Econ 2009

[R.D. Silverman]

Originally Posted by ewmayer

Pittsburgh To Tax Students For City Pension Shortfalls

Pittsburgh Sets Vote on Adding Tax on Tuition: The mayor of Pittsburgh calls it the “Fair Share Tax.” But to officials at the city’s 10 colleges and universities and many of their 100,000 students, it is anything but.

My Comment: Sheer insanity ... pandering politicians spend years making wage and pension promises guaranteed to bankrupt the city except under ludicrous Ponzi-stock-market-appreciation-in-perpetuity, then when the scheme inevitably blows up, they gouge some of the folks least able to afford extra taxes. If this passes, the ensuing "brain drain" from area universities will cost Pittsburgh far more than they estimate to gain from the surtax.

It may also be illegal. Aren't the universities non-profit? AFAIK,
non-profit entities are not required to collect (and may be prohibited from)
collecting such taxes on their goods and services.

[ewmayer]

Trillions Of Troubles Ahead: A crushing burden of debt threatens to sap America's growth for years to come.

Not too long ago, a billion dollars in a governmental budget was a lot of money. Then we got into hundreds of billions. People understood that this was a lot, just because of all the zeros. Now, unfortunately, the number has become small: the world "trillion," as in $1.2 trillion for health care reform, seems so tiny. But it has 12 zeroes behind it, which is so easy to forget.

What is a "trillion?" According to the Web site www.100777.com, if you laid 1 dollar bills end to end, you could make a chain that stretches from Earth to the moon and back again 200 times before you ran out of dollar bills! One trillion dollars would stretch nearly from the Earth to the sun. It would take a military jet flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out 1 trillion dollar bills.

Our colleague Rob Arnott, who always does terrific research, wrote in his recent report that "at all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Add the unfunded portion of entitlement programs and we're at 840% of GDP.

The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.

It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year's election, there will be no way to turn back.

Japan's recession is now 19 years old. It has the highest debt-to-GDP level (227%) of any industrialized country. The Fitch rating agency is talking about a potential downgrade of Japan's debt. Japan's stock market is still down 75% from the high in 1990. We predict it will make new bear market lows next year. That will make it a 20-year-long bull [ewm: I'm pretty sure he intended 'bear' here] market on the way to 25 years. The bulls in the U.S. should consider that possibility in the formerly great United States of America.

I do not believe the bullish theory that the U.S. situation is different than Japan's. Ours is so much worse.

[cheesehead]

Originally Posted by http://www.forbes.com/2009/12/18/government-budget-deficit-personal-finance-financial-advisor-network-treasury-debt.html

Unless there is a change in Washington by next year's election, there will be no way to turn back.

I don't know just what Bert Dohmen meant by "a change in Washington by next year's election", but I'll bet very few Republicans will admit that their party's administrations since 1980 were responsible for 70% of the national debt that the recent Bush administration turned over to Obama.

The turnabout in regard to conservatives' approach to fiscal responsibility that their side's think-tanks formulated in the late 1970s in order to "buy" political power now has the nation so accustomed to multi-trillion-dollar national debt that we acquiesced to last year's Bush-started trillion-dollar fix with not nearly so much resistance as we could have had (or needed!).

Had the last three Republican administrations produced the balanced budgets their party used to claim as a goal when I was young, and all else was equal, we'd now have a national debt of only three trillion dollars -- actually, probably less than half that because of the different fiscal environment -- and a proposal to add a trillion dollars to one year's spending might have seemed correspondingly more shocking. I like to think that a proposal to raise national debt by over 66% in one year would have had much less chance of success than one to raise it by only 10% in that period. But conservatives decided to adopt a policy that "deficits don't matter anymore" in a trade of principle for power, as I've outlined in more detail in my postings over the past few years.

The chances that the average economically-and-fiscally-ill-educated American realizes the impact of that late-70s turnabout in conservative fiscal policy, or its connection to our present-day troubles, are quite slim. I've tried to do my small part here in Soap Box to spread that information. Perhaps if I'd blogged instead ...

[ewmayer]

America's decade of dread

By Harold Meyerson
Wednesday, December 16, 2009

This decade began and ended in dread. It began with Wall Street -- the World Trade Center -- targeted for mass murder. It ends with Main Street fearful and reeling from economic reverses that Wall Street helped create.

