those temporary troughs and peaks evaporate toward year-end as values resumed their earthward trajectory.

A Jobless Recovery is an Oxymoron
June's Employment Situation report scorched another green shoot, an improving rate of job losses, as the economy shed 467,000 jobs last month compared with 345,000 in May. Both May and June are substantial improvements over January's near 800,000, but the U-3 (headline) unemployment rate is nearing the 10-percent-plus level not seen in a generation, up a tenth in June to 9.5 percent, and is likely to exceed 12 percent sometime next year, which is by far the biggest impediment to economic recovery.

Worse yet, the broader U-6 unemployment rate stands at 16.5 percent, which includes nine million or so people involuntarily working less than full time, which is borne out in June's average workweek of 33.0 hours, the least hours worked since recordkeeping began in 1964. All of which leads again to points we have made in the past: this time it's different.

A balance-sheet-repair recession is unlike any previous post-WWI economic experience, and, thus, can be expected to: i) last longer than all previous post-WWII downturns (already we are close to exceeding the duration of all recessions since 1900 except The Great Depression), and ii) be much more tepid in recovery which leads to further weakness.

We hope you only penciled in that “V” shaped recovery because deleveraging and disinflation will deliver a GDP double dip in 2010.

Debtors Revolt in the Offing - Check Local Listings

2009-06-26T16:26:00.015-05:00

A debtors revolt is coming and, ironically, the dozen or so Too Big Too Fail (TBTF), systemically important financial institutions which control the bulk of about a trillion dollars of unsecured credit card lending, and which so generously received and in many cases still show on their balance sheets copious amounts of taxpayer capital borrowed from China, are now enacting the very policies which will be the cause of said revolt.

JPM Chase is leading the way, sending letters to cardholders who have locked in low "teaser/promotional" interest rates of 3.99% or 4.99%, mostly through balance transfers from other higher-rate credit cards which promise these low rates for the life of the loan unless you default (the technical term for doing something really bad) by making a late payment, going overlimit, missing a payment, paying less than the required minimum payment, forgetting to call your Mom on Mother's Day, and so on. Chase, and other debt-pushers, now the beneficiaries of the lowest interest rate environment since ever (they can borrow from Uncle Ben at the Fed for about a half percent, p.a.), aren't squeezing enough profits from these promo-rate cardholders, but now they've found a way.

Chase recently notified tens of thousands of cardholders it is raising the minimum monthly payment to 5 percent from the old industry-standard we'll-make-you-a-debt-slave-for-life-and-since-we-rewrote-the-bankruptcy-rules-good-luck-with-that minimum monthly payment of only 2 percent. Starting August 1, Chase cardholders who received these letters (see this link at Consumer Affairs and this link at Daily Kos for some real-life examples of the impact of this change), now will need to pony up 150 percent more each month to keep the low, low teaser/promotional rate. So if you just did a balance transfer for $20,000.00 (!) and were starting to feel pretty good about consolidating your debts into a manageable $400.00 minimum montly payment, surprise!, your convenient new minimum monthly payment jumps to$1,000.00.

Chase, of course, which recently did repay its $25-large Uncle Sugar equity infusion (and therefor never should be eligible to receive another bailout, TBTF or not), says it's merely following recommended federal (Office of the Comptroller of the Currency) guidelines in hiking the minimum monthly payments to 5 percent, but it (and probably all other card issuers who will follow) is rushing to change any and all credit card terms while it can before new regulations prohibiting such changes go into effect next year. The Clearly Intended Effect, of course, is, by making the new minimum monthly payments two-and-a-half times higher in one fell swoop, carholders unable to comply with the new $1,000.00 payment will default, which then gives Chase the ability to jack a cardholder's interest rate into the stratosphere, or at least 25 percent to, yes, incredibly, 39.99 percent, from the low, low, life of the loan 3.99 percent the cardholder was deceived into accepting. (And, insult-to-injury-wise, the cardholder probably paid a 5 percent balance transfer "fee" to boot - another grand for a $20,000.00 transfer.)

Marshall Auerback raises the same issue of a debtors revolt in his new deal 2.0 piece "Risk of Major Social Upheaval Likely if Bank Bonanza Continues," albeit triggered by different circumstances, and as the only remaining form of protest available to citizens of a new and dangerously armed police state (forget marching, as in Iran), but the effect will be the same.

When most of the home owning voters cannot pay their major debt or have no
incentive to pay their mortgage debt, there will either be a debtors revolt that
society will sanction or there will be a bailout of such a magnitude that mega
moral hazard will affect private lending forever. Once these things happen, you
will no longer have the social rules for private risk based lending. In other
words, financial markets will be unlike anything ever seen before in private
economies. Is this really what Wall Street wants, let alone American society as
a whole? (emphasis mine.)

When U.S. debt-slaves decide they have nothing left to lose, when neither marching in the streets nor bankruptcy is an option, the former due to personal status/safety issues and the latter because that game is already rigged in favor of the lenders, when minimum monthly payments are more than doubled specifically to create an opportunity-by-default to spew interest rates into the 30 percent range, the time will be at hand. Maybe not this year, but soon. Naturally no one in the finance-captured main-stream-media has picked up on this story, much less the widespread implications in a consumer-driven economy (Update One, 06/30/2009 Via Bloomberg: JPMorgan Raises Minimum Monthly Payments on Credit Cards to 5%).

In the meantime, Chase's action (and likely all other cardholders which will follow suit) will KILL what remains of the withering, green-shootless retail economy, no question, as cardholders are forced to shut down any and all discretionary spending to divert funds to credit card payments. Either way, kiddies, it'll be a lean Christmas (or Hanukkah or Kwanza or whatever) this year, so don't expect much under the tree (or menorah or whatever).

Your tax dollars at work. (Well, not Chase, but for BofA and Citi and Wells Fargo and...)

