Econ 2009

[Fusion_power]

CIT went down over the weekend with a bankruptcy filing affecting $71 billion of debt and assets. This was the primary lender funding small and mid-size business in America. Cost to the American taxpayer? 2.33 Billion.

There will be plenty to comment about re this lender over the next week.

DarJones

[ewmayer]

Why CIT Group's bankruptcy doesn't matter

Peter Cohan
Nov 1st 2009

I would like to congratulate the Obama administration for drawing the right line in the sand. Unlike the Bush administration, Obama did not permit a $639 billion bankruptcy -- Lehman Brothers -- whose collapse nearly caused social chaos as people lost confidence in their money market funds. With today's CIT Group (CIT) bankruptcy filing, the U.S. will lose $2.3 billion in TARP money, but with $71 billion in assets [ewm: Which likely have yet to be marked-to-market, i.e. big haircut coming there], CIT will keep operating and global panic will not follow.

As I posted previously, CIT Group makes loans to about a million small businesses like Dunkin' Brands franchises. Those businesses need capital to operate and they can't get it very easily by accessing public debt and equity markets. So lenders like CIT Group really matter to them. But the company got distracted by subprime mortgages and student loans and it is likely to scale back to its core business of lending to small and medium sized business.

The U.S.'s $2.3 billion in preferred stock and common shareholders' stock will be wiped out. Those common shareholders include FMR LLC -- a Fidelity Investment company -- with a 9.9 percent stake in CIT common and Brandes Investment Partners LP with 9.7 percent, according to Business Week.

I think that investors should derive confidence from this announcement. That's because it proves that the private capital markets can function well enough without government assistance to allow a company to fail without government intervention. Unfortunately taxpayers will lose $2.3 billion (out of $700 billion in TARP money) in the process.

But the real problem is that bigger TARP recipients -- like Citigroup (C) -- could be in greater danger, according to the New York Times. However, the U.S. has decided that the cost of their failure cannot be born by free markets. [ewm: Apparently U.S. taxpayers are not considered part of these "free" markets ... perhaps because their present and future "contributions" are not voluntary?] So they're still too big to fail. And the U.S. taxpayer may need to throw more good money after bad to prop them up.

An interesting footnote to this deal: up until last Friday, as I posted early last month, Goldman Sachs Group (GS) was poised to pull in a cool $1 billion if CIT went bankrupt. But on October 30th, CNNMoney reports that Goldman and CIT reached an agreement in which CIT would reduce the size of its Goldman loan to $2.125 billion from $3 billion.

In exchange, CIT will pay Goldman a mere $535 million -- including a termination fee of $285 million and collateral of $250 million. That looks much better than the cool $1 billion Goldman would have gotten.

My Comment: Ha, "got distracted by subprime mortgages" ... yeah, I had to file for bankruptcy because of my little "distraction issues". Translation of the article title: "These guys didn`t have massive swap agreements with the TBTFs and weren`t lending to highly leveraged players like hedge funds, so no one on Wall Street gives a crap." I do love the ironic (but apparently not to the author) pairing of the two underlined lines about "investor confidence" ... yes, surely all the common shareholders who had zero say in the prepackaged bankruptcy and loan restructuring and whose shares are now worth pennies feel very confident (OTOH anyone who didn`t see the very large "bankruptcy is coming" handwriting on the CIT wall months ago and get out while the getting-out was still above a dollar per share probably deserves to take a well-deserved market-speculator`s haircut]. The bit about Goldman actually taking a moderate haircut on their loan is interesting - perhaps the ongoing negative publicity about GS getting reimbursed 100% on their AIG swaps as the result of a secret deal worked out by then-NY-Fed chair Geithner and ex-GS-CEO Paulson has convinced the folks at 85 Broad to be just a tiny bit less flagrant in their rape of the U.s. taxpayer ... or equally likely, GS was shorting the snot out of CIT (perhaps by way of the various hedge funds they do business with, to make it less obvious) while working out the loan termination deal with the CIT management.