It was the decade of distraction. While the U.S. economy bubbled and then crumbled, the president for eight of the decade's 10 years embroiled us in a grudge match with Saddam Hussein and then persisted in throwing lives and money into the chaotic conflict that (as many predicted would happen) ensued. The decline of the American middle class was nowhere on his radar screen.

The stocks bubble of the late 1990s was succeeded by a bubble in housing; these were the engines of our economic growth. America's production of goods no longer received the level of investment that had made it the engine of our economic growth from the mid-19th century through the 1970s. The change began at the outset of the Reagan years, when the percentage of corporate profits retained for new investment dropped sharply. A report from the International Labor Organization published last week shows where the money went: to shareholder dividends, disproportionately benefiting the wealthy. In the prosperity years of 1946 to 1979, dividends constituted 23 percent of profits. From 1980 to 2008, they constituted 46 percent.

Finance boomed. The gap in annual wages between workers at financial companies and workers at non-financial companies, the ILO reports, grew from $11,000 in 1989 to $40,000 in 2007. The financial sector defended this shift by arguing that it had created many innovative financial products -- the very financial products that managed to turn downturn into Great Recession. In an interview in Monday's Wall Street Journal, former Fed chief Paul Volcker said that he has "found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy." He went on to say: "All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations."

The dread in the land today isn't just a fear of losing your job -- or of your spouse, sister, father or child losing his or hers. It's a fear that America has been hollowed out, that we don't have a sustainable path back to mass prosperity, let alone to economic preeminence. A poll taken last month for the Council on Foreign Relations (CFR) shows that 44 percent of Americans considered China to be the world's leading economic power, while just 27 percent thought the United States still held that throne. Such fears can only be intensified by public policies that fail to champion America's national interests by fostering the flight of investment abroad.

Overcoming some of our national phobia about having an industrial policy, the Obama administration has rightly targeted the renewable energy sector for investment -- a long overdue shift back to real, rather than financial, production. But we don't yet have policies to ensure that the real production we're fostering is done at home. As Joan Fitzgerald, director of the Law, Policy and Society program at Northeastern University, notes in a recent article, 84 percent of the $1.05 billion in federal clean-energy grants distributed since September has gone to foreign wind turbine manufacturers. Unionized, high-wage Germany and non-unionized, low-wage China both have thriving wind-power industries that profitably export their products to us. We have shunned policies that bolster domestic production, which is why more Americans are betting on China's economy than on our own.

The problem is that America's economic elites have thrived on the financialization and globalization of the economy that have caused the incomes of the vast majority of their fellow Americans to stagnate or decline. The insecurity that haunts their compatriots is alien to them. Fully 85 percent of Americans in that CFR-sponsored poll said that protecting U.S. jobs should be a top foreign policy priority, but when the pollsters asked that question of the council's own members, just 21 percent said that protecting American jobs should be a top concern.

The moral world that we see in that poll is the moral world of Charles Dickens. Of the elite of his day, he wrote in "Bleak House," "there is much good in it...." But, he continued, "it is a world wrapped up in too much jeweller's cotton and fine wool, and cannot hear the rushing of the larger worlds, and cannot see them as they circle round the sun. It is a deadened world, and its growth is sometimes unhealthy for want of air."

America, at the end of this dreadful decade.

My Comment: Nice quote from Dickens, but in my opinion describing the world of Big Finance as merely being unhealthily disconnected from the real productive economy is being far too kind. Modern-day big finance is in fact better analogized as an army of blood-sucking leeches parasitizing the productive economy and doing everything in its power to suck as much blood out of the host before it dies as possible. I estimate that over 90% of the activity of the much-hallowed and oh-so-necessary "capital markets" is nothing more than Ponzi finance and purely-speculative money-changing which constitutes a "parasite tax" on the real economy.

[Fusion_power]

The ethos of modern day finance is "eat as much as you can as fast as you can".

DarJones

[__HRB__]

Originally Posted by ewmayer

I estimate that over 90% of the activity of the much-hallowed and oh-so-necessary "capital markets" is nothing more than Ponzi finance and purely-speculative money-changing which constitutes a "parasite tax" on the real economy.

So, what's the problem? As long as purely-speculative money-changing leaves fewer resources in the hands of idiots, there will sooner or later be a shortage of idiots with resources.