TARP Repayment Terms MUST Preclude Future Support

2009-06-05T10:30:00.007-05:00

The "Gang of 19" and other U.S. banks which accepted hundreds of billions of TARP recapitalization funds - taxpayer money borrowed from our BFF China - since October 2008 now are growing impatient to return the money to Uncle Sugar. Stress tests were graded Pass-Pass last month after fantasy Q1 earnings were reported and accommodating capital markets have allowed the largest of the "Too Big to Fails," (TBTFs) with a couple notable exceptions, to bring debt and equity offerings fast and furious to a newly eager investor crowd. Even the much-heralded PPIP (really, MLEC 3.0) designed Rube-Goldberg-like to extract toxic waste from bank balance sheets and fob it off on an unsuspecting public, replete with more-than-generous fee comps for the "managers" now is DOA, having recently been euthanized by the FDIC as no longer necessary.

The Anecdotal Economist is all in favor of now-healthy financial institutions, courtesy of bogus Q1 earnings (huge wind assists from AIG derivatives unwinds, trading profits, mark-to-make-believe and the best, right Citi?, theoretical discounted debt buy-back gains), repaying the government and getting on with the business of fleecing credit card customers and mortgage refinancers and a rapid resumption of unrestricted, astronomical pay and bonus plans, but the fine print of the TARP repayment term sheet must contain one vital provision:

Any bank repaying TARP funds must forever be barred from receiving any and all similar government aid in the future.

TARP, if repaid, has to be an one-off for the TBTFs. ~~When~~ If the economy continues to head down the crapper, if the green shoots turn out to be weeds, if the green shoots get scorched, if home foreclosures double - again, if credit card default rates hit 20 percent, if personal and business bankruptcies double - again, if unemployment reaches 12 percent, if states, counties and municipalities go broke and tax revenues at all levels evaporate, well...boo-frigging-hoo, too bad for you.

Are you listening, Government Sachs? Did you catch that, Jamie? Taking notes, Kenny? If you pay back the TARP - THAT'S IT. No more government rescues again, ever.

So if, in future quarters, your metrics go south and you begin to report crappy results - again - and the shorts come after you with a vengeance - again - and it turns out 2009 earnings really were make-believe, do not ~~demand~~ expect another gift from Timmy, Ben and Sheila (and Larry and Bob).

If there needs to be a next time, to again save the TBTFs, the U.S. economy and the world from financial armageddon and meltdown, we respectively request it be done the old-fashioned way: Failing banks must be seized, management and boards must be dismissed, common and preferred stockholders and unsecured bondholders wiped out, toxic waste removed and new, solvent institutions re-opened. The FDIC has done this for billions of years. It can do it again.

Global Recession World Series

2009-06-01T09:51:00.001-05:00

Game One of the Global Recession World Series finally is over, probably ending in early March. Team America notched a narrow victory against a worthy opponent –– Liquidity Crisis –– though not without some tense and thrilling moments, and not before bringing in its ace closer Timmy Geithner who, following his game-winning save, immediately demanded to be traded to Treasury.

Team America manager “Helicopter” Ben Bernanke, now 1-0 in his professional career after decades studying and theorizing how the game was played during The Great Depression (1929-1941) and more recently in Japan's Lost Decades (1990-Present), was pleased with the win despite needing numerous extra innings to conclude the game. “I thought it was gonna get away from us last September when we got shelled in the top of the twelfth,” Helicopter Ben said. “Geesh, bases loaded with Fannie, Freddie and Lehman, and who stalks up to the plate – AIG! – and there it goes, out of the park for a grand slam,” Ben recounted.

“So the bases get cleared, but then a Money Market Mutual Fund broke its buck trying to field an easy pop fly and the go-ahead run gets to third. Good thing it started raining,” Ben noted. “We got the TARP out and that helped cool things off during the delay, although not as quickly as Team America CFO Hank Paulson would have liked.” Paulson's TARP-use instructions seemed simple and easy for the grounds crew to understand – all contained in a three-page memo. How difficult could it be? When it starts raining, drag out the TARP, get it on the field and don't ask any questions.

But League Commissioners Pelosi, Reid, Frank and Dodd, would have none of it. If a TARP was to be deployed, there had to be specific rules and circumstances and a minimum number of grounds crew available to drag out the TARP and others available in case any TARP-draggers got hurt, and so on, until the TARP deployment instructions comprised more than a thousand pages and specified a new TARP be purchased with optional fittings, moisture sensors and other gizmos which cost $100 billion more than the original $700 billion estimate.

The Commissioners, and their 531 assistants, were forcibly ejected from the stands at the request of Team America manager Bernanke and CFO Paulson, relegated to watching from a small hole in the fence mostly left-of-center. Later, team CFO Paulson retired and arranged an acquisition of the club by a former League Commissioner and his friends shortly after the rain delay concluded. For some reason, however, what was left of the TARP remained on the field. We really would rather have not even played this contest,” said Bernanke. “Team America's record should have been good enough to exempt us from all this post-season nonsense, but apparently others didn't think we demonstrated enough skill and proficiency during the regular season, most of which, by the way, was managed by my predecessor, Alan “the Maestro” Greenspan. But a win is a win, and I'm pleased there will be countless Ph.D. dissertations written about Game One in the future.”

Fresh off its grueling, yet satisfying, first victory, Team America took its 1-0 record in the series and swaggered into an adjacent stadium to face its next opponent – Credit Crisis.

Game Two – which also went into extra innings – only recently has concluded following the universal sightings of green shoots. Again, Team America narrowly won a hotly contested battle against Credit Crisis, this time with invaluable assistance from game MVP Sheila Bair of the Federal Deposit Insurance Corporation. League Commissioners and their 531 assistants who set the rules and regulations of the sport, and also generously fund it, again were ejected from the game, forced to watch from a small hole in the fence mostly left-of-center, while they conspired with new Team America owners to spend another $800 billion to create a spin-off, Shovel-Ready Farm League.

“With the lucrative broadcast rights we sold to China, Japan, Brazil and others we can pay for at least half of the cost of this new league, and we have options to make them fund us for at least the next four years, as well,” one of the League Commissioners was overheard to say. Which was good, of course, as the TARP had shrunk so much after the rain in Game One there was little left. That and because the new Team America owners had cut away a big chunk of the TARP and used it to pitch a hospitality tent in the parking lot for their vehicles and the makers of those vehicles.