To extend Mr. Cohan`s opening metaphor: You know what happens to lines in the sand: They are nice and easy to draw and see when conditions are fair, but the next strong tide or windstorm simply erases.them. But the metaphor is completely inappropriate to begin with: How does several billion in TARP bailout funds - now gone poof - amount to "a line in the sand"? Sounds more like a taxpayer-bailout "ATM in the sand" to me.


Texas congressman (and co-author of the "Audit the Fed" bill, HR1207 -- by the way, if you are in favor of Fed transparency and are from North Carolina, you might be so kind as to drop NC congressman Mel Watts a line and ask him how it feels to be a bought-and-paid-for whore of Wall Street) Ron Paul on the fake recovery

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.

By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been.

My Comment: And speaking of "yet another asset bubble" ...

Lehman art sale fetches huge prices: The investment bank's demise added value to a mostly unremarkable art collection. But then again, there's no accounting for taste -- or emotion -- in asset valuation.


Former AMD CEO Hector Ruiz Implicated in Galleon Insider-Trading Case, But "Is Nice Guy" So No Indictments Forthcoming

Former AMD CEO Hector Ruiz Will Leave Globalfoundries Amid Galleon Insider-Trading Case: Hector Ruiz, the most prominent executive tied to the Galleon Group LLC insider-trading case, is stepping down as chairman of Globalfoundries Inc., a spinoff of Advanced Micro Devices Inc.

Ruiz is the AMD executive government prosecutors say provided nonpublic information to Danielle Chiesi, alleged to be part of the Galleon insider-trading ring, a person familiar with the matter said last week.

Ruiz, who stepped down as AMD’s chief executive officer last year, was instrumental in the company’s plan to spin off its manufacturing plants, becoming chairman of Globalfoundries, the new company created from the deal. Chiesi allegedly traded on information about that transaction.

Prosecutors have released parts of recorded conversations between Chiesi, a former Bear Stearns Asset Management official, and an AMD executive, in which they allegedly discussed the timing of the spinoff of AMD’s plants. The unnamed executive told Chiesi about the transaction in September 2008, ahead of the announcement of the deal, according to court documents.

Ruiz had already been planning to step down -- he had submitted his resignation in September, which would take effect in January, Sunnyvale, California-based Globalfoundries said. Board member Alan E. Ross, the former CEO of Broadcom Corp., will replace Ruiz, serving as interim chairman until a permanent replacement is chosen by the board.

Last week, International Business Machines Corp. replaced Senior Vice President Robert Moffat, who is accused by prosecutors of leaking information on the transaction that created Globalfoundries to Chiesi.

Ruiz hasn’t been charged with wrongdoing in the case, and prosecutors don’t say he profited from insider trading. Jeremy Fielding of Finsbury Group, who is representing Ruiz, declined to comment. Globalfoundries hasn’t been approached as part of the investigation and isn’t conducting its own inquiry, spokesman Richard Mintz said. AMD isn’t commenting on the matter, said spokesman Drew Prairie.

My Comment: So Ruiz clearly violated not only securities laws related to leaking of inside information but also his fiduciary duty to AMD shareholders and employees and neither AMD nor his present employer think that worth looking into? (And apparently the SEC only thinks charges should be filed if one personally made huge insider stock trades based on the information). Yep, that sounds about right, modern-day American crony capitalism at work.

[garo]

What a crap article by Mr Cohan. BTW, Ernst, I edited your post to fix the Mel Watts link.

[ewmayer]

Thanks for the edit, Garo ... by way of breaking news, Ron Paul says the aforementioned bought-and-paid-for-whore-of-Wall-Street Mel Watt has gutted HR 1207 (this is a Mish posting quoting a Bloomberg article):

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.

Why the U.S. Auto Industry is Screwed, Part 219436548549:

One of Mish's readers offers this tasty little vignette about a recent attempt to change a car battery in a newer-model Chrysler ... The animated Guinness guys and their cries of "brilliant!" ring in one's mind's ear (or wherever that type of imaginary tinnitus occurs) on reading this:

On Sunday I went over to my friend to replace his car's dead battery. He asked for assistance, so I assumed he knew nothing about cars. Oh, boy, was I wrong! Turned out he was as skilled as I, but his Chrysler had the battery sealed under the front left fender. To access it, one had to turn the wheel to the right and remove a protective cover.

