Economic Stories of Relevance in Today's World -- June 19, 2011

The Ponzi Economy

Pimco's Bill Gross on Scoping Out Subprime - The co-founder of Pimco, the $1 trillion-plus fund manager, avoided the subprime bubble by turning his analysts into fake home buyers - Bloomberg Businessweek - Diane Brady - June 9, 2011 - In 2006, there were signs that this had become a highly leveraged Ponzi economy and that housing was at the pinnacle of this leverage. The temperature of the U.S. housing market was always best read here in Orange County [Calif]. But one day that August, as I was going across the street for my daily yoga exercise, it occurred to me that we needed to get a feel for the rest of the country... We had 40 credit analysts covering companies like IBM (IBM) and General Motors (GM). I thought: Why not take 10 of these people and turn them into pretend real estate buyers? Instead of sending them to Armonk to interview the treasurer of IBM, let's send them to places like Detroit, Miami, or Vegas to pretend to be in the market to buy a house. They didn't have a bankroll, and they obviously weren't going to buy a house. Nonetheless, I gave each of them a territory and told them to go there two or three times a month until June 2008. They were told to be serious buyers, to get serious information... There was no pushback, but I wondered whether it was kosher. I wasn't necessarily proud of the obvious deception. But this little bit of trickery alerted us to what was really going on: the liar loans and the extravagant lending practices. We got much better real-time information, and we learned homes were being bought without a down payment or without documents to prove income. The extent of the lending malpractice—to use a nice word—was shocking, and it caused us to stay out of the subprime market.


China’s economy: Burgeoning giant or bubble ready to burst? - Globe and Mail - Brian Milner - June 16, 2011 - Unlike deficit-ridden governments in the U.S. and Europe, Beijing was – and still is – swimming in surpluses. So money was no object. The Chinese leadership was highly motivated to do whatever it took to get the economy back on the fast track. Strong economic growth is vital to maintaining the country’s improving living standards, keeping social unrest in check, greasing the wheels of China’s unique version of state capitalism and ensuring that the Communist Party’s hegemony remains unchallenged... China’s heavy pump-priming worked. Major infrastructure and social-housing projects got off the ground quickly. A flood of subsidies kept large numbers of factories open, avoiding the spectre of millions of unemployed migrant workers taking to the streets. But the influx of cheap credit and investment capital has also created dangerous bubbles in real estate and other assets... It’s on the domestic front where China’s frailties stand out – a feeble financial system, falling consumption as a share of GDP, weak job growth, major inefficiencies in state-dominated sectors and unfavourable demographics stemming from the one-child policy – and where dreams of global domination are most likely to come unglued.


Stimulating a Dead Economy - Huffington Post - Jim Worth - 06/17/11 - The U.S. economy is surviving only because of over-stimulation. We're living on fumes in this country, and the pursuit of happiness has come to an end for millions of families! Main Street is still suffering. But, the market is on Viagra, shored up by QE2, the Fed program to buy hundreds of billions of dollars in U.S. Treasury Bonds. As QE2 winds down, and the economy falters, the discussion turns to the possibility of QE3. A tremendous number of band-aids have been administered to keep the U.S. economy from hemorrhaging; to prevent not only a domestic collapse, but a global one... The Fed's covert loans, exposed by Bloomberg's lawsuit under the Freedom of Information Act, and brought to the attention of the American people by Senator Bernie Sanders and Representative Ron Paul, shows some despicable -- potentially criminal -- actions in the program including loans to Muammar Gaddafi totaling more than $26 billion. The President's Housing Affordable Modification Program, designed to help homeowners, was pretty much a failure and has done little to stabilize the housing market. The FDIC's loss-share program is a fire-storm waiting to explode and the Treasury's $300 billion guarantee to Citibank is a hidden time-bomb that falsely supports over-priced Citi stock... There are subsidies to oil companies and agriculture corporations, and other equally destructive giveaways. (The Hound doesn't believe in his summation that it is all the Republican's fault, but I am still scratching my head about why we are giving huge tax breaks to corporations who don't seem to give a crap about U.S. economic interests).


U.S. Economic Outlook

IMF Sees Risks to Global Economy Mounting - Wall Street Journal - Sudeep Reddy - June 17, 2011 - The International Monetary Fund released its latest global economic forecast Friday, cataloging risks that have piled up in the world economy over just the past two months... The IMF says it still expects global growth of 4.3% this year, down slightly from the 4.4% estimate offered in April in what it called a “mild slowdown of the global expansion.” Among advanced economies, the U.S. is seen growing at 2.5% (slower than the prior 2.8% estimate) while Japan is expected to contract 0.7% (instead of 1.4% growth).