“Give us your tired, your poor, your wretched assets longing to be marked-to-par,” Bernanke implored the nation's systemically important financial institutions, industrial companies, insurance giants, mutual funds and hedge funds, “and with Sheila's help we will turn that toxic waste into shiny new Treasury bonds,” as Team America beat back the Credit Crisis foes.

With 26 letters in the alphabet, Team America manager Bernanke was able to create nearly 456,976 different Federal Reserve Credit Facilities, using four-letter acronyms like TALF and CPFF and PDCF and such (although some notable four-letter acronyms were avoided, despite the urgent need for as many credit facilities as possible), an offensive barrage the likes of which no opponent could surmount. (Everyone had a personal favorite Fed credit facility. Ours was the BARF: the Boat Anchor Refinancing Facility, under which the Fed would accept gently used moorings as collateral for needed credit extension.)

In doing so, the Fed lofted its staid balance sheet from mere billions, mostly U.S. Treasury obligations carrying the full faith and credit of the federal government, to trillions backed by who-knows-what, but the gambit worked like a late-inning squeeze play, credit markets thawed like a melting glacier in Greenland and Credit Crisis went down. And when the results of the Stress Test, which everyone passed with flying colors, were posted on the JumboTron during the seventh-inning stretch last month, the crowd went wild. Credit Crisis never was in the game from that point on as it became Team America's turn to shell its opponent.

In a post-Game-Two interview Bernanke said, “Green shoots clearly are sprouting everywhere and rivers of credit, at least in bond and equity markets, now flow which only months ago were locked in ice, and while fooling with our credit facility 4-letter acronym generator was fun, we really would rather have not even played this contest. But a win is a win, and I'm pleased there will be countless Ph.D. dissertations written about Game Two in the future.”

That recaps the action so far in this now 24-month-long Global Recession World Series. Fresh off its equally grueling, yet equally satisfying, second victory, Team America takes a 2-0 record and girds for its next, perhaps most difficult opponent – Deflationary/Solvency Crisis.

Game Three promises even more drama and action, as Deflation/Solvency Crisis certainly could be a formidable opponent. They have that big guy from California, the governor, who still can bench press about 500 pounds, the team's designated hitter and a fearsome intimidator (terminator?) of opposing pitchers, as well as an equally deep bench of individuals, businesses, industries, cities and states lined up for their crack at Team America.

With unemployment approaching 10 percent, and whole industries, cities and states teetering on the solvency brink, green shoots easily could get scorched and there promises to be some real curveballs in this match. For starters, it's possible the new Team America owners may fire Helicopter Ben and bring in a new manager. From what we hear, there's a short list with one name on it. And, the League Commissioners are debating whether to allow the Federal Reserve, which plays on Team America, to also be designated Chief Umpire. Not sure how that would work, but they write the rules.

Hard to say how long this game will last, as the opening pitches only now are being thrown, but the first batters, General Motors and Chrysler, went down swinging against some seriously good bankruptcy court fastballs, although a number of secured bondholders and common stock holders were injured in the stands from some errant foul balls.

After that, it's Game Four against Massive Government Debt Bubble as Team America's all-stars – the Fed, the Treasury and the FDIC – suit up against the League Commissioners' pet team, nicknamed the “CUBES” (Congressionally Unrestrained Budget and Entitlement Spenders). This could be the decisive contest in this winner-takes-all Global Recession World Series, although Game Five, if necessary, against the Forces of Hyper-Inflation, tentatively is scheduled for 2011 or 2012. Check local listings.

Executive Summary: We Are Screwed

2009-05-28T12:31:00.004-05:00

“Never make predictions, especially about the future,” baseball legend Casey Stengel once observed. Despite his admonition we make our guesses anyway, extrapolating our current moods and worldviews as far into the unknowable future as can be tolerated with straight faces by polite company. As such, optimists of America’s 21st century often see a rosy future of bunny rabbits and rainbows, where energy is unlimited, money is unnecessary, the world’s population is smaller, well-fed, educated, civilized and healthy, and future generations enjoy long lives of ease, comfort and wealth thanks to the extraordinary beneficent progress of science, medicine, technology and government.

Modern-day pessimists, on the other hand, foresee a future far more dismal than the crumbling present reality, teetering on the brink of anarchy and collapse and fraught with the vicious animal spirits arising from our reptilian brain stems as bipedal inhabitants of an over-populated planet violently compete for ever-scarcer resources and future generations are imperiled thanks to the extraordinary destructive progress of science, medicine, technology and government. Since pessimists merely are optimists with better information, and inasmuch as there is none so zealous as a convert, one can be forgiven the newfound realist zest of a former optimist whose eyes have opened to view the precipice at which we, as a nation and a species, now stand. Predicting major changes to a complex system, however, much less its collapse, is an exercise fraught with indescribable futility, subject as they are to sightings of Black Swans, that elusive species whose arrivals are unknowable and unpredictable, unlike the buzzards which still return every March 15th to Hinckley, Ohio.

For Black Swans are the harbingers of both good and evil, and, as such, are apt to make one’s future view of the world both amusingly irrelevant and dangerously outdated mere moments after their sighting. Undaunted, and with full foreknowledge of the hilarity with which some of these prognostications will be viewed after 2012, herewith I submit my forecast for the future.

Executive Summary

We are screwed.