The catch? Power steering! The wheels lock without power. So, if one has a dead battery, to access the compartment he needs to use power steering, which of course, doesn't work when the car's not running. Amazing piece of engineering! It had to be done on purpose. Chrysler must have figured that letting people change their own batteries was a crime leading to loss of potential revenue, so they designed a monstrosity that would force the client to use a tow truck and a mechanic each time someone forgot to turn off the lights overnight.

Also, the battery is practically flush with the front bumper, meaning even the lightest of collisions would render the car useless. I once crashed an old Chrysler, mangling the very part where the battery of the new model would've been. I was able to drive the car to the mechanic with no issues. All it took was a call to the insurance company to confirm that I was still allowed to operate a damaged vehicle.

I looked through this car's manual - a comedic goldmine! Some verbal descriptions were in direct contradiction with the pictures. The instruction for making extra keys stated that one could make extra sets provided he had 2 original ones. Isn't that funny! My friend needed to make a copy of the only ignition key that he got from the previous owner. Turns out he could make a copy only if he already had a copy! Brilliant!

And we're wondering why the domestic car industry is dying! The same way TV shows "written into the ground" our cars are getting designed into oblivion. The modifications that I find on the newest models aren't errors - they're deliberately engineered flaws.

[Fusion_power]

Citigroup got an unbelievably healthy rating in this article. I would rate citi as 3 day old dead meat.

http://www.nytimes.com/2009/11/01/bu...my/01citi.html

OVER the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. In previous instances, the bank came back from the crisis and prospered.

Will Citigroup rise again from its recent near-death experience?

The answer to that question concerns not only the 276,000 employees who work at what was once the world’s largest bank, but the nation’s taxpayers as well. Even as Citigroup’s stock has soared from a low of $1.02 to its current $4.09 — and the company has eked out a $101 million profit in the third quarter along the way — it’s still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania. If Citigroup remains stuck, taxpayers will be on the hook for outsize losses.

Citigroup remains a sprawling, complex enterprise, with 200 million customer accounts and operations in more than 100 countries. And when people talk about institutions that have grown so large and entwined in the economy that regulators have deemed them too big to be allowed to fail, Citigroup is the premier example.

As a result, the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year. Through the Federal Deposit Insurance Corporation, a major bank regulator, the government has also agreed to back roughly $300 billion in soured assets that sit on Citigroup’s books. Even as other troubled institutions recently curtailed their use of another F.D.I.C. program that backs new debt issued by banks, Citigroup has continued to tap the arrangement.

Citigroup is also one of only two TARP recipients so desperate for capital that they’ve swapped government-issued shares into common stock, diluting existing shareholders. (GMAC, the troubled auto lender that may receive another government infusion, is the other.)

While Citigroup has written down tens of billions of dollars’ worth of mortgages on its books, there are looming problems in its huge credit card portfolio. Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines. A measure of the bank’s efforts to wrestle that problem to the ground is the interest it charges customers: in October, Citigroup raised interest rates on some credit card holders to 29.99 percent.

At this time, the U.S. taxpayer is on the hook to the tune of about $350 Billion for Citi obligations. I'll grant you that $300 Billion of that is via the FDIC, but FDIC does NOT have $300 Billion so in the end, the taxpayer still is on the hook.

Keep the printing presses running boys, we need MORE money NOW.

DarJones

[ewmayer]

Saw this interesting new book by economists (these are of the rare "clueful" variety) Carmen Reinhart and Kenneth Rogoff discussed (along with a brief interview with Rogoff) on PBS last night -- tagline could be "when it comes to financial crises, there is nothing new under the sun". The title of the book derives from the authors` view that the innocuous-sounding little phrase "this time is different" is quite possibly the most dangerous one in the entire English lexicon:

This Time is Different: Eight Centuries of Financial Folly

Rather than immerse themselves in history's narrative details, Carmen M. Reinhart and Kenneth S. Rogoff have sought to quantify them. "This Time Is Different" catalogues every debt, banking and currency crisis the authors could find back to the 1300s, in hopes of identifying elements common to all. Almost continuously since 1800 some part of the world has been in a banking crisis and some country has failed to repay its debt -- in other words, has been in default. Given their frequency, why do crises always come as a surprise? Reinhart and Rogoff, economics professors at the University of Maryland and Harvard University, respectively, say investors and governments "delude themselves" into thinking they are smarter than their forebears. This thinking guarantees new "bouts of euphoria that usually end in tears."