Alan Simpson, Erskine Bowles Predict Coming Economic Crisis - Newsmax - Forrest Jones - June 18, 2011 - A crisis will strike the U.S. economy within two years if politicians don't roll up their sleeves and address fiscal spending like they did in the 1990s, warns former Sen. Alan Simpson. Simpson, a Republican who co-chaired President Barack Obama's National Commission on Fiscal Responsibility, says the United States faces "the most predictable economic crisis in history" by 2013. His remarks echo comments made by his partner in studying deficit reduction, Democrat Erskine Bowles, according to CNS News. The tipping point "will come when the rating agencies find out we Economy, Alan Simpson, Erskine Bowleshave no plan" to seriously address federal spending and the national debt, Simpson says... Simpson, along with Bowles, former President Bill Clinton's chief of staff and co-chair of the spending committee, have warned that fiscal deficits must narrow if the U.S. economy is to recover at a more adequate pace. Simpson says Bowles reached across the aisle to craft policy and acted in the interest of the country, and not just in his political party when in office. "How do you think he did the balanced budget in '96?" Simpson asks... Earlier this year, Simpson told the Senate Budget Committee that the United States was headed toward financial disaster unless spending was curtailed. "This debt and these deficits that we are incurring on an annual basis are like a cancer, and they are truly going to destroy this country from within unless we have the common sense to do something about it.” (The Hound agrees with Simpson and Bowles premise, but unless the Financial Banking Cartel is brought back into line, then they are wasting everyone's time. They are talking about saving Trillions over a decade, which history shows can never be guaranteed, while trillions in spending will go on as usual. A few years ago a $400 billion deficit was looked upon as a disaster and now $1.5 trillion dollar deficits with hopefully a couple hundred billion in cuts is supposed to cure the problem. All of this doesn't even include what is taking place off budget. This is all window dressing on the Titanic. This mindset is not going to cure the ills that we face!!!)


Germany Fires Debt Shot at US - Goldseek.com - Dr. Jeffrey Lewis - June 16, 2011 - In what will likely be the first of many European debt downgrades for the United States, Germany’s own Feri credit rating agency took down the United States’ debt rating from AAA to AA. The difference is marginal in many ways (after all, few countries ever get to become AAA rated), but for the United States, which has always been AAA, this confirms that the downside is here. In addition to downgrading the United States’ debt, the agency also had a few warnings for Washington DC. The ratings agency CEO Tobias Schmidt is reported as saying, “The U.S. government has fought the effects of the financial market crisis primarily by an increase in government debt. We do not see that there is sufficient attention being paid to other measures.” Later on in the release, he would remark that the current deficits are not sustainable.


How Miserable? Index Says the Worst in 28 Years - CNBC - Jeff Cox - June 17, 2011 - When it comes to measuring the combination of unemployment and inflation, it doesn’t get much more miserable than this. In fact, misery, as measured in the unofficial Misery Index that simply totals the unemployment and inflation rates, is at a 28-year high, reflective of how weak the economic recovery has been and how far there is to go. The index, first compiled during the soaring inflation days of the 1970s by economist Arthur Okun, is registering a nausea-inducing 12.7—9.1 percent for unemployment and 3.6 percent for annualized inflation—a number not seen since 1983. The index has been above 10 since November 2009 and had been under double-digits from June 1993 through May 2008... Investor sentiment continues to fall. The latest Investors Intelligence survey, a weekly poll of newsletter authors, points to bulls outnumbering bears by just a 37 percent to 26 percent margin. Yes, it does indicate more people believing the market is heading higher than lower, but the bullishness is around financial crisis levels. The survey includes a smattering of comments from participants. One of the more common that represents the bearish perspective looks at how much optimism there had been in the market prior to the May 2 highs. “Frankly, we have been stunned by the disconnect that we see between these optimistic calls over the past six to nine months and the reality of what is occurring in the global economy,” wrote Boston-based Hans P. Black in the Interinvest Review & Outlook. Conversely, misery is not universal, with Elliott F. Gue’s Personal Finance Newsletter making the case for the optimists that one should not “fall prey to the panic fanned by the usual fear-mongering doomsayers,” a group that presumably includes those unemployed or bewildered by inflation and, thus, in misery.