Rationale

We have ruined our endgame. Our children are screwed. Their children and the posterity of humankind are screwed. Humans, as a species, have screwed up a really good gig on this planet and, at some point, some miserable centuries hence, likely will be evolutionarily selected, as were dinosaurs, to cease to exist. Other species will survive and thrive, however, if only bacteria dwelling far undersea or underground, and perhaps, in the four or five billion years before the eventual decomposition of our solar system’s star into a red giant engulfs the orbit of this planet, another form of conscious, self-aware, communicating, tool-using life will escape the evolutionary chains in which it now is entrapped. All of which will occur well-after 2012, but in the meantime, here’s what to expect between now and then:

Black Swan Alert

December 21, 2012, as every student of apocalypse knows is reset day of the current Mayan 5,125.36-year “long count” calendar, as well as culmination of a fifth long-count great cycle and beginning of a new great-great cycle of 25,626.8 years which roughly coincides with the earth’s axis-wobbling precession of equinoxes cycle. It also represents a point at which the sun will cross the elliptic plane of the galaxy at the same time all its planets are aligned behind it away from the galactic center and the day on which Thomas Friedman will realize, belatedly, everything he ever thought or said was wrong and dogs and cats will be living together and…

Well-before 12/21/12, however, an unknowable, unpredictable black swan – the tipping-point event – will occur, setting into motion a cascading chain of unstoppable events which leave humanity forever changed and slipping, eventually, into evolutionary obscurity, just one of many accidents of DNA which didn’t quite work out. These forecasts, these dark musings, focus more on the immediate aftermath of the tipping point event (TPE), and the longer-term repercussions for the United States and the world. As another commenter recently observed, two of the four horsemen of the apocalypse already appear to have been untethered: Demand Collapse, in the form of sharply reduced consumer spending, reduced debt levels and increased savings, and Systemic Failure, via the collapse of AIG.

In 2009, however, a strong case can be made that these seals only partially have been broken, as consumer demand is falling, but has not completely collapsed, and the systemic failure of AIG has been tempered by the unlimited amount of borrowed government/taxpayer funds which have been shoved into the gaping maw of the AIG transfer conduit, only to be parceled out among some of the nation’s, and world’s, largest unindicted co-conspirator institutions, whose own day of reckoning looms near. In the nearer term, clearly the current policy of the United States government, regardless which persons or political party officially are wielding power (or the oligarchs behind them), is to insure the grand game continues unmolested, that no financial bubble ever is popped and no economic reset button ever is pushed. The Treasury Department and the Federal Reserve, therefore, in coordinated fashion, have become, and will continue to be, the financial backstop and lenders of only resort, setting up the scenario which will culminate in the actual “financial Armageddon” of which we were warned, boy-who-cried-wolf-like last September, but in orders of magnitude far beyond the worst nightmares of even the most pessimistic among us.

This next year-to-three-plus-years represents the final “blow-off” stage of our financial evolution, from our meager origins on the slime-lined shores of metal coins to the sophisticated velocity of electronic money, mere electrons, circling the globe at the speed of light. And it will be to those ancient metal coins and a much larger, rounder, colder world (sorry, Tom Friedman), at some point in our bleaker future, to which we will return. Whether good-intentioned or ill – it’s immaterial - the U.S. government/Federal Reserve will be enabled to become the final Ponzi-finance bubble of humanity’s electronic era, and in doing so will again replicate the oft-repeated outcome of all paper (fiat) currencies.

The last giant bubble shall burst on that day – not in 2009, but within four years – when:

· We will have bailed out, rescued, backstopped, guaranteed and thrown money at every major business, corporation, industry, state, city, bank, insurance company, automaker, retailer, airline, factory, shopping mall, commercial real estate company, pension fund, mutual fund, money market fund and a good portion of the population, ballooning our national debt to incredible, historic, bubblicious proportions, mostly via funds borrowed from international creditors.

· Under this illusion, we will have returned to some semblance of pre-2007 “life as we knew it,” albeit with new, improved price-deflated consumer goods, but also a renewal of free-flowing credit for consumers and businesses and cities and states and a restored, growing (if illusionary) economy.

· Just when things are looking up and Obama is running for re-election, with a prevalent, growing perception of hope and a “big bullet” dodged, the TPE occurs (unexpectedly, of course), say, yet another derivatives bomb (hey, there’s a quadrillion of ‘em…) which threatens the extinction of yet another too-big-too-fail financial institution. This time, however, the “financial Armageddon” cry-wolf ploy fails to engage our international patrons, as they previously have read about John Law and know the movie’s ending (like “Titanic:” it sinks every time).

· America, belatedly, will realize we have gone “a bailout too far,” which will end as badly for the Allies as did the movie “A Bridge Too Far.” (Note: by definition, the Black Swan TPE will NOT be a derivatives eruption, because that is already a “known unknown.” The Black Swan TPE will be a Monty-Python-esque “And Now For Something Completely Different” occurrence, which may, in fact, detonate a derivatives bomb. As such, it shall be henceforth, for the purposes of this commentary, be referred to as “the Black Swan TPE Which Cannot Be Named,” or BSTPEWCBN.)

· America’s international creditors, including “friendlies” like Japan, Britain, Canada, Brazil, and others, immediately and en masse, become unwilling to lend the United States, at any rate of return or rate of interest, save the pledging of U.S. gold reserves and/or deeding over of real, physical assets. The “Full Faith and Credit of the United States” overnight becomes regarded as some sort of ironic joke.

· Our international suppliers of energy, on which we foolishly still are dependent for two-thirds of our minimum daily requirement, no longer will accept our paper IOUs, again only gold or the deeds to other real, physical assets.

· The U.S. dollar no longer is accepted for any form of payment outside the country, much less is deemed the world’s reserve currency. In its place, a hastily arranged basket of other currencies is created to isolate the financial damage to the U.S.

· U.S. dollar-denominated global trade and commerce grind to an abrupt halt, ships at sea stop, divert or return to ports of embarkation (if headed to the U.S.), pending delivery of goods to alternate buyers or arrangement of payment in forms which are not the U.S. dollar.

· Resolutions are introduced to the United Nations to require the United States to stand down its military everywhere in the world, in recognition of our new status as a banana republic with nuclear arms. The U.S. naturally vetoes this resolution in Security Council. U.N. member representatives approve a measure to immediately relocate U.N. headquarters to Switzerland.

· After the failed U.N. resolution, our overseas armed forces are ordered by host countries to immediately vacate their garrisons or face forcible ejection, including troops based in active theaters of conflict.

· Post-Katrina-New-Orleans-like, widespread hoarding of cash, food, water, medicines, alcohol, batteries, candles, fuel, arms and ammunition occurs within hours of the BSTPEWCBN, rapidly escalating into regional episodes of violent theft, robbery, burglary and looting which overwhelms local law enforcement.