CIT Group: A Bit of History

In the wake of Sunday`s "prepackaged" bankruptcy filing (i.e. the company had come to a debt restructuring agreement with most of its creditors which it will present to the courts) by 101-year-old commercial lender CIT Group, it is interesting to examine a bit of the early history of the company, which illustrates how much of corporate America used to be run, in the days when most people still gave a rat`s ass about the arcane concept of "ethics":

On February 11, 1908, Henry Ittleson founded the Commercial Credit and Investment Company in St. Louis, Missouri.[4]

In 1915 it moved to New York City and renamed itself Commercial Investment Trust and went by the initials of C.I.T.[5] It remains in New York City today. By that time, the company provided financing for wholesale suppliers and producers of consumer goods. The company added automobile financing to its product line in 1916, through an agreement with Studebaker, the first of its kind in the auto industry. During World War I, CIT financed the manufacture of 150 submarine chasers. It also added consumer financing of radios through an agreement with Thomas Edison, Inc. During the Roaring 20s following the war, consumer spending rose dramatically and CIT prospered in its consumer appliance, furniture, and automobile financing groups. In 1924, CIT incorporated in Delaware and listed itself on the New York Stock Exchange. CIT entered the field of factoring in 1928 and expanded operations into Europe in 1929.

With international tensions rising prior to World War II, CIT closed its German operations in 1934. Arthur O. Dietz succeeded Ittleson as president of the company in 1939. During the war, CIT offered its 2000 employees a month's bonus, life insurance, and a guaranteed job on return if they served in the armed forces. From 1947 to 1950, the company's net income rose from $7.3 million to $30.8 million — $273 million in recent terms. Ittleson died at age 77 on October 27, 1948.[4]

My Comment: Now fast-forward to the go-go Greenspan-credit-bubble years (we really need a name for that era ... the giant early-20th-century credit bubble which led to the great Depression was "the Roaring Twenties" ... perhaps "the Raging Zeros"?), The fascinating thing to observe is how CIT`s recent history is a one of successive credit bubbles and busts, from early-1990s Japan to Dotcom and now to U.S. Real-Estate-slash-global-credit (italics annotations mine):

In 1984, CIT was sold to Manufacturers Hanover Trust. In 1989, Manufacturers Hanover Trust sold sixty percent of CIT to Dai-Ichi Kangyo Bank of Japan [During the height of their real-estate/credit bubble, the Japanese were paying top dollar left and right for U.S. companies and commercial assets]. As Dai-Ichi Kangyo Bank ran into troubles within its core operations [due to the bursting of the Japan RE bubble], it sold off non-core assets, including CIT, which in 1997 was carved out as a separate company and re-listed on the New York Stock Exchange.

In 1999 [During the height of the U.S. Dotcom/credit bubble, U.S. companies flush with Dotcom dollars (or with access to the easy credit of that bubble era) were paying top dollar left and right for mergers, acquisitions and leveraged buyouts], CIT acquired Toronto-based Newcourt Credit Group Inc. for approximately US$4 billion to create one of the largest publicly-owned leasing companies. CIT over-paid for Newcourt, and merger integration troubles forced CIT to draw upon emergency credit facilities with several banks to avoid bankruptcy. As other funding sources dried up, CIT was forced to sell itself to Tyco International Ltd. in June 2001. CIT became the principal operating subsidiary of Tyco's Tyco Capital business.[6] CIT's Livingston address was changed to 1 Tyco Drive.

Tyco ran into its own operating troubles [Tyco`s acquisition-a-week growth strategy of the 90s under CEO Dennis Kozlowski ran smack into the post-Dotcom-bubble recession and credit crunch] and sold or spun-off non-core operations, including CIT. On July 8, 2002 Tyco completed its divestment of its Tyco Capital business through an initial public offering IPO, via the sale of 100% of the common shares in CIT Group Inc. As an independent public company, CIT changed its Livingston address to 1 CIT Drive from 1 Tyco Drive.