The Top and the Bottom

Survey: U.S. trails in equal legal treatment of citizens - McClatchy Newspapers - Daniel Lippman - June 13, 2011 - The U.S. lags behind western Europe in access to civil justice and legal assistance, according to an international survey released Monday that also raised questions over whether U.S. police forces treat all citizens equally... A fair legal system provides a critical backbone and infrastructure for countries - ensuring that they run effectively, citizens get a fair shake and companies can operate under predictable rules, the researchers said... While the U.S. scored high in many areas - including checks and balances in the legal system, civil liberties, freedom of expression and independence of the judiciary - it trailed western European countries in such areas as legal access for low-income communities and ethnic minorities and also scored low in perceptions of whether police treat people of different backgrounds equally. "In the United States, rich individuals take their disputes to courts, whereas poor and low-income individuals normally don't use the formal dispute resolution mechanisms. They simply either negotiate, do nothing or resort to violence in the worst-case scenario," said Juan Botero, the director of the index... The findings echoed experts who have said that the much-heralded Arab Spring protests this year were sparked in part by major shortcomings in the rule of law and mistreatment of ordinary citizens across the region. The protests started after an impoverished Tunisian street vendor lit himself on fire after an altercation with local police. "Widespread corruption which goes unpunished and the selective administration of justice is very much part of the sense of alienation and anger which people all across the region felt," said Marc Lynch, a professor of Middle East politics at George Washington University.


Recession… what recession? Pelosi's wealth grows by massive 62% (and Boehner and Cantor are also millionaires) - UK Daily Mail - Paul Bentley - June 16, 2011 - House Minority Leader Nancy Pelosi saw her wealth rise considerably last year, from just more than $20million to a huge $35.2million. Establishing Pelosi's place as one of the wealthiest lawmakers in the country, the sudden 62 per cent rise was revealed in the annual release of forms detailing the assets and liabilities of congressmen today. New House Speaker John Boehner also remained a multi-millionaire, with his wealth jumping from $1.8million in 2009 to $2.1million in 2010, and his deputy Eric Cantor reported even higher earnings.



Working America's Dismal State - Steve Lendman Blog - June 17, 2011 - From 2007 - 2009, private sector wages and salaries declined sharply, while unemployment, underemployment, and their median and mean durations skyrocketed... In fact, "(t)he tepid recovery from the 2007 - 09 recession through (Q I 2011) marks the first time in post-World War II history that civilian employment as measured by the" Current Population Survey (CPS) "failed to register any net growth seven quarters following the end of the recession." As a result, real unemployment as measured in the 1980s tops 22%, not the manipulated Bureau of Labor Statistics (BLS) 9.1% headline figure. Wages have also stagnated or declined, and benefits are eroding... From 2009 Q II through 2010, real US national income rose $528 billion. Pre-tax corporate profits alone increased $464 billion (88% of real national income) while aggregate real wages and salaries rose only $7 billion or 1%, despite double-digit inflation, not the manipulated BLS 3.6% CPI in the previous 12 months, excluding or underweighting food, energy, transportation, rent, college tuitions, and other sharply rising components... Since 1988, EPI published it annually, including data on household incomes, wages, jobs, unemployment, wealth, and poverty. Notably it said from 1948 - 1979, one third of average income growth went to America's 10% richest. However, from 1979 - 2007, the richest 10% got 91% of average income growth, an unprecedented disparity still widening as working households experience deepening hard times with no relief in sight because policy initiatives demand greater sacrifices when massive social spending is required to relieve need... Wealth destruction from 2007 - 2009, was disproportionately experienced by 80% of Americans. The average net worth of America's wealthiest 1% was 225 greater than the median 2009 household net worth - the highest ratio on record. In 2009, about 25% of US households had zero or negative net worth. For Black households, it was 40%. Their median net worth was $2,200, "the lowest ever recorded" compared to Whites at $97,900. In 2009, America's 20% richest controlled 87.2% of all wealth. The top 1% controlled 35.6%. In 2009 dollars, median household wealth fell from $71,900 in 1983 to $62,200 in 2009 while America's richest got richer. In 2009, the Forbes top 400 wealth averaged $3.2 billion - 523% higher than 1982. Their collective net worth was $1.3 trillion. Today it's greater... During the "Great Recession," 8.4 million jobs were lost, and long-term unemployment and underemployment registered record highs. Because of the deepening housing depression, home equity as a percent of property value fell from 59.5% in 2006 Q I to 36.2% in 2009 Q IV. "For the first time on record, the percent of home value (owned outright by homeowners) dropped below 50% - meaning that banks now own more of the nation's housing stock than people do." Moreover, one-fourth of mortgage holders are under water because of rising debt and plummeting prices. Homeowners' equity as a percent of home value fell from around 70% in the early 1970s to 36.2% in Q I 2009.



Gerald Celente - The Ponzi Scheme is Collapsing - June 17, 2011