· Our remaining domestic armed forces and national guard units are ordered into U.S. streets, with authorized use of deadly force, to support local and state law enforcement in quelling protest, looting and violence, to enforce 24-hour curfews and, for the third time in our nation’s history, to enforce martial law. Armed forces and local law enforcement conduct house-to-house weapons sweeps, under the auspices of local force majeure ordinances (in violation of the Second Amendment and Fourth Amendments), and based on NCIS gun-purchase records and state concealed-carry permits, as applicable.

· In short, we transform ourselves from unilateral superpower to international pariah in a matter of a few weeks. Martial law, curfews and restricted movement and travel remains in place for months as essential services and commerce are allowed to recommence under strict rules and regulations.

Then what? The process begins anew under an entirely different reality, an entirely different set of criteria, but the process remains the same: Denial, Anger, Bargaining, Depression, Acceptance.
Denial will evaporate rapidly at a pace which coincides with full establishment of the new world order, and Anger, having flourished briefly and violently on our streets and in our neighborhoods, will be severely, perhaps painfully, curtailed in a previously unimagined militarized manner. There will be no Bargaining, for there is nothing left to bargain for, or to bargain with. What was, was, and what now is, is, and for the first time in the post-WWII era, possibly longer, the United States of America no longer will call the shots in the assemblage of nations. Depression, arising from a lifestyle lost, and Acceptance, of a new, much lower, standard of living, will be the most difficult segments to live through.

But muddle through we must. As always, younger children will adapt most easily and most quickly to our reduced means and living arrangements. They will , however, grow weary of the endless stories of how wonderful and amazing American life used to be, as told to them by their aging Baby Boomer, Generation X and Generation Y elders.

Now my head hurts…time for some scotch, which I will sorely miss, someday.

Despite Fed Efforts, Deflation on the Horizon

2009-05-01T09:40:00.004-05:00

Despite the heroic efforts of Ben Bernanke's Federal Reserve to combat the forces of deflation, not seen en masse since The Great Depression, March wholesale and retail inflation data now confirm sightings of the forward elements of falling prices, the Fed's (and bankers') worst-case economic scenario. Under Bernanke's leadership, the Fed has more than doubled its balance sheet in the last year to more than $2.3 trillion as it undertook an unfamiliar role as U.S. lender of only resort and deflation eradicator, and it has pledged to nearly double its footings again to an unprecedented $4 trillion in its so-far unsuccessful battle against the deflationary effects of individual and business balance sheet deleveraging.

But March and April inflation data from the Producer Price Index (PPI) and the Consumer Price Index (CPI) confirm the potential beginnings of with what Ben Bernanke's nightmares must be filled: downward spirals of asset prices and incomes insufficient to service fixed amounts of debt in an unfamiliar environment of a shrinking money supply as new money created by Fed fails to keep up with wealth being destroyed. April Producer Prices for Finished Goods ticked up 0.3 percent but fell 1.2 percent in March, and have fallen six of the last nine months. Intermediate Goods declined 0.5 percent in April following a drop of 1.5 percent in March, falling nine months straight, but Crude Goods, the most volatile measure, jumped 3.0 percent on higher energy prices after falling eighth consecutive months, previously down 0.3 percent in March.

May 15th's Consumer Price Index for April reflects falling prices at the retail end as well, where prices also have declined in six of the last eight months, but more importantly, now are showing the first back-to-back monthly and year-over-year declines (-0.7 percent) in more than a half-century. No, not since 1955, when President Ike was improving his golf game and laying groundwork for the nation's interstate highway system, have consumer prices declined in a twelve-month span.

Admittedly, some of the overall decline in prices at all levels, wholesale and retail, can be attributed to a dramatic plunge in energy prices compared with a year ago, but crude oil at $60 in early May against $100 a year ago cannot explain away all of this new evidence of price deflation. As we suggested above, deflation technically is a shrinking money supply which manifests itself in the form of lower prices - literally fewer dollars available to purchase a finite quantity of goods and services.

But won't all this Fed balance sheet expansion create big-time inflation some day? After all, $4 trillion is a lot of pump priming – it's 30 percent of GDP. The answer, categorically, is “maybe.” Or, “someday,” but not today, because so far – halftime, perhaps – it is estimated nearly $14 trillion of wealth (money) has been dispatched to money heaven since the end of 2006 in the form of stock market values, real estate values and credit write-downs and charge-offs.
The Fed's heavy lifting to-date has created far less money than already has been destroyed by the financial and real estate markets so no inflation worries now, though, mate, it's DEflation ahead. Which is why, no doubt, the Federal Reserve now must be practically desperate to ramp the speed of the printing presses in the basement of its grand edifice at 20th and Constitution in Washington, D.C. Well not really. The Fed actually doesn't print currency in its basement – that messy chore is performed by the Treasury Department's Bureau of Engraving and Printing a few blocks away at 14th and C Street.

But the Fed does create money from thin air in a number of ways, most often by buying government bonds and paying the seller via an accounting entry on its books (the thin air). As you remember from Macro Econ 101, the Fed adds the bonds to its assets and credits a financial institution's account on its liability side (which, in turn, credits the bond seller if other than the bank). In theory, the Fed can do this almost endlessly, to the extent of the total amount of publicly held government bonds ($6.8 trillion not counting about $3 trillion of Agency bonds), and, if necessary, other bonds such as the $5 trillion of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

In fact, this is exactly what the Fed has begun doing in earnest since reaching monetary DEFCON 1, Zero Interest Rate Policy (ZIRP), the "zero bound" for interest rates in mid-December. But there are many other ways the Fed can will money into existence, most of which were neatly outlined more than six years ago by then-Fed-Governor Bernanke in his now famous November 2002 speech, "Deflation: Making Sure 'It' Doesn't Happen Here." (Because as we all know, "it" happens.)