CIT moved its global headquarters back to New York City, opening a brand-new headquarters in 2006 across from the New York Public Library.[7] Its headquarters were last in New York city in 1983. CIT retained its Livingston campus as its corporate headquarters.[8]

My Comment: What the above history does not note is that in 2003 former Merrill Lynch rising star Jeffrey Peek took the helm of CIT. Peek adopted the same hypercharged strategy that worked so well for Merrill in the early part of the decade (until it didn`t), namely to get into the business of mortgage-backed securities and related risky/exotic financial products in a big way. Basically, having failed in his dream of ascending to the CEO-ship of Merrill, Peek was trying to turn CIT into the next Merrill, with disastrous results. (Peek has announced he will step down at the end of the year - that was surely part of the bankruptcy agreement with the major creditors). This is what makes Peter Cohan`s description (quoted in my post of yesterday) about CIT getting "distracted by subprime mortgages" so incredibly disingenuous (or completely clueless) - that was no "distraction", that was the core business plan under Peek.

Cohan and the similar 90% of financial "journalists" who haven`t a frickin` clue should stick to Twitter, where they can tweet merrily away with the other twits and their lack of journalistic standards will go unnoticed. (I posted the above 2 paragraphs to the reader comments section of Cohan`s article, by way of registering my disapproval. Not that it`ll matter one whit to the twit.)

[ewmayer]

RBS, Lloyds Banking Get $51 Billion From U.K. Taxpayers in Second Bailout: Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will receive 31.3 billion pounds ($51 billion) in a second bailout from the U.K. taxpayer as the two banks agreed to cap bonuses.

The rescue will bring the U.K. closer to full ownership of RBS, while Lloyds will escape government control. Lloyds Chief Executive Officer Eric Daniels will raise funds from money managers to avoid the Treasury’s asset insurance plan, which would give the government a majority stake. He’s betting bad loans will drop after the Bank of England said the country’s recession was nearly over. Stephen Hester, RBS’s CEO, will by contrast accept more government oversight and insure 282 billion pounds of his banks’ riskiest assets with the Treasury.

“There is now a very fine line between RBS being nationalized and the stake the government now holds,” said Danny Gabay, director of Fathom Consulting in London and a former Bank of England economist. “This contrasts with Lloyds’s willingness to fight harder for its independence.”

Both banks will sell branches and divisions to comply with state aid rules. The European Union is forcing banks that received government help to sell assets to stop them having an unfair advantage and boost competition. Last month, it forced ING Groep NV, the biggest Dutch financial services company, to sell its insurance units to win approval for a bailout. By contrast, U.S. regulators have provided financial assistance to banks that expanded during the crisis through acquisitions.

“There is a very obvious contrast with the American banks,” Gabay said. “That is symptomatic that the U.S economy is healing, whereas the British economy is still stuck in recession.”

My Comment: Wow, I guess it`s not just Americans who are swallowing the "green shoots" propaganda. No need to feel bad, old chap - we here on the Yankee side of the pond are just are screwed as you, it`s just that our government has decided throw even the last shreds of prudence to the four winds when it comes to bailing out the banks at all costs - we don't just throw gobs of taxpayer money at them over here, we also suspend key asset-valuation rules so the banks can engage in pure unadulterated accounting fiction. Couple that with the government buying a couple trillion dollars of the resulting overvalued assets, guaranteeing trillions more in bank debt and engaging in the most highly orchestrated economic propaganda and market-pump campaign in history and you get even knowledgeable skeptics doubting themselves and proclaiming the end of the Great Recession.


Japan Spirals Toward the Abyss

It is Japan we should be worrying about, not America: Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world`s second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).

Regime-change in Tokyo and the arrival of Yukio Hatoyama`s neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan`s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America`s rate. Japan`s $1.5 trillion state pension fund (the world`s biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan`s bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don`t see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo`s price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher`s 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l`outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.