Let me guess: the "real" economy is precisely the economy that produced goods you prefer, right? Since you don't listen to Norwegian Death Metal, all the effort that goes into making CDs of Dimmu Borgir is wasted and a 'parasite tax' on real music, because what the world needs is more CDs from the Musikantenstadl.

ewmayer's favorite song: http://www.youtube.com/watch?v=m5AM_bVXbXw

[ewmayer]

Some great insights into how the nearly-year-long Fed-orchestrated market-futures-pump works (ZeroHedge.com has also remarking on the near-daily futures-pump for months, but this article ties motives and methods together nicely) ... note that during the recent Bernanke 2nd-term reconfirmation hearings, the closest any senator got to to asking the right question was by way of asking whether THE FED ITSELF was engaged in buyign and selling market futures, which allowed Bubble-Head Ben to easily evade the issue by answering in literally honest but ethically disingenuous fashion, "no, Senator":

Are Big Banks Pumping Up Stock Prices?

Even though big banks have received untold billions in bailout funds, banks are not lending. Where did all the money go?

Much of it went right back to the government as banks have loaded up on all sorts of Treasury bonds. But where did the rest go?

Real estate prices are still falling, unemployment is sky-high, consumer spending is down and corporate profits are nowhere near to last year's levels.

The only thing that provides comfort for the masses is rising stock prices. The S&P 500, Dow Jones and Nasdaq have gained in excess of 65% in less than ten months against a backdrop of continuously less than stellar news. The government, banks and other financial institutions have a vested interest in rising stock prices.

Things would look grim if it wasn't for the hope provided by the Dow and S&P's of the world. But more than hope is at stake. Another drop in investor's perception would send real estate and equity prices tumbling. It could also push many financial institutions to the brink of ruin and discredit all government efforts.

Looking at what's at stake and the motivations involved, could it be that some of the big players are manipulating the market to keep prices artificially afloat?

A secret committee

Already back in 1988, Ronald Reagan signed an executive order to establish a specific committee designed to prevent major market collapses. [EWM: This is the President's Working Group on Open Markets, colloquially referred to as the "plunge protection team" - it would appear that the "maintaining investor confidence" part of their multifold-self-contradictory mandate trumps the "enhancing the integrity of the financial markets" bit.]

As per this order, the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the SEC and the chairman of the commodity futures trading commission make up the core of this team. By extension, major financial institutions like JP Morgan Chase and Goldman Sachs are used to execute their orders.

Artificially inflating prices, how?

Supply and demand drives prices. Where the demand comes from does not matter. In emergency situations, the Federal Reserve is said to lend money to major banks, which serve as surrogates who will take the money and buy markets, predominantly futures, through large unknown accounts.

The timing of those buys will be such that those shorting the market will be forced to buy back shares. In theory, this eliminates the most pessimistic investors and causes others to buy. Soon sideline money from mutual and hedge funds comes in and the rally gathers a life of its own.

A close ally

One of the obvious suspects to serve as surrogate and carry out the government's plan would be Goldman Sachs. For years, the ties between the U.S. government and Sachs have been too close for comfort. Earlier this year the ETF Profit Strategy Newsletter touched on a case of 'indiscretion' which never received much publicity.

Stephen Friedman, the chairman of the New York fed was instrumental in orchestrating the multi-billion bailout for Goldman and AIG. AIG used nearly $10 billion of the initial $85 billion to pay Goldman.

Chairman of the New York Fed was not the only title Mr. Friedman held. He also happened to be on Goldman's board during that time and was Goldman's CEO in the 1990s. Also during that time, Mr. Friedman was actively buying Goldman stock and generated profits worth millions of dollars.

Other ties between government and Sachs include Hank Paulson, former Secretary of the Treasury and former Goldman CEO. When Mr. Paulson needed someone to oversee see the government's first $700 billion bailout, Paulson recruited an inexperience, 35-year old, former Goldman investment banker. The list continues, but we'll stop here. [EWM: Another former treasury-secretary-by-way-of-Goldman, Robert Rubin, who was highly instrumental in getting the Depression-era Glass-Steagall law repealed, shortly before leaving government to take a $30-million-per-year-plus board seat at the chief beneficiary of the law's repeal, Citigroup, would surely feel slighted at being omitted from the list of notables here.]

Putting the odds in your favor

The Financial Times reported that Goldman Sachs suffered only one losing day during the 65 business days of the third quarter. On 36 separate days during the quarter, the firm's trades netted more than $100 million.