In hindsight, since August 2007 the Fed has been following Dr. Bernanke's 2002 playbook “Reviving an Ailing Economy by Prevention and Treatment of Deflation,” page by page, and these are the step-by-step “in case of deflation” instructions Ben outlined to re-flate a deleveraging economy:

· First, cut interest rates: Check – all the way to an effective fed funds rate of zero-ish (officially 0.00 percent to 0.25 percent), down from 5.25 percent in mid-2007.

· Next, increase paper currency in circulation: Check – Federal Reserve Notes outstanding have increased to more than $900 billion, up $80 billion since August 2008, with a more-than-usual amount likely now lurking under mattresses notwithstanding the recent increase to $250,000 in FDIC coverage for deposit accounts.

· Then, fling open the Discount Window: Check – The Fed has lent $467 billion to depository institutions, up from nothing a year and a half ago, through its Term Auction Facility (TAF).

· Still no pulse? Create lending facilities for non-banks under Fed's “other duties as assigned” bylaws: Check – Resulting in an acronym-rich variety of cheap loans for commercial paper issuers (CPFF), primary dealers (PDCF and TSLF), securitized asset issuers (TALF), money market funds (MMIFF) and money market funds owned by depository institutions and bank holding companies (AMLF). Total credit extended now exceeds $300 billion under these facilities, none of which existed 18 months ago.

· Next, backstop selected “SITBTF” institutions (Systemically Important Too Big To Fail): Check and check – Bear Stearns and the AIG Money Conduit now account for $108 billion of newly created loan facilities which didn't exist at the end of 2007.

· Then, start buying bonds in size: Check – The Fed has begun purchasing agency mortgage securities ($431 billion) and selected Treasury debt ($50 billion) as a means to reduce longer-term interest rates, and, hence, mortgage rates. The Fed has announced its intention to purchase up to $1 trillion of bonds, including sovereign debt of other nations.

· Finally, make loans to foreign central banks: Check – the Fed now has $247 billion outstanding in Central Bank Liquidity Swaps, in which it has lent foreign central banks dollars in exchange for their local currencies which the Fed holds as an asset on its balance sheet.

The end result of which has been a more-than-doubled Fed balance sheet to $2.3 trillion as of May 14, 2009, on its way to $4 trillion by the Fed's own estimate, and $927 billion of Fed member-bank deposits (excess reserves currently available for lending) earning somewhere between 0.00 percent and 0.25 percent. Back to the “should-we-be-worried-about-future-inflation” question, for a moment: those $927 billion of excess reserves, in theory, could create more than $9 trillion of new money once the economy recovers and bank lending resumes under more normal economic conditions.

“The large volume of reserve balances outstanding must be monitored carefully,” Dr. Bernanke observed in an April 3rd speech about the Fed's balance sheet,1 “as – if not carefully managed – they could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher.” (Emphasis added.)

But for now, falling real- and financial-asset values, wholesale and retail price declines, collapsing industrial production and capacity utilization, plunging retail sales and automobile sales, and, probably, for the first time ever, declining consumer credit (both mortgage debt and revolving credit lines) are conspiring to produce a bout of domestic deflation not seen in several generations.

So when it comes to future inflation, Ben Bernanke, Scarlett-O'Hara-like,2 “can't think about that right now” and thus will worry about inflation “tomorrow,” opting instead to fret more now about deflation and hope against hope that when tomorrow arrives his Fed (or his successor's?) will, one, be able to recognize it, and, two, constructively rein in the powerful forces of money creation which will have been unleashed.

Note that not everyone is as convinced as Dr. Bernanke that, when the time comes to be more worried about inflation, the Fed will be able to return the evil spirits of huge, inflationary money supply increases to Pandora's box of moderate economic growth, currency stability and full employment as we quickly are becoming addicted, at all levels of our economy it is said, to the crack cocaine of record-low financing rates. The obvious fly in the ointment is the impact on all debtors – business, individual and, especially, the federal government – of a return to a “normal” interest rate environment. That impact, of course, is a significant jump in the cost of debt service as interest rates rise, which clearly could impede any nascent economic recovery.

On that day, sometime in the misty future but perhaps as early as the end of this year (you heard it here first), the Fed's Open Market Committee will decide inflation poses a greater risk to the economy than any other risk and will vote to increase its target fed funds rate. That may signal the beginning of a long march upward, especially rates on the long end of the yield curve, and the process of breaking our low-interest-rate addiction may be painful indeed, fraught, as it will be, with heated political discord and ample amounts of second-guessing ahead of the 2010 mid-term elections.

And the Fed's usual method of draining such reserves – selling its Treasury holdings into the marketplace – may not be as effective as it has been in the past based on the portfolio the Fed then will be holding: long-maturity Treasury and Agency obligations, mortgage-backed securities and foreign government debt, all of which could be trading at significant discounts to par when long-term interest rates surge from the constraints of this artificially induced short-end zero-bound. Who would want to buy the Fed's long-term bond portfolio, even at substantial discounts (big losses to the Fed since the Fed will have been collecting most of these bonds at par or “near-maturity” prices), if the likely direction of long-term interest rates is upward and buyers could get stuck with even bigger (you know, mark-to-market) losses?

Like the card games “Spades” or “Old Maid,” no financial institution with rational investment managers will be willing to pick up game-ending long-term-bond “cards” from a selling Fed in a rising interest rate environment. What then would be the Fed's options to quench the fires of inflationary expectations? When he delivered his better-to-prevent-than-to-cure "Deflation..." speech nearly seven years ago, at the time Dr. B was referring to the unpleasant effects of deflation on Japan's economy, which had been bumping along for a "lost decade" in the 1990s, due primarily, as Bernanke noted, to "political constraints" inhibiting the necessary and painful measures required to appropriately deal with that country's deep economic malaise.3, 4

As is generally agreed by economists in polite company, that malaise stemmed much from Japan's seeming inability to effectively solve the crisis in its banking sector, which, in turn, arose from deflating asset values lurking at par on the banks' balance sheets. Those mis-valued assets, it was thought, masked the true solvency picture of those lenders, giving rise to the derogatory term “zombie banks,” those Japanese financial institutions rumored to be dead but still walking.
At this moment, in the "history-may-not-repeat-but-sometimes-it-rhymes" department, one should be wondering if Japan's immediate past is not America's possible prologue: "Political constraints" preventing effective monetary and fiscal policy? Keep reading...