Japan`s terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

My Comment: AEP has me until the comment at the end about Japan`s quantitative easing (roughly equates to money-printing) being "too little, too late" ... rather it was too much, too long, coupled with allowing banks to keep bad loans on their books at inflated valuations as long as wanted (or could) to do so. As Denninger notes in his unmistakable style:

Japan's error was in papering over bad debt with more debt, transferring defaults that had already taken place but were being hidden to the public treasury and, as a consequence, to the taxpayer.

This in turn put in place a structural drag on GDP that cannot be jettisoned, as that debt did not go to build a road or bridge over which commerce flows, but instead went to bail out oligarchs who successfully persuaded lawmakers to kneel before them and perform obscene acts.

And the U.S. is following the Japanese post-real-estate-bubble "extend, pretend and money-print" playbook almost to a T ... aside from some demographic differences (Japanese workforce still male-dominated; U.S. baby boomers aging with little saved to retire on; Japanese oldsters have more savings but fewer young workers to support the retirement system) and a difference to whom the exploding national debt is owed (Japanese citizens bought most of its sovereign debt, whereas U.S. debt is much more foreign-owned), the impending Japanese debt/currency crisis is also the direction in which the U.S. is headed.

[Fusion_power]

I'm going to change the tenor of this thread by asking a question. I know part of the answer, but will let others give their take instead of posting what I know.

How do nations inject new money into the economy?

U.S.?
Britain?
Canada?
Japan?
France?
Germany?
China?

As an example, the U.S. buys treasuries in part to depress the price/yield of treasuries, and in part to push new cash into the economy. How else does the U.S. inject cash? and how do other nations do it?

DarJones

[ewmayer]

Originally Posted by Fusion_power

How do nations inject new money into the economy?

As an example, the U.S. buys treasuries in part to depress the price/yield of treasuries, and in part to push new cash into the economy. How else does the U.S. inject cash? and how do other nations do it?

What you are asking sounds like "how is quantitative easing effected?" There are multiple ways for a nation`s central bank (here in the U.S.that means the Fed) to effect QE, but the generic rubric under which they all fall is

Easing of Monetary Policy: The most-public way in which the Fed eases MP (which equates to trying to increase availability of credit among banks) is to lower the rate at which it lends short-term to its various member banks, in hopes that these lowered "target rates" will encourage banks to lend to each other at similarly lowered rates. The Wikipedia page on the Federal Reserve System sums this aspect of the Fed`s mandate up nicely in its Interbank lending is the basis of policy section:

Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed`s task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.

As the wikipage goes on to explain there are actually 3 prongs of Monetary Policy for the Fed: Open Market Operations (purchases and sales of U.S. Treasury and federal agency securities), the Discount Rate ("interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility—the discount window"), and easing of Reserve Requirements (the ratio of lent-out funds to depositary reserves, which is the basis for fractional reserve lending).

A good question is "where does the Fed get the money to purchase Treasuries?" ... that is where the Fed`s ability to "print money" comes in ... with a few keystrokes the Fed can simply increase its "balance sheet" and use the "newly printed money" to purchase securities. An underappreciated bank-level version of this is with respect to reserve requirements - when these are relaxed, banks themselves can in effect "print money" simply by increasing lending against their existing reserves - since this is all done electronically and (less frequently) with little printed pieces of paper, it costs them noting to do so. Any accounting-rule change which allows banks to increase their *valuation* of existing reserves (e.g. a portfolio of securities which have some marketable value which is not fixed by fiat) has much the same effect.