In addition, Bloomberg reported that Goldman Sachs' effective income tax rate for 2008 was 1%. In dollars, Goldman's tax liability was $14 million. For the same year, Goldman reported a $2.3 billion profit and paid out $10.9 billion in bonuses.

One could argue that a record of 90%+ winning trades and a 1% tax rate could only be accomplished with certain connections to high-ranking government personnel.

Is it possible?

The notion that prices can be inflated artificially makes sense and sounds good in theory. Based on the evidence, this kind of maneuvering even seems to be more common than we think.

But a simple look at the chart shows that even the government and big banks do not have superhuman powers, at least not unconditionally. [EWM: "Unconditionally" here means "unless they work together".]

In 2000, 2002, 2008 and 2009, the major indexes a la S&P 500, Dow Jones and Nasdaq declined 30% or more.

It is now known, as it was back then, that the nation's most powerful financiers got together on October 24, 1929 to prevent a major meltdown. Their plan succeeded on that very day which came to be known as Black Thursday. The recovery on Black Thursday was as remarkable as the selling that made it so Black.

On Friday, the Times reported that the financial community felt 'secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic.' In a concerted advertising campaign in Monday's papers, stock market firms urged to pick stocks at bargain prices. The rest is history and the Great Depression unfolded in all its cruel ways.

One of the flaws of artificial buying is that all the money used to buy stocks will eventually have to be taken out [EWM: Unless one of the parties involved can literally print money ot of thin air ... nah, that could never happen]. As we know, banks are not immune to greed and once prices start declining, banks are likely to be the first to cut their losses and flee the sinking ship.

What goes up ...

In summary, we can conclude that there seems to be an organized committee with the job description of lifting markets. Quite likely, their efforts have contributed to the protracted rally in stock prices. However, as we've seen, the market is too wild to be contained. Normal market forces still apply. [EWM: Uh, I think you just laid out in detail why "normal market forces" most certainly do *not* apply currently.]

One of those age-old forces is investor sentiment, possibly the best known and most accurate contrarian indicator around. Extreme levels of pessimism tend to signal market bottoms while extreme levels of optimism tend to signal tops.

The ETF Profit Strategy Newsletter used this contrarian indicator as a foundation to issue the March 2nd Trend Change Alert which foretold a massive rally with a target range of Dow 9,000 - 10,000 a mere seven days before the March lows were reached.

Now once again, we see an extreme of investor sentiment - this time it's optimism. According to the Investors Intelligence survey, this week saw the highest percentage of bulls since December 2007.

More importantly, the major indexes are butting up against levels of resistance that have been years, even decades in the making. Those different resistance levels converge in the Dow 10,100 - Dow 10,500 range, which is the very range the Dow has been stuck in for over three months.

The ETF Profit Strategy Newsletter includes an analysis of predominant, and probably formidable, levels of resistance along with a short, mid and long-term forecast, and a target range for the ultimate market bottom. If history is a guide, and it usually is, the market will do what it wants, regardless of the government's efforts.

The question is this: Who are you putting your trust in, the market or big banks?

My Comment: Leaving aside the - admittedly important - issue of whether there even *is* a semblance of an equity market anymore which is not a Fed-rigged Ponzi casino designed to (a) recapitalize the insolvent TBTF banks by allowing them to issue billions in new shares at highly inflated prices and (b) support the illusion of an "economic recovery" in the absence of any credible real-economic data to that effect ... the problem is, even if the banks involved in the Ponzi once again get burnt in a major market downleg, their downside is limited because they will simply get bailed out again.

A very merry (and preferably non-Ponzi) Christmas to our readers who celebrate Christmas!

[Xyzzy]

http://www.time.com/time/specials/pa...947251,00.html

[__HRB__]

Originally Posted by Xyzzy

http://www.time.com/time/specials/pa...947251,00.html

No real surprise there. Obama got the Peace Prize, Krugman got the Economics prize, so probably Malin Akerman is going to win an Oscar for her performance as the Silk Spectre. It goes without question that Lactating Biker Sluts take it up the Number 2 Chute is going to win best picture.

[cheesehead]

"Fed exit strategy: Let banks set up CDs"

... with no early withdrawals.

http://news.yahoo.com/s/ap/20091228/...YtZmVkZXhpdHN0

[garo]

Neat gig! Fed lends banks money at 0.5% and accepts the same money back in CDs yielding 4% or whatever. Frankly, it is just more bullshit from Benny.