From Bernanke's "Deflation..." conclusion:

"As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve." (Emphasis added.)

Well, that's a relief. We're certainly glad the U.S. is grabbing those "large-cost" bulls by the horns and choosing not to follow in Japan's failed-policy footsteps, having learned what can go wrong in an environment of political deadlock from that country's now two decades of economic stagnation (an extended "L-shaped" economic reset). Irony alert: Clearly in the last 12 months, and painfully more apparent in the last six, we are trodding exactly in the footsteps of the world's second-largest economy as attention and scarce resources continue to be diverted to "systemically-important-too-big-to-fail" financial institutions while unemployment soars, GDP retracts, industrial production and capacity plummet and retail sales wither.

The U.S. is not alone teetering on the brink of general deflation. Japan deflates anew as its exports crumple, and we are being joined in short order by Iceland, Sweden, Switzerland, Ireland, Britain, Korea, Taiwan and Singapore. Many of those export-dominated countries in Asia and Europe and other floating-exchange-rate currency countries will be desperate to devalue those currencies against the U.S. dollar and the Euro as a means of halting their exports slide.

Exporting deflation via currency devaluation, however, could have some unpleasant side effects for us by choking off our better-priced export business, the recent gains in which have helped bring the U.S. trade deficit to a nine-year low of $26 billion in March from an all-time high in August 2006 of nearly $68 billion. And yet we depend on a number of foreign countries – China, Japan, Saudi Arabia, Brazil and Russia chief among them – to recycle their export remittances from us into freshly minted U.S. Treasury and Agency (Fannie Mae/Freddie Mac) debt.

A slump in their exports to us means less money to recycle into our debt instruments, and at a crucial time when, to combat the effects of our own recession, our government is generating unprecedented deficits which could top $2 trillion by the September end of FY2009. Oh, the inter-connectedness of it all. Our global economy has been likened to a big clump of traffic – say a couple hundred cars, buses and semis – at 75 mph with about 10 feet between each vehicle travelling at 3:00am entering a densely foggy stretch of road covered with black ice.

Now it's entirely possible the traffic clump will emerge unscathed, at least theoretically. But all it takes is one young deer to bolt across the road in front of the lead vehicles to bring the entire entourage screeching to a horrific, crumpled, deadly halt. And it's not good for the deer, either. The ensuing chain-reaction accident would leave many battered and bruised, and they would be the lucky ones. Such is the risk, however small, when a complex system requires perfection for a safe, suitable outcome.

And such was the global economy at year-end 2006, priced for, and requiring, perfection to emerge from an oncoming foggy stretch of black-ice-covered highway. It's now quite possible to observe, with the clarity of hindsight, that scrawny sub-prime deer that jumped in front of us on the global economic super-highway a couple of years ago.

The question which remains, as the resulting global economic pile-up still is in progress, is when the time comes to call for cease-fire and truce with the forces of deflation and muster anew against the armies of inflation, will Dr. Bernanke's (or his successor's) Fed be up to this unprecedented task. When that day arrives, it will be another one of those “theory meets reality” tests upon which, no doubt, countless Ph.D. dissertations will be based for decades to come.

* * * * * *
Note: All data updated as of May 15, 2009

Footnotes and References
1 “The Federal Reserve's Balance Sheet,” Dr. Benjamin S. Bernanke, Chairman, Board of Governors of the Federal Reserve System, April 3, 2009.

2 “I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.” Scarlett O'Hara, Gone With the Wind, 1939.

3 “Deflation: Making Sure 'It' Doesn't Happen Here,” Dr. Benjamin S. Bernanke, Governor, Board of Governors of the Federal Reserve System, November 21, 2002.

4 “Deflation: Making Sure 'It' Doesn't Happen Here,” Dr. Benjamin S. Bernanke, Governor, Board of Governors of the Federal Reserve System, November 21, 2002, full text of comments on Japan:

“The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.

“First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.

“Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result,
politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
“In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.”

Starve the Beasts - Start the Revolution

2009-04-21T14:25:00.029-05:00

It is apparent now there remains only one way for ordinary Americans who love their country and want at least some of what's good about it to be preserved for future generations: We must kill the FIRE Economy beasts (FIRE: Finance, Insurance and Real Estate).

Recommended method of choice: Starvation - suitably slow and painful.

We're the victims in a hostage situation, if you didn't know, held captive and mesmerized by the soft, flat-panel-TV glow of the FIRE Economy, which depends on our sheep-like conformity and Stockholm-syndrome-like admiration of our captors, but it's NOT too late to regain our senses, if only for the benefit of our children and grandchildren. Even if it is only wildly exaggerated - and it isn't - that the Systemically Important Too Big To Fail (SITBTF) institutions completely have captured our flag, our capital, our political parties, our "democracy" and our very lives, we as regular, hard-working, country-loving J6Ps have only this one remedy remaining, as all others woefully have failed.

We've tried writing letters to Congress, but they fell on deaf ears attached to bodies sated with the addictive, lobbyist-supplied narcotics of perks and favors and clothed with garments filled with finance-industry campaign contributions. One might feel good having written a letter, but unless you're one of the someones stuffing their pockets with cash, it's wasted effort. We've tried voting out the "ins" in the Capitol Building to no avail, either. Once the DC Kool-Aid has been consumed by elected Representatives and Senators of BOTH parties the fix is in. It's all good fun in Washington; ask anyone who has done the peoples' business in Babylon for even one lousy two-year congressional term and they will concur: it's a great gig if you can get it, and better if you can keep it as long as possible. As such, they always will cater to the whims and needs of the purveyors of campaign cash who can insure they remain as Courtiers at the Castle in Emerald City.