In "emergency circumstances" (which is loosely defined, and is apparently whatever the Fed board of governors decides it is) the Fed can also directly inject capital into banks and lenders by purchasing non-Treasury-or-agency securities, presumably at some valuation higher than the emergency in question would lead to in an open-market sale of same. For example the Fed has committed to buying over a trillion dollars in mortgage-backed securities (MBS) at par value (or close to it) from Fannie, Freddie and various member banks in order to keep mortgage rates artificially low. Analogously, when it became clear last year that Lehman was in deep doo-doo, the Fed accepted a monster wad of dubious "collateral" as part of a "triparty repurchase agreement" between itself, Lehman and JP Morgan. We now know that some of that collateral in fact consisted of par-valued stock in bankrupt companies, i.e. was in effect worthless. Much of the MBS the Fed has purchased over the past year is of similalrly dubious valuation - for example the Maiden Lane Trust the Fed set up as a holding company - whether the Fed has the authority even under its emergency provisions to set up shell companies of this sort is a separate discussion - for Bear Stearns` assets is known to be underwater by upwards of 30% of its nominal valuation of roughly $30 billion. I estimate a similar (or larger) when-all-is-said-and-done haircut on the trillion-plus of MBS the Fed is purchasing, so in effect this will amount to a multi-hundred-billion-dollar "stealth recapitalization" of the banks and lenders that offloaded the stuff onto the Fed`s balance sheet. You can bet the same banks won`t be the ones eventually helping to shrink that ballooned balance sheet (in essence a form of sovereign debt) toward zero - that task will be borne by present and future taxpayers.

[ewmayer]

Unemployment hits 10.2% : The unemployment rate spiked to its highest level since 1983, much worse than expected as employers continue to trim jobs despite other signs of growth.

"The only good news is the number of layoffs are dropping off, but those who are laid off still aren't finding jobs," said David Wyss, chief economist with Standard & Poor's.

The jump in the unemployment rate was driven up by a large drop in the number of people who describe themselves as self-employed, as well as the number of teenagers who have jobs. The unemployment rate for teenagers in the labor force soared to 27.6%, up 1.8 percentage points and hitting a third straight record high.

Both teen workers and the self-employed are not captured very well in the government's separate survey of employers that is used to calculate the number of people on U.S. payrolls. That explains much of the disconnect between fewer job losses overall and the much worse unemployment rate.

The rise in unemployment was not spread evenly across the population. For those with college degrees, the unemployment rate fell to 4.7% from 4.9% in September, as the unemployment rate for those in management, professional, and related occupations slipped to 4.7% from 5.2%.

But the unemployment rate for production jobs, such as factory workers, jumped to 14.5% from 14.1%. The jobless rate for workers in construction, maintenance or natural resources industries such as mining rose to 15.5% from 14.3%.
...
Prior to this report, most economists had believed that the unemployment rate would keep rising and that job losses would continue into next year. But the jump in unemployment in October took it to levels worse than what many previously had expected to be the peak.

According to a survey of top forecasters by the National Association of Business Economics last month, the consensus estimate among economists was that unemployment would hit a high of 10% in the final three months of this year and the first quarter of 2010.

The five economists with the most bearish forecasts had expected unemployment to rise to 10.2% in the fourth quarter of this year before hitting 10.5% in the first half of next year.

Wyss is one of those economists who had projected an unemployment rate of 10.5% in the middle of next year. He said Friday's report may force him to raise his worst case estimate.

"Some things aren't playing out the way I expected them to," he said. "There's just no good news in this report."

My Comment: But all is well, because "the rate of job losses is slowing" (a shrinking labor force means less people available to lay off, which is an encouraging sign for the economy, right?) and the government can simply print more money to make up for the lost jobs:

Obama signs jobless benefit extension : Bill extends unemployment benefits by up to 20 weeks. Legislation also extends homebuyer tax credit into next year.

NEW YORK (CNNMoney.com) -- President Obama said he signed into law Friday a bill to provide up to 20 additional weeks of jobless benefits to unemployed Americans and extend the $8,000 tax credit for new homebuyers into the middle of next year.

The signing came after the Labor Department reported that the unemployment rate spiked to a 26-year high of 10.2% in October, with 190,000 jobs lost in the month.

After calling the jobless rate "sobering," Obama said the bill he signed will "will help grow our economy, help create and save jobs, and help provide necessary relief to small businesses," in a statement following the signing.

My Comment: And how does artificially propping up housing prices which in most parts of the country still need to come down quite a bit to revert to historically sustainable price-to-income levels "grow the economy". Maybe it`s really designed to "create and save" the jobs of realtors ... the last bit about providing relief to small businesses is yet another example of the government robbing Peter to pay Paul, since it takes the money out of already-plunging federal tax revenues, and thus simply widens the yawning federal account deficit.

[ewmayer]

"Stimulus Saved/Created 640,000 Jobs" = Steaming Load

A pair of AP reporters shows what`s really going on. Think "Soviet Crop Reports", think "Vietnam War Enemy Body Counts". A Ponzi economy deserves Ponzi "recovery" numbers, I suppose.

AP IMPACT: Stimulus jobs overstated by thousands

WASHINGTON (AP) - A Colorado company said it created 4,231 jobs with the help of President Barack Obama's economic recovery plan. The real number: fewer than 1,000.

A child care center in Florida said it saved 129 jobs with the help of stimulus money. Instead, it gave pay raises to its existing employees.

Elsewhere in the U.S., some jobs credited to the stimulus program were counted two, three, four or even more times.

DJIA Now 99.9% Correlated...

...with the headline unemployment rate. In the past month headline unemployment in the U.S. rose from 9.8% to 10.2% ... in almost exactly the same time span, when we smooth out the short-term noise, the Dow Jones Industrial Average rose from around 9,800 (intraday on 9 October) to today`s intraday 10,200. It`s so simple ... I see it all very clearly now ... Dow indeed will continue higher, quite possibly hitting 20,000 in the next 2-3 years as headline unemployment hits 20%.



John Reed Says `I'm Sorry' for Glass-Steagall Repeal, Building Citigroup: John S. Reed, who helped engineer the merger that created Citigroup Inc., apologized for his role in building a company that has taken $45 billion in direct U.S. aid and said banks that big should be divided into separate parts.

My Comment: "The monstrous bonuses I collected during the bubble years as a result of Glass-Steagall's repeal are of course safe, but I`m really, really sorry about the whole 'economic ruin' thing..."


Insanity: Nearly half of laid-off workers cashing in their 401(k)s

Denninger has a What are they thinking? article about this disturbing trend:

As the last of his severance pay dwindled away in March, Brad Cleghorn of northwest suburban Marengo cashed out his 401(k) plan in order to pay his mortgage and feed his family.

Cleghorn is not alone. A Hewitt Associates study shows that 46 percent of workers with 401(k) plans who lost or switched jobs cashed the plans in, a trend that could lead to serious problems when younger generations of people working today reach retirement.

Your 401k or IRA has near-absolute protection in a personal bankruptcy. As a qualified retirement plan it cannot be seized by creditors if you file a Chapter 7 or Chapter 13.

The absolutely worst thing you can do is to cash out those plans. This is not just about sabotaging retirement, although that's serious.
...
Even if you find another job, will you be able to come up with the penalties and clawback on the tax exemption you got on the gains and contributions? That's unlikely, and yet it will be due in April, and the IRS will come after you if you don't pay them.

Your credit card company will call you incessantly and ruin your FICO score if you don't pay them. Eventually your mortgage company will come foreclose on your house, although these days they're not even bothering with that as most of the time the house isn't worth as much as the mortgage - there are people who are living in their house without making a mortgage payment for more than a year!

But if you don't pay the IRS they will not only trash your credit they will come after you, and they don't play nice. They can and will intercept any refunds you get and even freeze your banks accounts.

My Comment: One`s priorities in straitened circumstances such as Mr. Cleghorn is facing are clear: First, keep your family housed, clothed and fed. You don't need to cash in you retirement savings to do the last two of those three things (if things get really dire you can go on food stamps and get clothing and supplementary food through local charities, so let`s focus on the first

Please "Give a Little Extra" to local charities this year

One more note about the local-charity aspect: Due to the exceptional nature of the current bankster-and-government-blown deflationary economic crash, there is a need for donations of money, food and clothing at community food banks and charitable organizations which is unprecedented in our lifetimes. I encourage all of those of you who are fortunate enough to still have a good job to "give a little extra" this year, even if it means scaling back some of your discretionary spending, holiday gift-giving and party outlays, etc. For my part, I intend to donate my entire year-end bonus (whatever it is - typical at my firm is around 10% of gross salary) to local food banks and aid groups. The donation will obviate any income taxes on the money, so there will 40-50% more going to charity than if I kept it myself. The need is great, so please give what you can - old clothing (both utility and business - your old business suit might help someone get e.g. an administrative or clerical job) is another way to give.