Last year we fell for the whole "change you can believe in" campaign gimmick but somehow the candidate elected in November has pulled off in many ways an astonishing, seamless transition from his predecessor, of which his administration's dealings with Wall Street, AIG, Fannie/Freddie, SITBTFs and the economy are only a few, validating once again that immutable fool-most-of-the-people-most-of-the-time law of the universe. (Which, in and of itself, should be all the evidence necessary to prove, beyond any doubt, the entirety of Wall Street's now-not-so-behind-the-scenes direction of public policy, and government's role as the FIRE economy's stooge and enforcer.)

We have only one option remaining to fix this ourselves, to starve the beasts, and it is, simply:
Stop Doing Business With Them.

If you are banking with a SITBTF bank, start by closing your checking account. Move it to a smaller community bank which offers the same features such as bill payment services, payroll depsosit, automatic debits and the like. Close your savings accounts, your CDs, your money market deposit accounts and move them to one or more community banks, and introduce yourself to an actual banker and branch manager (it will be handy someday to personally know someone).

You still will have ample FDIC deposit insurance, regardless of the institution's size and you still will have nationwide ATM capability, so shut down those SITBTF accounts NOW. If you own or manage a business, and are so empowered, close your business deposit accounts and move them to a financial institution not considered part of the current problem. It's a lot of effort, and it's not easy, but your future generations will thank you.

DO THESE THINGS, and, one, we will get someone's attention when they begin to notice a measurable increase in closed accounts and a rapidly falling deposit base (worst-case scenario for a SITBTF), and two, we will begin to starve the beasts via an orderly "run" on these giant messes masquerading as solvent, responsible financial institutions.

Next, open new IRA and investment accounts - not that you have much left in them, which makes the timing opportune, and you weren't getting any useful advice or guidance anyway - at regional or online brokerage firms NOT owned by or associated with any other FIRE economy player, including the giant mutual fund industry. Starve the beasts!

Need home, car, business or life insurance? Well, don't get insured through any subsidiary of any SITBTF company, especially one which has used its past-life AAA rating for evil, not good, and now has been seized by our government stooges and enforcers, not to rescue it but to co-opt it as a money conduit to pour tens of BILLIONS of dollars borrowed from China into the balance sheets of other, well-connected domestic and foreign (!?!) SITBTFs, one of which has the initials "GS."

Finally, methodically begin to terminate your borrowing relationships with the SITBTFs. This is the difficult part. Start by paying down and paying off your credit cards - all of them. Start consuming with CASH whenever possible. Yes, cash, Benjamins, coin of the realm and all. Besides, cash transactions have that certain, quaint, pleasing quality of anonymity so lacking today in our every-waking-thought-is-now-monitored cyber-world. Close them as soon as they are paid off and don't fall for that FICO-score crap that your credit rating will decline if you - YOU - voluntarily close a credit card account. If it does, so what. For god's sake, it's your option and your choice. Perhaps we all should shoot for no FICO score (or, zero, as Dave Ramsey boasts).

If enough of us begin voluntarily closing our revolving credit card accounts and paying with cash, the saps at FICO will be forced to change their secret statistical recipes which have worked so well the last 30 years to keep millions of us enslaved with debt. If that happens, if FICO is forced to change its magic algorithms, then voluntarily closing a paid-off account would IMPROVE a credit score, but our goal should be to not have a score at all - that'll show 'em. By then it won't matter. FICO will be going away soon enough as the discredited, flawed, theoretical mathematical formula it is, one, like so many financial models of the last generation, which worked right up until it didn't.

So, got an AmEx card? Pay it off and cut it up. Ditto for Discover. Mega-Bank Visa or MasterCards - flush 'em. What's in your wallet? Forget Capital One and get reacquainted with some dead presidents. For those credit-card-is-required transactions, use your debit card, the one attached to your new checking account at a small, solvent community bank. Starve the beasts! Take back our country! Car loans are trickier, but, again, an auto loan from a smaller community bank will help starve the beasts. The same for home loans - starve the beast by doing business with anyone else. We can do it.

Since Washington clearly will not DO ANYTHING to help ordinary people, only the monied interests, WE MUST. This is war, it's revolution, a fight for our future, but it's bloodless and LEGAL. We must declare our independence from the tyranny of the FIRE economy and the Systemically Important Too Big To Fails. We have the right to take these matters into our own hands because the heads of our elected and appointed leaders are crammed so far up the exit chutes of the titans of Wall Street and the Main Streets where the SITBTFs are headquartered there is NO OTHER SOLUTION.

If you agree "too big has failed," you have great company. Kansas City Fed President Tom Hoenig delivered a speech (as a private citizen, not necessarily reflecting the view of his Federal Reserve Bank) in March entitled "Too Big Has Failed," suggesting the time was right to break up the financial cartels. Hoenig testified before Congress April 21 and reiterated that view (his written statement here), going as far as saying "when you have banks that are too big to fail, you will get oligarchs." (Yes, oligarchs.) Simon Johnson, former IMF economist and now MIT professor, posting at The Baseline Scenario recently authored a must-read "The Quiet Coup," in the May issue of The Atlantic. William Black, a former regulator who led the cleanup of the Savings & Loan mess in the early 1990s and blew the whistle on the massive fraud and corruption in that scandal, recently told journalist Bill Moyers on PBS that CEOs of some of these SITBTFs, in order to increase their own personal income, have deliberately set out to make bad loans - pure fraud. He would know: the title of his recent book is "The Best Way to Rob a Bank is to Own One." And don't forget Nobel Laureate Joseph Stiglitz, who has been out spoken in his belief that no bank should be too big to fail.

There are countless more of us, without a public forum, who feel the same way, and we have the power to do something about it. The time is right, the time is now. Take back our country. Let's make SITBTF no BFD and RIP. It'll take a decade, maybe longer, but this is the only way to end our present hostage situation and we have the power. All we need is the will to make it happen. Start today. Stop doing business with our tormentors - all of them. Stop patronizing our persecutors. Are we stupid? HELL NO.

Stop the madness - starve the beasts. If we don't, WE are part of the problem and we deserve what we are getting and what is happening, now and in the future, because it WILL happen again if we let it.

Starve the beasts - start the revolution.